Bigger is better, right?
Not always. There are good deals and there are bad deals. In a year when mergers-and-acquisitions activity is heating up, finding the right marriage between buyer and seller is more complicated — and risky — than ever before.
Clearly, some of the major deals in play have the potential to reshape the industry. And there will be more to come. The climate bodes well for serious deal making in the weeks and months ahead, as the bigger players sitting on piles of cash look for ways to increase their scale, expand their reach and diversify their portfolios. There is little doubt that in an age of escalating costs and globalization, moves that improve the economies of scale are strategically beneficial. In theory, that is.
In reality, many recent deals have proven to be more problematic than expected, complicated by the fact that the retail and financial markets shift daily, sometimes hourly. What looked good on paper at the beginning of the month can emerge as a liability just a few weeks later. This, coupled with some common deal-making errors, can make a prospective marriage more difficult than imagined.
So what separates the good unions from the bad? The ever-increasing list of challenges is something no buyer can afford to ignore. While so many prospective buyers spend hours scrutinizing balance sheets and analyzing financials, other factors are often overlooked. With so many intangibles at play in any acquisition, it sometimes can be the “little” things that derail a happy and successful pairing.
Many deal errors occur in the due diligence phase. Industry insiders might think they know what they are buying and so fail to get enough outside perspective and honest feedback about the potential trouble spots. There are at least two huge mergers that will go down in the footwear history books for their lack of research prior to pulling the trigger. In one case, all turned out fine. In the other — well, I’ll keep you guessing — but let’s just say a lot of money and goodwill has been lost.
The right kind of deep-dive due diligence should reveal many things that will determine future success. This exhaustive research is critical to assure a harmonious fit because at the end of the day, footwear buyers and their customers will be the ultimate judges of a good deal.
If a company acquires a successful brand, retailers will be nervous about a change in ownership and management. For those looking to take on a tarnished or underdeveloped brand, the role of “fixer-upper” comes with other burdens and investment demands. In both cases, the potential purchaser is getting a piece of brand history for better or worse. All the ramifications of that history need to be carefully reviewed and understood prior to signing.
And then there is the question of talent. Relationships are so crucial in this business, and one of the hallmarks of most acquisitions is relationship interruptus.
Recently, when one of the industry’s most successful labels changed hands, the key executives stayed aboard. Until they were gone, that is. When they departed, a number of their biggest and most critical accounts were left in the dark with no communication regarding brand direction. The situation will be resolved, but uncertainty about the new management team could linger — a situation that would have been rectified with a more strategic and careful approach to transition.
But there are many cases where a sweeping management change after purchase has been very beneficial. Most retailers welcome fresh blood at companies that need a change in direction, and there are several great examples where the new owners installed a winning team to drive business to a higher level. Think Nike and Converse.
Clearly, the acquisition strategy doesn’t end at the signing. As with any union, the first year or two of marriage can be the acid test. The best deals have been the ones that made provisions for integration challenges, cultural fit and business uncertainty. The plan for moving forward has to be well thought out, something a surprising number of companies fail to execute having been consumed by the contract details and financial obligations needed to get to the finish line.
In the days ahead, power brokers on both sides of the equation would be wise to think carefully about product evolution, retail relationships, management teams and cultural fit as much as multiples, stock prices and sale tags.
As the wave of consolidation again picks up, it will be interesting to see who ends up with what. It will be more fascinating to see what they do with it.