Off-KORS I would CHOO-se You
Michael Kors has agreed to buy London Stock Exchange-listed company, Jimmy Choo for $1.2 billion. The LSE is a stock exchange based in London. As of December 2014, it had a market capitalization of 6.06 trillion GBP (according to London Stock Exchange Monthly Market report). The deal sees Jimmy Choo enter a merger or acquisition deal with a fashion company for the first time since it initial public offering.
The planned acquisition comes at a time when progressive discounting and flash sales have become common in Michael Kors’ day-to-day business activities, resulting in a depreciation of the company’s brand power. The company experienced a 15 percent decrease in net income during its fiscal first quarter in light of strong competition and infrequent departmental store visits by consumers. Bargain shopping has become the new trend for Michael Kors, therefore, pure quality is imperative in order to justify imminent exorbitant prices. This is why the chief executive officer, John Idol, has decided to look toward the stiletto blue chip for inspiration. The company has embarked on a mission to separate itself from the ‘masstige’ segment. He plans on doing so by building a luxury group and essentially structure Michael Kors as an umbrella entity. This of course, makes the attainment of healthy margins at the hands of high end pricing all the more realistic and justifiable. The CEO was adamant that this hefty purchase is just the beginning of his shopping spree. This move was also probably motivated by Coach’s acquisition of Kate Spade, a deal worth $2.4 billion. The acquisition is said to be one of the most compatible in the industry thus far given Coach’s expertise in authentic trademark handbags and Kate Spade’s expertise in flamboyant ones – they both bring something new to the table.
John Idol has attached certain conditions to the acquisition which may turn out to be advantageous to Michael Kors. The first condition includes keeping Pierre Dennis as CEO of Jimmy Choo which makes sense from a brand preservation standpoint. His leadership has helped maintain the allure of the company’s fashion portfolio while obtaining high prices for each end product. Such a trait would undoubtedly bode well for Michael Kors’ bottom line. The second condition includes Michael Kors’ products being kept out of Jimmy Choo’s stores. This again, preserves the strong brand name of its future subsidiary. However, it would have made more sense to create a complementary relationship between the two companies. Given Michael Kors’ strength in handbags and Jimmy Choo’s in shoes, the scope for product alignment is definitely clear to see. The rationale behind this strategy most likely reflects the differentials in the pricing models of the two businesses.
Mergers and acquisitions come with high degrees of risk. One being that the executive body of both companies may simply have varying and overlapping views that may turn out to be divisive. In this case, it is very possible for such a scenario due to the fact that Jimmy Choo will retain its own executive team. This is also the first time that Jimmy Choo has been bought by another fashion company as the previous ones were private equity firms. A private equity is only interested in buying, revamping and selling the business for a profit. Therefore, there is a no-strings-attached relationship with its peer company. This one, on the other hand, is a more sentimental relationship due to what each entity’s existence is based on. The fusion is a sensitive one and could turn sour in a heartbeat. Mergers and acquisitions result in layoffs and redundancies in order to cut costs, and Jimmy Choo employees will be well aware of that imminent reality. This may result in insecurity and in-fighting amongst employees which spill over into sales performance. This acquisition has been done at a premium, and Michael Kors has to plan and prepare accordingly so as to give the employees a sense of transparency.
The outlook, I would expect to see a weaker U.S. dollar due to rising uncertainty in Washington, D.C. and a weakening pound on the back of ambiguous Brexit negotiations. This would work in the favour of exports as far as the synergized company is concerned and inevitably strengthen the bottom line. However, Jimmy Choo’s export potential within the Eurozone will definitely be called into question depending on what trade laws come into effect following the so called ‘hard Brexit’. Michael Kors increased its full year revenue forecast following higher average selling prices due hitherto strong North American sales of its $1,000 satchel, The Bancroft.
This acquisition will definitely be an exciting one and it would be a joy for any fashionista to see a successful integration of the two companies. In the interim, the purchase would consolidate Michael Kors’ income statement and balance sheet making the financial records stronger which would increase demand in its equity. It is hard to make an accurate estimate of the joint company’s future but I would expect to see a successful integration.
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