Procter and Gamble (NYSE:PG)
Historical Stock Chart
2 Months : From Jun 2019 to Aug 2019
By John D. Stoll
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 reportedly for sale, and Coty is said to be the lead bidder.
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 Weber 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 email@example.com
(END) Dow Jones Newswires
July 12, 2019 11:01 ET (15:01 GMT)
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