Definition Of Mergers And Acquisitions

In todays competitive global business environment, the increasing number of Mergers and Acquisitions has presented companies with a new set of opportunities and challenges to consider. This has made the business world become more demanding as organizational leaders attempt to integrate the business strategies, operations, and cultures of the different companies in order to survive and grow. As a result, several companies are coming together to face the challenges.

The globalization of international economies and the resultant reduction in trade barriers has made mergers and acquisitions an attractive growth strategy for internationalizing organizations (Hitt, Harrison & Ireland, 2001). A merger or acquisition can increase the capabilities of a company within a relatively short period of time; an advantage over organic or internal growth which is generally slower at delivering similar growth outcomes (Lynch & Lind, 2002).

One of the strategies for growth which companies in the top 100 of the fortune 500 list 2011, such as Wal-Mart Stores, Exxon Mobil, Royal Dutch Shell, ING Group, Proctor and Gamble, AT & T, Barclays, Vodafone and Mittal Steel have adopted, is by merging and acquiring. Estee Lauder’s acquisition strategy was chosen because the company has been a big player in the cosmetic market and grown using acquisitions as part of its growth model. A recent acquisition carried out by Estee Lauder is the acquisition of Smashbox Beauty Cosmetics during late 2010. (Annual Report, 2011)

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Given the high usage of mergers and acquisitions as a domestic and international growth strategy, research into this approach appears timely. The purpose of the research will be achieved by evaluating the implications of the mergers and acquisitions strategy in the cosmetic industry by analyzing the growth strategy followed by Estee Lauder Companies Inc. which is purely achieved through mergers and / or acquisitions of other cosmetics and skin care brands around the world.

In this study an inductive approach has been used. The study is furthermore exploratory, meaning that the researcher seeks new insights of a new phenomenon, finds out ‘what is happening’ and seeks new insights into the area. The study is qualitative by nature as the researcher aims to develop an understanding of a complex phenomenon. A case study approach was chosen to achieve the purpose. The case concerned the corporate strategy of Estee Lauder Companies Inc, which uses acquisitions as tools for growth. In the search for secondary data journals, books, articles from the internet and company websites were reviewed and their appropriateness was discussed with a source with insight in the cosmetic industry. The primary data was collected through questionnaires and semi-structured interviews.

The acquisition strategy seems to be mostly influenced by the culture in the acquiring and acquired company. Further, the acquisition motive also affects the chosen acquisition strategy. The researchers also identified that whether an acquisition is successful or not depends on the time frame. Success also seems to be driven by financial returns. In order to act in an international environment, one also needs to be prepared to accept higher risks.

INTRODUCTION

In the twenty first century, mergers and acquisitions have become the most commonly used methods of growth for companies and have reached unprecedented levels over the past few years. They present a company with a potentially larger market share and open it up to a more diversified market. A merger is considered to be successful, if it increases the acquiring firm’s value. Majority of the mergers have actually been known to benefit both competition and consumers by allowing firms to operate more efficiently. However, it has to be noted that some mergers and acquisitions have the capacity to decrease competition in a variety of ways.

Mergers and Acquisitions are attractive as they create synergies and economies of scale by expanding operations and markets and contribute to eliminating inefficiencies and increase productivity and profitability. Mergers and Acquisitions are also powerful and pervasive; they may have other intended and unintended effects at the macro and micro levels. Company stock prices, for example, can change markedly due to attempted or actual mergers and acquisitions.

The ongoing economic crisis, originated from the United States, is hitting not only the origin, but also dozens of Asian, European, Latin American countries. It is evolving into an unprecedented global human catastrophe. During this global economic crisis, sensible business leaders pay doubled attention to corporate restructuring. Mergers and Acquisitions are one broad avenue toward the restructuring success. Therefore, “to do M&A or not?” is a big question facing business leaders, particularly those of fortunate corporations with healthy performance, and those of heavily beaten companies that are desperately searching for ways to survive.

Due the numerous types of mergers that are out there today, the topic of mergers and acquisitions is extremely complicated. It is also remarkably interesting, with the controversies and fierce price wars, which surround most mergers and acquisitions.

In the present world of growing economy and globalization, most of the companies in both domestic and international markets struggle to achieve the optimum market share possible. Everyday businessmen from top to lower level of management make effort to achieve a common goal – ‘being the best at what you do’, and getting there as fast as possible. As companies compete to beat their competitors they engage in various tactics to do so. One such tactics include competing in the market of their core competence.

Cross-border acquisitions have significant advantages. Foremost, they are quick solution to entry barriers. In fact, acquisitions may provide the fastest, and often the largest, initial international expansion of any of the alternatives (Hitt and Pisano, 2003). Second, cross-border acquisitions may be a cost-effective way of gaining competitive advantages through access to technology, brand names valued in the target market, and logistical and distribution advantages, while simultaneously eliminating local competition. Third, international economic, political, and foreign exchange conditions may result in market imperfections, allowing target firms to be undervalued.

Nevertheless, cross-border acquisitions typically carry additional disadvantages. International negotiations for acquisitions can be exceedingly complex. It is estimated that only 20% of cross-border bids lead to a completed acquisition. Dealing with the legal and regulatory requirements in the target firm’s country and obtaining appropriate information to negotiate an agreement frequently presents significant problems. The problems of integrating the two firms often are complex, especially dealing not only with different corporate cultures, but also with potentially different social cultures and practices.

It is noted that acquisitions do not consistently produce above-average returns for the acquiring firm’s shareholders. Nonetheless, some firms are able to create value when utilizing an acquisition strategy. Research suggests that there is a pattern of actions that can improve the probability of acquisition success (Hitt, Ireland, Harrision, and Best, 1998). The hitt, et al, study shows that when the target firm’s assets are complementary to the acquirer’s assets, an acquisition is more successful. With complementary assets, integrating two firms’ operations has a higher probability of creating synergy.

The current macroeconomic trend of declining demand has impacted Mergers and Acquisitions activities severely. Firstly the number of mergers and acquisitions decreased significantly. Secondly, the focus of transactions is shifting from growth to efficiency, hence future integration projects will have strong consolidation and restructuring components.

It can be seen that in the current economic downturn, post merger projects will tend to focus more on “value enhancement” instead of increased company growth.

Despite macroeconomic pessimism, the U.S. prestige beauty market, grew by double digits in 2011 according to a recent NDP report. The overall global prestige beauty market is estimated to have grown over 8%. With a strong presence in this segment, Estee Lauder’s sales and earning rode over the high growth momentum in prestige skin care and makeup categories. The posted consistent double digit growth rates and expanding market share, across geographies and major brands like Estee Lauder, Clinique, and M.A.C in 2011. As a result, the stock swelled by more than 40% during 2011 (Appendix – 7) and it seems to hold significant value. Estee Lauder is one of the leading cosmetic and beauty care players globally and competes with other such as Revlon, and L’Oreal. (Online source: www.trefis.com)

PROBLEM DISCUSSION

The reason why the researcher has focused on the topic, Mergers and Acquisition, is because of this business growth tool’s actuality. According to The Economists mergers and acquisitions are today very relevant themes in the field of expanding a business organization. There may be different purposes such as a rapid expansion, to beat potential future competitors or expand the product depth and range. It can also function as a short-cut to new markets.

The cosmetic industry’s capacity to innovate allows it to remain vibrant, responsible, competitive, and a major contributor to a healthy economy. Today, the cosmetics market is a global and highly competitive. Success depends on research, development and innovation that will deliver formulations to satisfy ever-changing and increasingly sophisticated consumer demands. Further, the beauty market is highly fragmented with large numbers of local and global competitors.

To remain competitive, manufacturers must innovate constantly to discover new ingredients, utilize existing ingredients in new applications and continue creating products. Consumers benefit from intense competition through greater choice and efficacy.

RESEARCH AIM AND OBJECTIVES

The aim of the research will be achieved by evaluating the implications of mergers and acquiaition strategy in the cosmetic industry by analyzing the growth strategy followed by Estee Lauder Companies Inc. which is purely achieved through mergers and / or acquisitions of other cosmetics and skin care brands around the world.

The following will be the objectives of the research;

To indentify whether the mergers and / or acquisitions carried our Estee Lauder have been successful or not;

To identify the main motives of Estee Lauder Companies Inc and the effect it has on its financial performance.

To assess the future prospective of Estee Lauder and whether the Company would be able to sustain a competitive advantage through the adoption of its strategy;

COMPANY BACKGROUND

COMPANY PROFILE

Estee Lauder Companies Inc was founded in 1946 by Estee Lauder, who believed that every woman could be beautiful, together with her husband Joseph Lauder. Based in New York City, Estee Lauder Companies Inc. is a manufacturer and marketer of four cosmetic product lines which includes skin are, makeup, fragrances, and hair care products. These products are sold over 150 countries under 28 brand names (Appendix – 2) that include Estee Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, MAC, Bobbi Brown, La Mer, Aveda, Jo Malone, Bumble and Bumble, Darphin, Rodan + Fields, American Beauty, Flirt!, Good Skin and Grassroots. The Company also has global licenses for fragrances and cosmetics sold under brand names that include Tommy Hilfiger, Donna Karan, Michael Kors, Donald Trump, Sean John, Missoni, and Daisy Fuentes. The company also employs over 22,000 people worldwide.

In the U.S. prestige cosmetics category, Estee Lauder Companies has a market share of almost 46 percent. In 1948, Estee Lauder established their first department store account with Saks Fifth Avenue in New York. During the next 15 years the products were selectively distributed in other stores in the United States. By 1960, Estee Lauder was an international corporation selling their products in the famous Harrod’s Department Store in London. Within a few years, they opened outlets in Central America, Denmark, Hong Kong, Italy, Spain, Sweden, Belgium, New Zealand, and Switzerland. The first Estee Lauder products sold were Super Rich All Purpose Crème, Crème Pack, Cleansing Oil, and Skin Lotion. Additional brands such as Aramis – a line of prestige fragrance and grooming products for men was launched in 1964, and Clinique – the first dermatologist-guided, allergy-tested, fragrance-free cosmetics brand was launched in 1968. Prescriptives – a colour authority with an advanced collection of highly individualized products was launched in 1979. Lab Series Skincare – for Men, specializing in men’s treatment was debuted in 1987. Origins – a plant-based line of skin care, makeup, bath or body and sensory therapy product was introduced in 1990. Besides this, the company signed a global licensing agreement with designer Tommy Hilfiger in 1993. In 1994, the Estee Lauder acquired a majority interest in MAC, but the acquisition was completed in 1998. In 1995, the company acquired a second makeup artist line – Bobbi Brown essentials. Estee Lauder also acquired the luxury skin care brand La Mer and signed a global licensing agreement with Kiton, which is an Italian fashion house for beauty products. In 1998, other acquisitions included Jo Malone, Stila Cosmetics, and Gloss.com. New York based Bumble and Bumble LLC was acquired. In 2003, Darphin and Rodan + Fields were acquired and a license with Michael Kors was signed shortly afterward.

Estee Lauder Companies Inc sells its products mainly through upscale department stores, specialty retailers, upscale perfumeries and pharmacies and prestige salons and spas. In addition its products are sold in freestanding company-owned stores and spas as well as its own and other authorized retailers’ web sites. Estee Lauder Companies Inc products can also be found for sale at stores on cruise ships, on television direct marketing channels, and at in-flight and duty free shops.

Top competitors of the Company are Alberto-Culver, Avon, Colgate-Palmolive, L’Oreal, Procter & Gamble, Revlon, and Unilever.

In the early years, Estee Lauder was unable to convince Madison Avenue to carry her products into the market. Facing rejection, she began to market her products directly to the customers. Her first products were sold to beauty salons and hotels and exclusively through boutiques and department stores. The first department store account was established at New York. After 15 years, the company globalized their business all over the countries. Besides, in 1998, Estee Lauder began selling a variety of products over the Internet and was one of the first major cosmetics firms to offer online shopping. Hence a new division called ELC Online was introduced to manage the online activities for all its brands.

Mrs. Estee Lauder was named one of the ten Outstanding Women in Business in the United States by business and financial editors in 1967. She also received the Spirit of Achievement Award from Albert Einstein College of Medicine at Yeshiva University. At the same time, the company expanded by opening Clinique Laboratories Inc, and in 1983 their products were introduced in the Soviet Union (Russia).

Although Mrs. Estee Lauder passed away in April 2004, she witnessed the growth of a small home operation into a worldwide corporation with annual revenues of more than $5 Billion. She was very proud that her company went public in 1995 and today is led by Estee and Joseph’s children and grandchildren.

Based on a SWOT analysis carried out for Estee Lauder Companies Inc, the strengths include; large geographical footprint diversifies revenue stream, Strong brand portfolio well positioned to participate in the revival of consumer spending, and in-house research and development facilities high consumer acceptance and quick market penetration. Weaknesses include; limited distribution strategy increases dependency on specific channels. Opportunities include; positive outlook for the skin care market in China and Russia, growing popularity of online retail channel and social networking media offer growth opportunities, retail environment in emerging economies provides strong growth potential, and men’s personal care products segment offers fast growing and large potential market. Threats include; highly competitive market, constrained retail sales growth due to increase in VAT in UK, and increase in the counterfeit products may hurt the brand image. A detailed discussion of the SWOT analysis is provided in Appendix – 6.

Estee Lauder’s principal growth strategy has been to acquire or create new brands with potential for global development, and bring them under the corporate umbrella while maintaining their entrepreneurial competitiveness. Among them are names like Clinique, Aveda, Tommy Hilfiger and Bobbi Brown-well recognized but seldom linked to Estee Lauder in consumers’ minds.

At the Estee Lauder Companies Inc, the single focus is to remain the preeminent leader in global prestige cosmetics. To do that means nurturing three key assets – great brands, great people and great ideas.

Their three strategic imperatives are:

Multi-National Scope – Strengthen and expand their geographic presence.

Multi-Brand Powerhouse – Strengthen their product categories.

Multi-Channel Opportunity – Diversify and strengthen their channels of distribution.

The company’s strategic plan is also provided in Appendix – 8.

VISION STATEMENT

The vision statement of the company is “Bringing the best to everyone we touch ‘by The Best’, meaning the best products, the best people, and the best ideas. These three pillars have been the hallmarks of our Company since it was founded by Mrs. Estee Lauder in 1946. They remain the foundation upon which we continue to build our success today.” (Annual Report, 2011)

MISSION STATEMENT

The mission statement of the company reflecting its core purpose, identity, values and principle business aims is as follows:

“We are a family company committed to working together with uncompromising ethics and integrity. We strive to always:

Provide customers with innovative cosmetic products of the highest quality.

Deliver outstanding service by treating each individual as we ourselves would like to be treated.

Create an environment that fosters personal growth and well being.

Build partnerships with our suppliers, retailers and colleagues based on fairness and trust.

Enhance our reputation of image, style, and prestige.

Pursue profit, but never at the expense of quality, service or reputation.”

(Annual Report, 2011)

LITERATURE REVIEW

DEFINITION OF MERGERS AND ACQUISITIONS

M&As have always played a vital role in corporate history, ranging from ‘greed is good’ corporate raiders buying companies in a hostile manner and breaking them apart, to today’s trend to use mergers and acquisition for external and industry consolidation (Sherman & Hart, 2006).

The term mergers and acquisition are often used interchangeably but it is important to understand the difference between the two.

In the academic literature, there are number of authors, who define merger, acquisition and takeover differently. According to Sudarsanam (1995), a merger takes place when two or more corporations come together to contribute and share their resources to achieve common objectives. The shareholders of the combining forms often remain as joint owners of the combined entity. But according to Sherman and Hart (2006), a merger is a combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm. According to Gaughan (2002), a merger is a process in which two corporations combine and only one survives and the merged corporation ceases to exist. Sometimes there is a combination of two companies where both the companies cease to exist and an entirely new company is created.

An acquisition on the other hand, is the purchase of an asset such as a plant, a division or an entire company. Sudarsanam (1995) defines acquisition as an ‘arms-length deal’ where one company purchases the shares of another company and the acquired company is no longer the owner of the firm.

The term ‘takeover’ is sometimes used to refer a hostile situation. According to Gaughan (2002), this happens when one company tries to acquire another company against the will of the company’s management. However, according to Sudarsanam (1995), a takeover is similar to an acquisition and also implies that the acquirer is much larger than the acquired.

According to Gaughan (2002), mergers and acquisitions are friendly transactions in which the senior management of the companies negotiates the terms of the deal and the terms are then put in front of the shareholders of the target company for their approval. Whereas in a takeover, a different set of communication takes place between the target and the bidder, which involves attorney and courts. Bidders here try to appeal directly to the shareholders often against the recommendations of the management.

According to Sudarsanam (1995), the differences between merging and acquiring are very important to consider valuing, negotiating and structuring the client’s transactions. ‘In line with common practice’ (Chiplin and wright, 1988), terms ‘mergers’, ‘acquisitions’ and ‘takeovers’ will be used synonymously in this dissertation. According to Sherman and Hart (2006) at the end, the differences in the meaning may not really matter as the result of these processes is often the same i.e. two companies that had separate ownership are operating under the same roof, usually to obtain some strategic and financial objective.

TYPES OF MERGERS AND ACQUISITIONS

Brealey and Myers (2004) and Gaughan (2002) in respect with the economic theory classify mergers and acquisition into three categories:

Horizontal merger and acquisition

This is the combination of two corporations in similar lines of business or between two competitors. The main reason for merging and acquiring similar business is with the aim to obtain synergy between the two business units. Apart from this, other reasons for horizontal M&As are to increase the market power, exploit economies of scale, to diversify through separate markets and provide different services.

The level competition in an industry is affected by the increased horizontal M&As and according to the economic theory consumers benefit from the increased competition. Some of the examples of horizontal M&A are JP Morgan and Chase Bank, Vodafone’s acquisition of Mannesmann, and L’Oreal’s acquisition of Body Shop.

Vertical merger and acquisition

These are combinations between companies in the same line of business but different aspects of production. Vertical M&A may be of two types:

When a producer acquires a supplier of the raw material in the chain of production, with the aim of reducing cost of production, it is known as backward vertical integration.

When a company buys its vendor, in the direction of its consumer to reduce marketing and delivering costs, it is known as forward vertical integration.

Some examples of vertical M&A are acquisition of Kalon Group by Total and Walt Disney’s acquisition of ABC television network.

Conglomerate mergers and acquisition

This is a combination of companies with different or unrelated field of business. These companies neither are related nor are they competitors. The main motives for conglomerate M&A are efficient capital allocation and the reluctance to distribute cash flows to the company’s shareholders. Companies also seek diversification of risks and entry to a new emerging market through this type of acquisition (Marks and Mirvis, 1998).

Some examples of conglomerate M&A are acquisition of General Foods by Philip Morris and the acquisition of National Cash Register Corporation by American Telephone and Telegraph Company.

Cartwright and Cooper (1992) make a distinction of one category called the concentric merger, which is acquisition of the dissimilar but associated field of business in which the buying company looks forward to expansion.