Does Merging Two Struggling Firms Create Value?

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Fortune's Chris Morris has reported that Neiman Marcus has rebuffed an acquisition offer from Saks, a competitor in the luxury retail market.  Apparently, merger talks continue, with Neiman Marcus hoping that Saks will increase its $3 billion offer.

This potential merger raises an interesting question for me:  Will merging two struggling firms create value?  Both brick-and-mortar retailers are struggling to compete as e-commerce rivals soar, and specialty retailers such as Zara and Lululemon outperform them.  Morris explains some of the challenges at each firm: 

The potential matchup comes at a time when luxury retail is in a down cycle, as consumers focus on bargain hunting and economic headwinds continue to keep them on edge. Neiman, in 2002, filed for bankruptcy, but has emerged in a better position, with less debt. Saks has reportedly been late with several payments to vendors, some of whom temporarily halted shipments. Hudson Bay Company, which owns Saks, sold real estate holdings recently, raising $340 million to help pay bills.

Saks believes that some synergies will be created as a result of the deal.  According to the article, management believes that combined entity will have more negotiating leverage with powerful luxury brands, particularly those that have become part of very large luxury conglomerates such as LVMH in recent years.  Moreover, management believes that the elimination of certain duplicative functions will reduce costs.  

These synergies may be real, and cost savings may result.  However, a fundamental question is:  Will merging the firms help them turn their revenue problem around?  Can they develop a stronger competitive advantage that enables them to grow in the face of strong headwinds in the brick-and-mortar retail industry?  It seems unlikely that a merger solves the growth problem at these firms.  In addition, one has to wonder about the burden of merger integration hoisted upon two organizations that are already struggling in many ways.  Will the merger integration effort make them more inwardly focused, when they should be paying ever-closer attention to changing consumers?  How much distraction will an integration effort create?  

Two wrongs don't make a right, and two weak firms don't necessarily make one stronger one after a merger.  If this deal does occur, it may lead to value creation, but formidable challenges lie before them if they are to create and sustain value and competitive advantage for the long haul. 

Lessons from the House of Gucci

I just finished reading Sara Gay Forden's terrific book: House of Gucci: A Sensational Story of Murder, Madness, Glamour, and Greed.   Forden wrote the book two decades ago, but it has recently received a great deal of renewed attention due to the release of the movie starring Lady Gaga.  The book is filled with family intrigue, squabbles, and of course, a murder plot.  However, the book also provides a compelling examination of the rise, fall, and rebirth of the Gucci enterprise over the years.   As such, it offers a number of important management lessons.  

For me, one intriguing lesson centers on the attempt by Maurizio Gucci to restore and enhance the Gucci brand when he tooks over from the prior generation.  His instincts were solid in that he was quite worried about the dilution of the brand that had occurred over the years.  The desire to drive top line growth had led the company to develop and sell less expensive products for the masses.  The problem, of course, is that such efforts often make it much more difficult to remain highly attractive to the luxury consumer willing to pay top dollar for a quality product, but only as long as it retains a high degree of exclusivity.  This growth trap ensnares many companies pursuing niche differentiation strategies. 

Recapturing the premium positioning after a brand has been diluted can be very difficult.  The reason is that it takes time to change consumers' minds about a brand.  Moreover, trimming the product portfolio can be challenging to execute.  The company has to essentially retrench to restore the brand, but that can be very painful to do.   Maurizio tried to execute a "cold turkey" approach to restoring the brand.  His efforts to quickly eliminate lower-priced, lower-quality products led to a precipitous drop in revenues.  At that point, he had not yet done the groundwork required to transition the product line.  He failed on the execution of what is admittedly a tricky repositioning exercise.  Over time, new professional management managed to implement the repositioning very successfully, restoring the brand's luxury image.  In the end, strategy and vision are important, but execution often proves to be the difference between success and failure for a brand repositioning effort.