Growth Strategy: Mergers & Acquisitions

By Stephen Wyss

As retailers eye avenues for growth in 2012, mergers and acquisitions (M&A) will be a key area of interest and activity.

Our recent survey of 100 retail CFOs found that 52% believe most M&A activity in 2012 will be on the strategic side. Opportunities for strategic buyouts — both domestic and international — are ripe, and with many retailers reporting better-than-expected 2011 holiday figures in the U.S. market, some companies may be well-positioned to move forward with acquisitions.

Many domestic retailers recognize that they are overstored in the United States, and the international market presents the best opportunity for growth. As a result, we expect to see a continued focus on international expansion, particularly in the Asian markets, with U.S.-based companies pursuing deal opportunities both foreign and domestic, and foreign companies looking to take advantage of opportunities in the U.S. market. Companies that hold the potential to increase consumer loyalty, improve or establish efficient distribution channels, and provide enhanced global reach will be vied-for acquisition targets.

Strength of brand: Strength of brand will be especially important to M&A deals this year, particularly for strategic buyers. While we saw a lot of private equity buyouts in 2011, and there are indicators that private equity will continue to be very interested in the retail sector, we anticipate an uptick in strategic deals in 2012 as strong retailers look for opportunities to expand market share and enter into new markets.

An ideal target will have an enthusiastic and loyal consumer following and present an opportunity for the acquirer to integrate and synergize existing brands with those that are acquired. While a strong brand identity can pose challenges for integration, retailers recognize the value of a loyal customer base in an economy where consumers are increasingly forced to make choices between brands and limit their spending.

With the U.S. market largely saturated, an attractive target for a strategic buyout will give retailers opportunities to distribute products in new markets, both domestically and internationally. Gaining an international distribution channel is a huge revenue opportunity for domestic retailers, but it’s not the only important channel for growth. Our survey found that more than one-quarter of CFOs (29%) say e-commerce and mobile commerce will be their primary objectives for growth, as these channels offer potential for broadening distribution at a comparatively low risk. Retailers with developed online and mobile infrastructure and advanced technologies will be attractive targets.

Logistics: The economic downturn pushed retailers to be extremely diligent about cutting costs and improving supply chain efficiencies. This continues to be a key strategy to preserve margins and will be a considerable factor in M&A deals.

Retailers will look for acquisition targets that can be easily incorporated into the company logistics infrastructure or that have strong existing logistics capabilities to meet and push forward internal efficiency goals. Thus, a strong target will have robust logistics capabilities and solid vendor and supplier relationships in markets where the acquirer sees a potential for growth.

Risks: Those who have been enjoying the fruits of international expansion will see challenges from the economy in 2012, and there remain substantial risks for those looking to grow internationally.

Some European retailers, such as Next, the U.K.’s second-largest clothing retailer, saw disappointing holiday sales. This global environment represents both an opportunity and a risk for retailers looking to expand internationally, as foreign companies may be more open to strategic deals but international markets remain mercurial.

In addition to unpredictable markets on a global scale, a significant risk for companies looking toward international expansion in 2012 will be valuation. While valuations in the marketplace have stabilized, retailers still face challenges as they aim to get good pricing for acquisitions in the face of a volatile global economy.

Overall, we can expect to see significant changes in the retail landscape during 2012, both domestically and internationally.

Stephen Wyss is a partner in the retail and consumer products practice at BDO USA, LLP.