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We ask Angela Quintero, Consulting Director and head of Global Intelligence Alliance’s global Consumer & Retail practice, based in Hong Kong, for the reasons behind and the implications of these deals.
What is driving these mega-mergers in a global economy where consumers still seem to be cautious in their spending?
"Firstly, these deals are more strategic in nature, rather than predatory. Several factors are behind this: healthier businesses, a relatively positive outlook and the need to reach out to new markets and to diversify the businesses.
The recession was fatal for lots of retailers but the outcome for the strong survivors was probably very positive. During the downturn, companies were forced to cut costs, trim expenses, rationalize their size and footprint, close under-performing units or stores, rethink their strategies and renegotiate terms and leases. The most sophisticated players did all of this and some even went a few steps further by taking the opportunity to get rid of innate inefficiencies.
Coming out of the most severe part of the recession, we see an industry of survivors with healthier businesses.
The retail and consumer industry is polarized between big, strong players with good cash positions who are eager to revamp sales and conquer new markets on one hand, and more fragile players who may not be so strong in cash or power but still have attractive market shares, established brands and good profitability potential on the other. In other words, the industry is now a field of eager buyers looking at a wide spectrum of attractive targets. Chief executive of cash-rich Swatch Group, Nick Hayek, recently said, "If they are interesting and big brands (to acquire), we have always said yes, it is a possibility."
And the market is not quite where it was a few years ago. People are now more risk averse in their outlook and conservative in their valuations, no longer willing to hold out for a better price later. The thinking on the selling side is that it might be better to bank on a deal now, than to hope for a better offer later. In such a climate, companies may be less resistant to selling parts of their business, or their entire business. It is, in essence, a good time to buy high-performing company assets at softer prices.
The ambitious US$18.9 billion Kraft Foods-Cadbury deal in February set the stage for mega-mergers and acquisitions (M&A) in the industry. Next came the US$3 billion bid by Phillips-Van Heusen for Tommy Hilfiger. Hilfiger is an example of a company that out-performed the rest throughout the crisis, staying healthy and increasing sales while most competitors were in decline. It became a very attractive acquisition target in the industry thanks to its profitability and global reach. RadioShack’s initiated deal with Best buy is another example.
Seeing well-known brands involved in M&A and partnerships builds the confidence of other players – particularly when the economy appears to be picking up. Indicators from the first quarter of 2010 seem to show that the consumer and retail industry in general is picking up across major markets.
Wholesalers have so far posted good sales results, many above expectations. Retailers seem confident again, paying high prices for retail space in prime locations. Uniqlo for example, set a new record by paying US$20M annually for its 89,000 square-foot space in New York’s Fifth Avenue. Retail sales have been rising month after month. Consumer confidence has hit a post-2007 peak in Japan.
| United States|| 1.6%
| United Kingdom||0.4%|
| Latin America (main markets)|| 1% - 4%|
|Asia|| 2% - 4%|
Source: The Economist, US Census Bureau, Bloomberg, Reuters
Even if these better-than-expected results are just a short-lived overreaction by consumers to the long recession, we still expect to see lots of M&A activity, particularly in emerging markets.”
What lessons can we learn from the recession?
“This downturn has two important lessons for players in the consumer and retail industry.
First, consumer goods companies need to ensure they have strong bargaining power with the distributors and retailers who determine whether their merchandise gets into stores. Companies that manage to penetrate deeper into distribution pyramids and with more diverse portfolios tend to fare better. A broad range of products with well-known labels is much more attractive to retailers. But diversifying portfolios organically can take many years and is often risky in fast moving industries. Acquiring brands or product lines from established players to complement existing portfolios is always faster and generally easier for those with liquidity.
Secondly, companies can no longer focus on only one market – even if they are very successful in their one market. When we analyze the performance of different players throughout the crisis, it becomes very clear that companies with strong positions in several markets were able to come out of the recession stronger as a whole. Growth and profitability today comes from scale and a presence in different markets.
This is probably the main driver behind the Phillips-Van Heusen-Hilfiger deal. A very strong player in the United States, Phillips-Van Heusen has struggled to bring its portfolio to a more global level. The acquisition of the Hilfiger brand will immediately bring access to other markets, especially emerging markets in Asia and Latin America where Hilfiger is well established.”
Will we see more M&As in emerging markets?
“The short answer is yes. Industry players in mature markets, such as the United States and Europe, see hope for growth in the BRIC countries and other emerging markets.
But there is a caveat. Penetrating these more varied and volatile markets is no easy task.
Take China and India for example. Modern retail chains are still relatively weak in these countries and the vast majority of consumer goods are sold in traditional ’mom and pop’ shops. Entering these markets means falling back on established and powerful distribution systems. Very few companies in the world have the ability to establish independent distribution and most are better off acquiring or partnering with local established brands. Foreign companies, however, lack visibility and knowledge about possible acquisition targets and local market conditions.
Experience has shown that in general, entering new markets can be either painful and very expensive or highly successful – but only if done with the right strategy and deep local knowledge.
A few years back, due diligence centred on financial assessments and long talks between the two parties involved. Acquisitions and partnerships between completely unknown parties were very rare.
These days, and especially in the emerging markets, companies need to act faster by exploring new territory, and therefore require more intelligence before completing a deal. Furthermore, deals are done between companies that might know very little about each other, and completed within a few months. Financial and company registry records do not provide enough information in these cases.
It has become critical to perform thorough commercial and market due diligence through which the buyer gains visibility into numerous factors: the reputation the target has with its customers; its relationship with distribution channels; a sense for its implicit negotiating power with suppliers, distributors or retailers; the relationship it has with government bodies; the impact of opaque policies and regulations – and the list goes on.
The only way to obtain visibility into such factors is through primary research – talking to the market and other value chain players. So it is exceptionally helpful to work with a neutral third-party with the expertise, local knowledge and market connections, to help screen, evaluate and introduce potential M&A partners, as well as to conduct market due diligence both at the pre- and post-deal stages.”
What advice do you have for companies who need to identify the right M&A consultants for them in emerging markets?
“There are several aspects that will make a significant difference to the advice you receive.
Firstly, it is very important to assess the experience the firm has in advising M&A deals. Have they had actual experience conducting commercial and market due diligence in the relevant countries? What deals have they advised on previously? Have they helped both the buying and the selling side?
Besides the experience in M&A deals, it is also important to work with people who understand the industry. Have they had hands-on experience in the industry, other than consulting? What other relevant industries have they had hands-on experience in and how can this be a benefit or a hindrance?
If the deal is international, it is important that your advisors have had international market exposure and that they understand, and know how to handle all the ‘soft’ parameters that might affect the M&A deal, such as cultural differences and top management philosophy.
Check their understanding of the strategic issues your company is facing. As an initial assessment, it helps to ask them to provide brief implications of different possible scenarios in order to gain an insight into their understanding of the big picture.
Find out about the local industry connections, industry knowledge and information sources accessible to the firm. It is important to be aware of and have access to sources available only to industry-insiders.
Lastly, always ensure that the senior members of the team are actively involved in the case and do not just play a supervisory role.”
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