Succeeding in a Rapidly Evolving M&A Landscape

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These are exciting times in the financing and mergers markets, with several key themes influencing the consumer retail space, and exciting opportunities for high growth and emerging companies.

Financing Markets

During the financial crisis, we saw GDP growth plummet 0.3 and 3.5% in 2008 and 2009, respectively. Then 2010 saw a rebound of 3.0%, and 2011 exhibited progressive improvement. This year and next are expected to deliver stable growth, due in part to a belief that the unemployment rate will continue to decrease albeit at a relatively slow rate.

This increasing growth and stability has pushed equity market performance up almost 10% so far this year.

Against this positive macro market backdrop, consumers continue to spend, while saving less. In addition, investors have become less risk-averse.
These combined factors have resulted in retail stocks outperforming the market by 8% last year and 9% YTD. High growth retailers like Francesca’s Collections and Michael Kors have had even more spectacular performance.

The merger market peaked in 2007 at $4 trillion and dropped by more than half by the end of 2009. In 2011, merger volumes were up 6% to $2.5 trillion, but transaction volumes as a percentage of the overall market remain low at 5% (vs. a long term historical average of 6.5%.) We expect merger volumes to increase as the broader market continues to rise. Also, acquisitions of private companies have rebounded significantly and were up approximately 10% last year. We expect this trend to continue driven by exceedingly low interest rates.

Despite better-than-expected economic data and positive news from Europe, interest rates remain near all-time lows.

And private equity firms have more than $300 billion of uninvested equity capital.

With the economy growing (albeit slowly), jobs increasing, the equity market rallying and the merger market poised to continue to grow thanks to low interest rates and a significant amount of money available from private equity funds, this is a good backdrop for growing companies.

The Consumer Retail Landscape


Let’s begin with the scarcity of growth. The retail landscape has become increasingly crowded. In 1998 there were only 13 retailers with more than 300 stores. Today that number has doubled and 11 of those retail chains have more than 800 stores – a fivefold increase.

This retail development has far outpaced population growth in all age and demographic categories. Today the US has 7 times the retail space per capita of Western Europe!

As a result of this “overstoring,” and the fact that there is a lot of competition and not enough differentiation, fewer and fewer retailers are able to grow at 15% or more. Anyone who is able to accomplish this today is truly extraordinary.

The effects of technology on the consumer cannot be underestimated. E-commerce is changing the way consumers interact with and buy products, and making brands more important than ever.

Increased Internet penetration globally represents massive potential for the e-commerce market as people shift offline activities online. The global ecommerce market is expected to more than double over the next 8 years from $1 trillion in 2011 to $2.2 trillion in 2019. This represents a compound annual growth rate of 11% – more than double the expected growth rate for worldwide retail sales.

This will be driven in part by the rapidly growing number of smartphone users across the world, in particular in the BRIC (Brazil, Russia, India, China) countries. And mobile innovations such as smartphones and tablets have surpassed PC computers in unit shipments and are expected to soon outnumber PCs.

A quick look at Amazon will validate this belief. The number of shoppers per month on Amazon’s site is tremendous. Its sales growth – from a startup in 1995, an IPO in 1997 with $150mm of sales to more than $34 billion in sales today – is nothing short of meteoric.

This type of growth going forward will be driven by the intertwining of mobile, social and local innovations. A concrete example is Facebook – one of the first innovative concepts combining mobile technology, social networks and local communities – which surpassed Yahoo, Microsoft and YouTube as the #2 most visited site in the world after Google. While Facebook’s direct involvement in e-commerce transactions is limited today, any business should evaluate a marketing strategy on such a powerful social network platform. “Social Distribution” on social networks should be a powerful marketing channel for many years to come.

The emergence of the Internet has increased transparency and truly empowered consumers. As the online experience becomes more enhanced, personalized and convenient, more consumers become connected, driving rapid e-commerce growth. Even the affluent, who traditionally enjoyed the service and customization offline shopping provides, are now online. Almost 20% of affluent shoppers and 27% of ultra high net worth customers have engaged in mobile commerce.

The Importance of Brands

Mid-tier department store sales have been flat and mall square footage growth has turned negative – while branded apparel sales have accelerated. Why? Brands that matter to the consumer have the ability to move across geographies, categories and platforms (i.e. online). They can go to where the customer is when she wants them. Some of the world’s most iconic brands – like Nike and Coke – have proven that they are far more powerful than the outlets that sell them. That is even truer today as technology continues to change consumer behavior.


So what could success for every retailer look like?

In recent years several retail entrepreneurs have won big in the public markets. Kevin Plank at Underarmour and John Idol and his team at Michaels Kors took their companies public for different reasons, but have enjoyed wonderful success – as have their investors. These success stories make investors open and willing to seek out and embrace the next new great growth company.

Let’s talk about one particularly interesting case study, and what we can learn from it.



Lululemon has really been one of the most successful apparel launches of the past decade. Chip Wilson had a vision. He saw women becoming more powerful, both financially and socially. He saw the health and wellness trend and wanted to help women look good while they became more fit. He believed they would pay a premium for it and he was right. The small Vancouver company with a big vision began to grow rapidly and Chip decided to sell a portion of the company to a private equity firm. He wanted to diversify his risk and it was becoming too much for him to manage alone. The investor helped bring in experienced management and positioned the company for the public markets- one goal of Chip’s was to give back to all those who helped create Lululemon. Bob Meers, the previous CEO of Reebok was part of that team. Back in those days Chip often talked about Meers coming in as \”my Chevy – steady and safe to get me through the IPO.\” As the company continued to propel forward he brought in Christine Day to be his \”Lamborghini.\”

Chip had a vision and strategy, and we helped translate that into investor appeal. By focusing on yoga inspired apparel in conjunction with the newest innovations in technical athleticwear, we worked together to help investors see real white space in the retail sector instead of just another niche yoga company. In its early stages LULU showed proven results with a growing store base and potential for category expansion into running gear, casual wear, and menswear, all of which showed great promise for the brand. At the time of the IPO in 2007 many people in the US still had not been to a store (there were only 57 total stores, most of which were in Canada), but investors were getting very excited about its potential. Many naysayers, however, thought his grassroots, guerilla-style marketing could not be scalable. Although we discussed other approaches, he was unwavering in his determination to provide a unique \”un-retail\” retail format. Once again, he was right.


Conditions around the IPO were not ideal. Markets were depressed during the road show, which is not the situation you want to be in. But, investor demand was strong: Over 90% of the investors who had met management placed orders. The $377 million IPO was heavily oversubscribed with 450 institutional investors, and ended up pricing 64% above the midpoint of the original range. Keep in mind this was after a marketing period where retail indices were down 9 out of 10 days. It says a lot about the company, its vision, and management team. Today, growth is just tremendous. Expectations are extremely high for this brand, and the company has a track record of delivering exceptional results. The stock has returned over 600% since its IPO. It is currently trading at a price/earnings ratio of over 60 with a market cap of more than $10 billion, an all-time high.

I hope that the next Lululemon is reading this article right now. In order to get there, be true to your vision, know what you know and get experienced people to assist you in the areas you don\’t, and never look back. It can be a fun ride.



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