A big merger caused problems for beauty giant Coty. Some small
ones could provide the touch-up it needs.
By John D. Stoll
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 13, 2019).
Coty Inc. intended to "instantly create" a beauty superpower
with its $12 billion spree on Procter & Gamble Co.'s collection
of cosmetic and fragrance brands in 2015. Instead, it created a
headache that it may take a Kardashian to cure.
The owner of Max Factor and Clairol took $4 billion in
write-downs this year because of problems integrating P&G's
dozens of brands, marketing miscues and an inflated view of what
venerable brands are worth.
For corporations, it's a problem that's more than skin-deep.
Companies across sectors are slashing ever more deeply the value of
divisions they paid dearly to acquire.
Oscar Mayer bologna, Nokia handsets, Alstom power generators and
Ann Taylor dresses have all shrunk on balance sheets as they fall
off shopping lists or lose relevance. These write-downs can trigger
executive shake-ups, shareholder lawsuits and regulatory
investigations. It makes you wonder if a megamerger is worth all of
the fuss.
It's time to consider a fresh approach. Instead of overpaying
for once-dominant units that have probably seen their best days,
hunt for the emerging superstars where peak value is still to come.
Strikeouts will happen, but the cost of failure is a rounding error
compared with a big merger gone bad.
With this in mind, Coty's next big idea needs to look less like
CoverGirl and more like Kylie Jenner, the youngest of the five
Kardashian-Jenner sisters. She parlayed reality TV and social-media
fame into a beauty powerhouse and an e-commerce juggernaut. Control
of Ms. Jenner's Kylie Cosmetics is for sale, and Coty is said to be
the lead bidder, as reported by Women's Wear Daily.
Both companies declined to comment to me. Interest in a company
like Ms. Jenner's would come as alternative beauty ventures emerge.
Lady Gaga's partnership with Amazon.com Inc. on a new makeup line,
Haus Laboratories, is evidence of how hot celebrity-backed
companies can be.
Anyone with a smartphone knows Kardashian ventures are a
sky's-the-limit proposition -- these women continue to shatter our
expectations. That's why the $600 million price tag Ms. Jenner is
said to be asking for a majority stake seems like the kind of
low-risk/high-reward pursuit executives at Coty need.
Coty gets an up-and-coming product line and (hopefully) retains
the services of a billionaire entrepreneur who can outrun an army
of marketing experts when it comes to gaming Instagram or inspiring
young shoppers.
Linda Bolton Weiser, a D.A. Davidson equity analyst, told me the
$1.2 billion valuation on the entire Kylie Cosmetics business is
sensible given revenue estimates. In a note to investors, she said
its value could grow if Ms. Jenner's new foray into skin care
replicates her success in lipstick, eye liners, blush and eye
shadow.
What does Coty, which lost $100 million a month in its core
consumer beauty division over the past nine months, have to
lose?
Emilie Feldman, a professor at the University of Pennsylvania's
Wharton School, says there is growing empirical evidence that
companies pursuing a series of smaller deals rather than focusing
on whoppers are better off. She said even if a Coty/Kylie marriage
fizzles, doing a bite-sized transaction would help build the
acquirer's deal making muscle without posing the huge integration
hurdles that the P&G arrangement presented, which Coty
executives said in 2016 was a "massive distraction."
Ms. Bolton Weiser says Coty's competitors offer a good template
to follow. " L'Oréal and Estée Lauder built carefully curated
portfolios in recent years," with those companies spending a
billion here or hundreds of millions there on startup brands like
Too Faced, IT Cosmetics or Becca.
Ms. Feldman points to Cisco Systems Inc., Alphabet Inc. and
Danaher Corp. as examples of companies in other industries
employing a baby-steps philosophy to empire building.
Big banks have been pushing lower-scale transactions as the
recent deal boom slows, leading to a trend my colleague Greg Ip
calls "stealth consolidation" that helps companies, including those
in pharmaceuticals and tech, gobble up innovative competitors even
as it poses antitrust concerns due to the gradual buildup of a
dominant position.
McKinsey & Co., the giant consulting firm, has been
analyzing big vs. small deals for a decade. "We set out to answer a
critical management question," Andy West, a senior partner at
McKinsey, says in an updated version of results published
Friday.
"What type of M&A strategy creates the most value for large
corporations? We crunched the numbers, and the answer was clear:
Pursue many small deals that accrue to a meaningful amount of
market capitalization over multiple years instead of relying on
episodic, 'big-bang' transactions."
In studying 1,000 global companies over 10 years, McKinsey found
those that had the best results as measured by shareholder return
were those that did between two and three deals a year,
representing a median of 15% of the company's market cap over the
period.
Examples of what McKinsey calls "programmatic M&A" done
right include Facebook Inc.'s $1 billion Instagram acquisition or
Unilever's $326 million purchase of Ben & Jerry's. These were
pieces to a bigger puzzle. Not-so-shining examples include Apple
Inc.'s $3 billion bet on Beats Electronics LLC.
Coty has dipped its toes in the programmatic approach, achieving
mixed results. In 2016, it bought two separate companies: Younique,
a brand sold through social media with direct-marketing techniques
resembling an Amway salesman or the Avon lady, was acquired for $1
billion; and it spent $500 million on Good Hair Day, a brand of
high-end hairstyling appliances aimed at professional stylists.
Younique has tanked, with Coty Chief Executive Pierre Laubies
pinning struggles on a lack of appropriate "hype" for the cosmetics
line. He also said algorithmic changes at Facebook -- among the
brand's top marketplaces -- also dented performance. As a result,
Younique's profits have declined along with the rest of Coty's
consumer division.
GHD has sizzled, aiding Coty's professional products unit as it
has gone from representing a tiny sliver of the company's profit
and revenue to being a major driver of growth and earnings.
Ms. Bolton Weiser, the analyst, says growth with the pros is
fine, but Coty can't win without reviving its consumer product line
and bumping up its presence in the growing luxury segment. For
that, Mr. Laubies has no choice but to figure out how to better
keep up with a Kardashian. Or just invest in one.
Write to John D. Stoll at john.stoll@wsj.com
(END) Dow Jones Newswires
July 13, 2019 02:47 ET (06:47 GMT)
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