Byline: Thomas J. Ryan

NEW YORK — Merger mania, for better or worse, is finally infecting the accessories market.
Many executives and analysts see mergers as long overdue for the highly fragmented accessories arena, although a few fear that they will only sap creativity and remove variety and spunk from the selling floor. Nonetheless, mergers and acquisitions are in the air.
The M&A activity is expected to be driven by two initiatives: megafirms hunting down hot accessory brands as platforms for growth, and smaller firms needing to get bigger in order to work better with retailers. The majority will be small- or medium-sized firms seeking partners to absorb the ever-increasing costs of doing business with stores, which includes EDI and holding inventory longer, as well as improve their ability to fill large orders.
David N. Deutsch, president of the investment banking firm bearing his name that specializes in middle-market companies, noted that vendor lists are being narrowed to the point where department stores and chains are only turning to the largest, most reliable accessory resources or those few firms with the trendy name or item of the moment.
“If you’re simply a decent midsize resource, you’re almost finding yourself in no-man’s-land,” said Deutsch, who has worked on seeking financial alternatives for Wittnauer Watch, Judith Jack and Omega Fashions in the accessory field. “You now need to be a very differentiated resource, and more and more you have to be a combination of being a great manufacturer and owning a desirable brand.”
Most see accessories firms following the path of retailers and many other categories, such as sportswear and ready-to-wear, in realizing that these combinations are essential.
“You have to grow, merge or go out of business,” said Roger Gimbel, chairman at Worldwide Dreams, a megafirm created last year through the merger of RGA Accessories, B.H. Smith, Accessory Street and East End Bags. “Retailers are getting stronger, so EDI is becoming much more important as a way of doing business, and all this computerization is necessary for the future. Those expenses can’t be borne by small players.”
Sammy Hafif, who runs Hafif Holdings International, a venture-fund firm set up in January of this year to invest in and provide financial and back-office support for accessory firms, said many accessory firms are undercapitalized and have poor systems for handling shipping, inventory and chargebacks.
“Most of the people who run accessory firms are either good at merchandising or they are good at marketing, and sometimes both; but no one wants to do the back-office functions and the finance part,” Hafif said. “We take companies that are between $2 million and $10 million in sales and help them grow to $15 million to $20 million. That makes them prime for a sale to one of the larger players in the industry. We provide an incubator.”
A major deal earlier this year was Neiman Marcus Group’s acquisition of 56 percent of Kate Spade for $33.6 million.
Andy Spade, chief executive and creative director at Kate Spade, and the designer’s husband, said that while the firm was financially sound before the acquisition, the backing of NMG gives them more confidence about its future .
“I think the investment has made us feel more secure about our future to the point where we feel that nothing can wipe us out,” Spade said. “We’re buying advertising for the first time and we’re not afraid to invest in our infrastructure.”
Spade said that while NMG lets the firm operate relatively autonomously, he believes NMG’s presence has been a good selling point in securing licenses, including its first shoe license inked in June, and in recruiting management. The firm is also rolling out its own stores and will likely expand into fragrances and cosmetics through a license.
“Since the investment, we’ve been getting our structure set up so we can grow into other categories either by finding partners or doing it ourselves,” Spade said.
NMG said last year that it had allocated between $150 million and $200 million over the next three to five years to purchase stakes in possibly a half-dozen fledgling resources. Besides Spade, it acquired Laura Mercier makeup for $6.7 million.
Peter Farwell, NMG’s vice president of corporate relations, said NMG is “extremely pleased” with both acquisitions and will look for more, possibly in accessories.
“We think we’ve got an ability to identify brands that have expansion potential,” said Farwell. “So if you see the potential, why not try to take some financial advantage and participate in their growth. We would hope to do more.”
Besides Neiman’s, many luxury players such as LVMH Moet Hennessy Louis Vuitton, Gucci/Pinault Printemps, Richemont/Vendome, and Bulgari may target some of the hot high-end accessory names, as the whole luxury market finds itself flush in consolidation, said Christine Kilton Augustine, an analyst at ING Barings.
Several cosmetic firms, including Bliss, Hard Candy and Stila, have been plucked this year by suitors, and observers said accessories share similar characteristics as cosmetics in being a valued main-floor department store classification with rich gross margins.
In the middle market, Liz Claiborne has listed accessories as one of the areas it wants to expand as part of its new acquisition phase, according to Kilton-Augustine. She also suspects Jones Apparel Group, which entered accessories with the Nine West Group acquisition earlier this year, could be a future big consolidator, once it absorbs the purchase.
Other megacompanies with some exposure to accessories that could be suitors include Sara Lee Corp., which owns Coach, and Warnaco Group and Kellwood Corp., which also have small accessory businesses.
Most suspect these suitors will focus on more potentially higher-ticket areas such as handbags, shoes and watches rather than hats, scarves, belts and costume jewelry because they have a bigger impact on the top line.
“Accessories are a lot of nickel-and-dime items and it’s a lot of attention to small details, but the big companies typically don’t want to mess with all that detail,” said R. Fulton Macdonald, president of International Business Development, a consulting firm. “The big companies feel it’s a whole lot of trouble for what, so they often leave it to the specialists.”
However, MacDonald said despite the struggles of being a small company, he generally feels mergers are not good for accessories because it dilutes creativity.
“What spurs accessory sales is that they usually come from many fragmented companies rather than monoliths that tend to be less creative and original and are more into brand marketing,” said Macdonald. “Buying a Calvin skirt or a Hilfiger jacket is much more purposed shopping, but accessories is more impulse spurred. The newness comes from these small accessories houses competing with each other to get something special for the buyer. So I don’t think mergers and acquisitions are good because they tend to take away creativity and I think the customer ultimately suffers.”
However, many believe creativity can be preserved within a merger.
Randall Winn, principal at Saunders, Karp & Megrue, which acquired a stake in Accessory Network last year, said when Saunders makes an acquisition, a top priority is to encourage the retention of the “motivated, creative people” that are the backbone of the venture.
He said it’s a big mistake to only focus on cost savings resulting from a merger.
Winn said Saunders has aided Accessory Network by bringing in a new chief financial officer, developing better reporting systems and particularly in exploring acquisitions.
“We’ve made one acquisition and are in negotiations for a lot more now,” Winn said. “We hope in the long term we’re going to build a very big company.”
Lisa Baum, first vice president at Israel Discount Bank, said she has seen many mergers that have worked successfully over the last couple years, where designers are allowed to spend more time creating rather than toiling with the day-to-day business side of things.
Baum also said mergers often allow firms to diversify so their success is not solely tied to one product category.
She said, “It makes them stronger and more secure about their future.”
Nonetheless, the consensus from analysts is that about 50 percent of all mergers don’t work out as planned, mostly due to personalities or culture clashes.
Deutsch also said that while sharing of power in a merger can be tough on the psyche of an entrepreneur, the advantages of expanding into other categories, cost savings, adding economies of scale and reducing risks typically outweigh such concerns.
“Ideally, one plus one equals three,” said Deutsch, “But there are clearly issues of loss of autonomy and the loss of the upside if they hit a home run on an item. They have to decide if they want a smaller share of a bigger pie and if they want their downside protected.”
Worldwide Dreams’ Gimbel admitted that his firm found difficulty in meshing all the entrepreneurs together in its merger and is now restructuring its management.
“A small company has its own idea of how to operate, and things such as flying first class and whether and how much to give to charities can become issues,” Gimbel added. “When you become part of an organization, you have to adhere to the company’s policies.”
Gimbel said John Margaritis, who was most recently chief operating officer of Tommy Hilfiger Handbags, has just been named president and will direct the operations of the firm. Gimbel expects the management restructuring to be completed by year’s end.
Otherwise, Gimbel said the merger “has been a blessing,” particularly in its ability to share warehouse and back-room services, a Hong Kong office and freight costs.
“It also helped with positioning us as a licensor and with the retailers. It also allows us to do cross-selling,” said Gimbel, who noted that the firm remains open for new acquisitions.
Hafif was also weary of shortchanging the creative side, because he feels that the accessory business thrives solely because it is such a highly fragmented market, with low barriers to entry for many products. He believes in providing the financial and back-office support while keeping the creative side operating autonomously. He also said it’s essential to have the acquired company hold a stake, to give them incentive.
Since starting up in January, Hafif has acquired Accessory Island, the licensee for all Andy Warhol accessories; Vanessa Handbags, and Accessory View, a forecasting firm.
“Since January, we’ve looked at about 140 companies, had serious discussions with about 20 and closed on three,” Hafif said. “By the end of the year, we will have at least six.”