How to Evaluate Mergers and Acquisitions in the Fashion Industry

How to Evaluate Mergers and Acquisitions in the Fashion Industry

Introduction

Mergers and acquisitions (M&A) occur frequently in the fashion industry. They can result in significant changes for your company in the long run. A common misconception is that mergers and acquisitions only apply to large-scale businesses. However, small and medium-sized companies can make these deals and benefit from them too.  


It is crucial for retail business owners to be aware of mergers and acquisitions, since they might want to participate in these types of transactions. This financial concept may sound complicated, but I am going to simplify it to help your fashion brand and clarify any confusion

Mergers and acquisitions is the process of one company joining another. Both terms are often utilized interchangeably, but there is a main difference between mergers and acquisitions. A merger refers to when two separate companies combine to form a single new business. Meanwhile, an acquisition is when one company purchases another. You need to understand both in order to make the best choice for your business

Here is a list of the 4 steps for evaluating mergers and acquisitions in the fashion industry that will help you determine the right decision for your brand:

  1. Look at M&A Trends
  2. Determine the Benefits
  3. Consider the Disadvantages
  4. Make a Decision
  5. Conclusions

1. Look at M&A Trends

The first step for evaluating mergers and acquisitions for your fashion brand is to research the latest trends. New technology has led to the rise of e-commerce. Online shopping is not going to end anytime soon, especially since younger generations are dependent on technology. As a result, many companies are actively figuring out ways to enhance their digital skills to meet evolving customer expectations. In order to compete with online businesses, you may want to merge with a company or buy a smaller brand that has a strong digital presence

Another trend to look at is the longer timelines for mergers and acquisitions. The average time to close negotiations is continuing to grow. It typically takes four to six months to complete a transaction. The amount of time it takes for mergers and acquisitions is increasing because of due diligence. Both buyers and sellers in the retail industry must ensure they have all the information about a business. For example, they need to examine and comprehend the company’s financial statements, contracts, legal matters, and more. There is also the element of goodwill involved with fashion businesses that must be understood. Goodwill is an intangible asset. It is important to remember that it includes the loyalty of your customer base and brand recognition. The merger and acquisition process can clearly take a long time. Therefore, you will have to be patient if you choose to go through with this transaction.

It can be beneficial to look at past mergers and acquisitions in the fashion industry, so that you can gain insight into the process and see what worked for them and what did not. For instance, the merger of Kmart Holding Corporation and Sears, Roebuck and Co. into Sears Holdings Corporation in 2005 was a failure. Both companies were struggling at the time of the transaction and combining them did not make them stronger. Moreover, Sears Holdings Corporation was not prepared for the growth of e-commerce and ultimately filed for bankruptcy in 2018. Pay attention to the mistakes other businesses have made because you can learn a lot from them and use this knowledge to make better choices for your retail brand

2. Determine the Benefits

In the fashion industry, there are many benefits of mergers and acquisitions that you should take into account. For instance, your new business can experience higher growth. You will most likely increase your revenue and be able to expand further because you either joined another company or purchased a business. 

Another benefit is synergies, which is when the value of the combined company is greater than the value of the two separate entities. There are revenue synergies and cost synergies. Revenue synergies are usually when you can generate more sales through cross selling your fashion products or raising your prices. Examples of cost synergies are when you can cut costs because of technological advancements and supply chain improvements. 

By coming together, your new retail company will have diversification. Your company will experience less risk because you will have more revenue streams, instead of only one. In addition, you will have increased access to capital and a larger customer base through mergers and acquisitions. 

Furthermore, if the two companies that join together have comparable supply chain levels, horizontal integration occurs. This will be valuable to your fashion brand because you will have stronger market power, reduced competition, and access to new markets. Meanwhile, vertical integration is an advantage if the two businesses involved in the transaction have different supply chain levels. You will then experience independence from suppliers, increased differentiation, and lower prices. 

Mergers and acquisitions are the perfect way to achieve your goals faster than you originally expected. Many entrepreneurs create long-term strategies for their retail businesses, but do not have the opportunity to implement them. For example, one of your dreams might be to break into a certain market and by merging with or acquiring another company, you now have the chance to do so a lot quicker than if you tried on your own. You may also want to improve product development, but lack the necessary resources until this transaction is complete. 

3. Consider the Disadvantages 

The next step is to consider the disadvantages of mergers and acquisitions. For example, the amount of debt owned might increase. If one or both companies owe a lot of money, a merger or an acquisition between the two will lead to larger debt. Your new, combined business may experience potential issues when wanting to borrow funds, which can negatively impact the growth of your fashion brand as well. 

Every business has its own expectations and values. The culture of your retail company may not be the same as the one you are combining with. For instance, one business allows employees to work remotely certain days of the week, while another business requires employees to be in the physical store all the time. If there is a merger or an acquisition and these differences in policies are not addressed, it can create tension between leadership and confusion among workers. In addition, there might be a casual dress code for one company, while employees must wear business professional attire at the other company. If you do not have a strategic plan for a smooth integration process, there will be a higher chance that your transaction with another brand will fail.  

Another disadvantage is that employees of your retail company might not feel secure in their positions if there is a merger or an acquisition. After the deal is completed, typically there are duplicated positions, so some workers are no longer needed. It is common to see layoffs as an outcome of these transactions. As a result, your employees will be stressed and concerned about their future at your business. Plus, these emotions can interfere with their work and lead to less productivity

Costs associated with the transaction is a drawback of mergers and acquisitions as well. You typically have to bring in legal professionals to help negotiate the terms of this deal. You might enlist the assistance of financial experts to figure out the assets too. All these expenses add up and you need to carefully consider them before deciding to go through with a transaction. 

Mergers and acquisitions can be a disadvantage for your consumers, which may have damaging effects on your fashion company. When you join together, there will be less competition in the retail industry. Therefore, your fashion brand will have greater market share and most likely raise the prices of your products for consumers. Consumers will not like this increase in prices and may decide to leave without spending any money. They will not enjoy having less retail options to choose from either.     

4. Make a Decision

Now it is time for the last step: making a decision. You should have already weighed the pros and cons of these transactions for your individual fashion brand. After you have gathered all the facts, you need to choose whether you want to start the merger and acquisition process or not. Don’t rush such an important decision, though. There will be lasting impacts on your retail company that you must take into account. Mergers and acquisitions are not perfect for every business, so depending on your needs it can be appropriate to pass on this opportunity.  

If you have determined that participating in one of these transactions is right for you, the next step is choosing whether you want to merge with or acquire a fashion business. After a merger, you will have a new title for your company, so if it is crucial for you to keep your retail brand’s name, you should focus on an acquisition.

Furthermore, the amount of power your retail business will have differs depending on if you complete a merger or an acquisition. The majority of companies that merge have equal power. You will want to keep this in mind for when you have to make significant decisions. In an acquisition, there is a huge power difference. The acquiring business will be in charge of all the decision-making unless other terms are agreed upon.    

Also, the size of your business may help you decide between a merger or an acquisition. If you are looking to combine with a company that is of similar size to your own business, you will most likely want to merge. Meanwhile, if you would like your brand to be the bigger of the two, in most cases an acquisition will give you the chance to purchase a smaller company

5. Conclusions

It is common to see mergers and acquisitions in the fashion industry. We covered the 4 steps for you to follow in order to evaluate mergers and acquisitions, so that you can decide if it is the right choice for your fashion brand. The first step is to look at the latest M&A trends. You need to take into account the increase in online shopping and longer timelines for mergers and acquisitions as well as research past transactions in order to achieve a better understanding of these deals. Second, the next step is to determine the benefits. Higher growth, synergies, diversification, horizontal integration, vertical integration, and faster achievement of long-term goals are all advantages of mergers and acquisitions in the retail industry. 

The third step is to consider the disadvantages of mergers and acquisitions. Your combined fashion company might have larger debt, difficulties integrating company cultures, uncertainty among employees, increased costs, and dissatisfied consumers. The fourth and last step is to make a decision. When evaluating mergers and acquisitions, you must figure out all the benefits and risks, then determine if you want to complete a transaction or not. If you would like to make a deal, study the differences between mergers and acquisitions. Depending on the title, amount of power, and size of your retail brand, you may pick one over the other. No matter what you choose to do, make sure you have taken your time and are confident in your decision.  

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How to Evaluate Mergers and Acquisitions in the Fashion Industry In this post, we're looking at mergers and acquisitions in fashion and how they can be a tool for your business success.
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