JACOBS: NEW STRATEGY FOR MERGERS
Byline: Thomas J. Ryan
NEW YORK — With financial buyers of apparel companies in the Eighties badly burned in the Nineties, the future for mergers in the apparel business will be based on strategic considerations — firms in like or related businesses combining to strengthen their positions.
That’s the view of Michael T. Jacobs, director of corporate finance at Kurt Salmon Associates. In this post, Jacobs heads up the mergers and acquisitions business for KSA, a major consulting firm in the soft goods industry. He has been with KSA since 1992 and before that was director of corporate finance at the U.S. Treasury Department under the Bush administration.
While more money is flowing into venture capital funds and some analysts and others on Wall Street expect them to play a larger role in apparel deals, Jacobs holds to an opposite opinion.
“Most investment funds that have bought apparel companies have lost money badly on at least one apparel company, and very few of them have any interest in ever owning another apparel company,” said Jacobs. “The vast majority of them won’t even look at apparel deals, so it’s much harder to sell an apparel company to a financial company today than five years ago.”
Jacobs himself wouldn’t name specific instances. Deals in which venture capital funds were particularly scarred include Chalk-Line Inc., a sports-licensing firm; Cherokee Inc., the apparel and footwear maker, and Taren Holdings Inc., a swimwear firm, said industry sources.
While the number of financially driven apparel mergers is declining, strategic mergers should increase as larger retailers command greater control over all aspects of the apparel market. Indeed, Jacobs sees more M&As in the future driven by consolidations at retail, particularly at the mass market level.
“To Wal-Mart, a $50 million company is hardly worth doing business with,” Jacobs said. “If you’re selling to Kmart, or Wal-Mart or Target and they want you to grow 20 to 30 percent a year, you’ve got to keep up with the growth in their business. So you’ve really got to build scale quickly, and that requires capital. Undercapitalized is a word that applies to most middle-market apparel companies.”
Although the mass market level is seeing the most rapid growth, he said consolidations in other areas, such as department stores and catalog firms, will lead companies at the manufacturing level to combine to meet these larger retailers’ needs.
As the financial community’s interest waned in apparel deals, Kurt Salmon’s business has flourished. Among the deals Kurt Salmon arranged in 1994 was VF Corp.’s purchase of H.H. Cutler in January, Fruit of the Loom Inc.’s acquisition of Gitano in March, and Citicorp Venture Capital’s acquisition of Ruff Hewn in July.
Jacobs credits KSA’s rise in the M&A field to its savvy of the apparel field. “We understand who all the players are and we know their strategies,” he said. To get the best offer, Jacobs said a company — whether looking to buy or sell — should prepare for a year to a year-and-a-half process. A typical deal involves compiling background information, identifying the right parties, contacting those parties, negotiations, overcoming hurdles created by lawyers and finally closing on the deal.
Jacobs said the company should look at all the options available to them before completing a deal, noting that even many larger firms “are not that sophisticated financially” and possibly missed some alternatives.
Options may include recapitalizing with new banks, adding subordinated debt, finding an outside investor or seeing if through the current bank they can gain “more leeway” or capital.
In the end, selling may be the best option. Besides getting capital for growth, merging provides firms, often led by a sole entrepreneur, greater management depth.
“A lot of them get into trouble because they don’t have the infrastructure to build a business that can have a long duration,” Jacobs said.
Firms may sell because principal shareholders want to retire and cash out as in the case of H.H. Cutler, a children’s and sports licensing apparel firm that was coming off a record year. On the other hand, a troubled firm is sometimes forced to sell by its banks or creditors.
Jacobs said one big mistake many sellers make is waiting until the firm reaches its peak before considering a merger.
“Most people in the apparel business think that when things are going well, selling their business is the last thing they want to do. Most wait until they’re forced to sell it, then ask, ‘Now what do I do?”‘ Jacobs pointed out.
Often, companies selling after their peak run into problems of underperformance, and it makes it hard to get a fair price.
On the other side, buyers typically look to add brands that complement existing ones or gain access to new distribution channels. Often buyers overlook the cultural fit of the acquired firm and are not able to retain key people once the deal is completed.
— Fairchild News Service