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AT Kearney: Legacy Brands Banking on M&A to Pioneer New Markets

Though traditional consumer product companies and retailers looked to be on the ropes last year—prompting more than a few people to speculate about its imminent demise—legacy companies just might rebound if they’re able to expand their market share, consumer base and know-how. And as a few companies have already illustrated, the most attractive way to do so could be through acquisitions.

A.T. Kearney adds its voice to the chorus affirming that 2018 will likely be the year of M&A. In its recent report “Can M&A Reignite Growth in Consumer and Retail?,” the consulting firm outlines why the time is right for this activity, how companies will approach acquisitions going forward and the benefits these deals could ultimately bestow.

Though the report acknowledges that M&A slowed in 2017, it said the causes—led by political uncertainty in many corners of the globe—have relented, leaving a more confident market.

“While some key trends in the market will become even more entrenched—such as record-high cash reserves and the continued ease of global trade that M&A represents—others will shift,” says A.T. Kearney Partner Bob Haas, leader of the firm’s global Mergers & Acquisitions Practice and co-author of the report. “Much of the wait-and-see climate we saw in 2017 that has characterized M&A globally has dissipated. At the same time, with interest rates finally on the uptick, we will likely see an increase in U.S. companies making innovative acquisitions to stay relevant.”

The report noted the year ahead in mergers will be characterized by four key trends. 

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Traditional companies creating opportunities

M&A will be the choice for legacy companies looking to quickly get up to speed in areas where they’ve fallen behind, namely capturing the new consumer, learning innovative launch strategies and adopting the latest technologies. Last year, Walmart illustrated this strategy best by bringing on a slate of digital natives to woo millennials and turbocharge its online aspirations.

“As newer players disrupt the retail and consumer product space, the choice for the old guard has become clear: use M&A to help pivot business toward the future—otherwise, face losing relevance or being acquired,” the report’s authors said.

In fact, 80 percent of the executives polled for the report said traditional retail and consumer product businesses will pursue an M&A strategy in 2018. Tellingly, 71 percent of respondents say these deals create value, up from only 48 percent who felt the same last year. Fewer (only 18 percent) see this activity as merely a way to improve costs, whereas 24 percent viewed it as such in 2017.

While M&A will accelerate, A.T. Kearney said these companies will favor one type of transaction over the other. The firm anticipates more legacy brands opting for convergence deals over consolidation this year, as they try to open up new avenues for revenue growth. Think of the way Whole Foods has given Amazon a foothold in grocery, as well as providing it with a fleet of physical stores from which it can fulfill online orders.

While transactions like that can offer an easy entrée into an adjacent market, the consultants caution that there are inherent challenges with this new “beast.”

“Cost savings will always play a role, but the primary focus must be on nurturing the people and the culture in pursuit of new customers and growth,” the firm advises.

Fueling these deals is the reported $1 trillion in cash that consumer products and retailer companies have available to them. Though it represents less than half of the debt these businesses are carrying, A.T. Kearney doesn’t see the leverage impeding M&A transactions in the near future.

Private equity back in the game

Another cash-rich sector is private equity, which A.T. Kearney said had $951 billion in investable cash in 2017, resulting in a “buying spree.” Last year, these firms invested $120 billion in the consumer and retail sectors, securing 30 percent of the mergers and acquisitions in those markets, compared to a low of 16 percent in 2016.

The report pointed to Sycamore Partner’s $6.9 billion acquisition of Staples as an example of the heights that were achieved last year.

A.T. Kearney sees that pace continuing—even with PE’s shaky track record in retail. Leveraged buyouts by these firms are thought to be at root of the liquidity issues that ultimately undermined retailers like Rue 21, Gymboree, Neiman Marcus, J.Crew and Toys R Us.

Recent history notwithstanding, the report said these firms will be particularly interested in any companies that can complement their existing holdings.

Overseas opens up

A.T. Kearney expects P.E. and CPG companies and retailers to look abroad for acquisition opportunities this year.

While U.S. companies accounted for 67 percent of M&A targets in 2017, the coming year could look quite different. While 79 percent of those polled expect inbound M&A to continue at the same pace or even increase, 86 percent anticipate the same for overseas activity.

The reasons for the look abroad are twofold. First, the firm notes that expanding geographically is a top initiative for many U.S. businesses, and mergers and acquisitions offer the ability to grow mature markets. Second, overseas acquisitions could be even more attractive this year given the higher valuations U.S. companies are enjoying thanks in part to tax reform benefits, which makes them less attractive as a target. On the other hand, that same windfall could make these domestic companies better able to borrow the necessary funds toward their own acquisitions.

Venture funds evolve

A.T. Kearney says 2018 is “ripe for a shakeup” in the realm of corporate venture funds. By investing in, or acquiring hot new startups, CPG companies, in particular, have been attempting to identify the best ideas as they come over the horizon.

The attempt, though, has been less than fruitful for most, according to the report, which said companies must make a concerted effort to learn from these upstarts.

“Large CPG firms have a lot to learn from start-ups regarding product development, speed to market, agile marketing techniques, and their use of digital to capture consumers,” A.T. Kearney stated, adding if they are able to do so, they’ll be positioned to disrupt themselves. “Similarly, the large companies can help start-ups scale faster by providing access to their customer base, supply chain, and consumer insights.”

The consulting firm is more bullish on incubators, which have yielded better results.

With so many factors bolstering the M&A market, A.T. Kearney expects these deals to transform consumer products companies and retailers this year.

“Uncertainty remains a constant, but it’s taking a back seat as traditional retail and consumer companies continue to go after more customers and more revenue. We predict that legacy consumer and retail companies will fight back in 2018 and seek out adjacent and convergent businesses” said Bahige El-Rayes, A.T. Kearney principal and co-author of the report. “Winners will be those that understand what consumers prefer and the channels they use, take a holistic view of their industry, and fearlessly pursue innovative, out-of-the-box opportunities.”