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Why 2018’s Retail M&A Predictions Missed the Mark

At the beginning of the year, the powers that be were convinced that 2018 would be known for mergers and acquisitions. A number of big firms and influential players including commercial real estate services firm Cushman & Wakefield and consulting firm A.T Kearney predicted that M&A would be “through the roof.”

We’re now at the halfway point, however, and retail M&A has been much slower than anticipated. Save for a few deals like the Eddie Bauer and Pacific Sunwear merger, Delta Galil’s acquisition of French underwear firm Eminence, JD Sports snapping up Finish Line, Authentic Brands Group picking up Nautica and a flurry of activity on the landlord side, very few headline-making transactions have emerged.

The biggest misses surrounded chatter about the biggest players.

“There was a lot of speculation, although we didn’t really share it, that Amazon would go on a buying spree and that because retail stocks were getting hammered Macy’s, Nordstrom and even Target could be acquisition targets,” said Garrick Brown, vice president of retail research for the Americas at Cushman & Wakefield.

Following last year’s acquisition of Whole Foods, many in the retail community have been expecting the e-commerce giant to make another huge acquisition. Thus far, they’re still waiting. Other than talk of Amazon adding Target to its roster of brick-and-mortar stores and conjecture surrounding a similar deal for Nordstrom, nothing has materialized.

Brown said the relatively quiet M&A front is directly related to the improving economic conditions that have put more money in consumers’ pockets making them more willing to spend. The upgraded confidence has proven to be a shot in the arm for retailers, improving the health of the best and extending the life of the most anemic players.

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It’s the opposite of what occurred a year ago when negative press helped taint the whole retail sector, sending stocks downward and prospects of takeovers sky high, Brown said.

“Most retailers that aren’t deeply troubled have seen growth in their stock values so that’s helped keep M&A down,” he said. “As long as the current conditions persist, the stock values are higher so there’s not as many potential bargains and situations where retailers are completely undervalued.”

While the current climate makes retailers less likely to be picked off, it doesn’t mean deals are completely off the table. The one area that’s seen robust M&A activity is tech, specifically retailers adding tech firms that allow them to circumvent lengthy in-house R&D timelines.

For Nordstrom, that’s resulted in the acquisition of BevyUp, a digital tool that allows sales people to create shoppable Style Boards, and MessageYes, which offers e-commerce over mobile messaging. Walmart, which is “in acquisition mode,” according to Marc Lore, head of the company’s e-commerce business in the U.S., picked up Spatialand, a virtual realty startup, and took a 75-percent stake in the Indian marketplace Flipkart. Macy’s acquired b8ta, a retail-as-a-service company that enables new concepts to launch quickly and economically. Nike bought Invertex, which offers technology that makes sizing easier, and Zodiac, a startup that predicts customers’ future spending trends.

A recent report from PwC shows that deals like this are part of a larger trend.

Consumer and retail companies have accounted for 32 percent of tech acquisitions by non-tech firms this year, the consulting firm said.

“Firms are looking to reinvent old business models and shed assets that no longer fit as the pace of technological change accelerates,” according to the report. “Since the start of 2018, one-third of megadeals crossed sector lines, driven largely by an appetite for new technologies. That interest in tech hasn’t been limited to huge transactions, with examples of smaller deals coming in retail, media and printing.”