SBANC
Small Business Advancement National Center University of Central Arkansas — Conway Arkansas
Quote
115H, College of Business - University of Central Arkansas - 201 Donaghey Ave. Conway, AR Issue: 816 – May 6th, 2014
Of The Week
“Every young man would do well to remember that all successful business stands on the foundation of morality.” - H en r y Wa rd B e ec h er
Upcoming Conferences INTE
Who: International Conference When: June 3-4, 2014 on New Horizons in Education Where: Paris, France What: 2014 Sakarya Conference
What: 2015 Conference
EMS
Who: International Conference On Advances in Economics, Management and Social Study
Who: Marketing Management Association.
When: September 17-19, 2014
MMA
When: January 5-9, 2015 Where: Bangkok, Thailand
Where: San Antonio, TX
What: Educator’s Conference
GCBF
Who: Global Conference on Business & Finance What: San Jose Conference
When: May 27-30, 2014 Where: San Jose, Costa Rica
Announcements SBANC
The Small Business Advancement National Center aims at increasing your knowledge of small business and entrepreneurship. All questions and comments are greatly appreciated.
DIMRS
The Call for Papers is now underway for the 2014 Direct/Interactive Marketing Research Summit sponsored by Marketing EDGE, to be held October 25-26, 2014 in San Diego, CA. All submissions must be received by May 24, 2014.
ISBE
The Haydn Green Institute at Nottingham University in partnership with the Institute Small Business & Entrepreneurship (ISBE) is inviting people to attend a Paper Development workshop that will take place on September 18, 2014 at Nottingham University, Nottingham, UK.
ICSB
UNM
The Mentoring Institute at the University of New Mexico is accepting proposals for its seventh annual Mentoring Conference. The 2014 conference will be held on Tuesday, October 21 through Friday, October 24 in Albuquerque, NM, at the Student Union Building, UNM.
The International Economic Development Council will be hosting a 2014 Spring Conference in Minneapolis, USA from June 13, 2014.
Call for Papers TAF
Who: The Academic Forum
Where: Santa Rosa, CA
What: Santa Rosa Conference
Deadline: May 18, 2014
When: June 22-25, 2014
SBR
AABRI
WBI
Who: Society of Business
When: October 23-25, 2014
Research
Where: Nashville, TN
What: Nashville 2014
Deadline: October 1, 2014
Who: Academic and Business Research Institute
When: June 12-14, 2014
What: Hawaii Conference
Deadline: May 12, 2014
Who: World Business Institute
Where: Paris, France
What: Paris Conference
Deadline: June 30, 2014
When: August 7 - 8, 2014
Where: Honolulu, Hawaii
Ownership Changes as Strategic Initiatives Although deep recessions increase frenetic merger and acquisition activity and make retailers more vulnerable to takeovers and bankruptcy, the core reasons for implementing ownership change remain consistent. All retailers must eventually cope with a maturing industry, overstored retail markets, increased competition, and changing public sentiments. Some fear the possibility of bankruptcy proceedings; others simply seek survival by forging new partnerships or ownership structures. The mechanics of ownership are as complex as retailers evaluate strategic options.
Mergers, Acquisitions, and Divestiture Mergers, acquisitions, and divestitures of companies are popular growth and competition strategies used by retailers. Mergers involve the pooling of resources by two or more companies in order to become one. Acquisition describes the buying of one company by another in either a friendly or hostile manner. This practice is also called a buyout or a takeover. Hostile takeovers receive more public attention than innocuous mergers. An ownership change that occurs when one company purchases large quantities of outstanding stock in another company, thereby giving controlling interesting to the acquiring company, is called a hostile takeover. Some retailers use divestiture to refocus their operations and remain solvent in the face of increased competition. Divestiture is the selling of one business to another company. Although mergers, acquisitions and divestitures have been
“
Tip
of the Week
“The increased base of retail knowledge created when two companies join forces may make the organization more competitive.” an established practice for decades, a new wave of aggressive activity began in the mid-1980s. The beginning of the 21st century saw a similar acceleration of ownership change, heightened by economic recession. Changes in the ownership affect retailers and customers in many ways. Precipitating factors, advantages and disadvantages of mergers and acquisitions, and uses of divestiture follow.
Causes and Effects of Mergers and Acquisitions Many newly formed retail entities are successful; others are not. A look at the causes and effects of mergers and acquisitions will help clarify these business practices. Mergers and acquisitions are initiated for several reasons: Companies are less expensive to purchase during stock market declines, periods of currency fluctuations, or political unrest Retailers with available capital in stable and thriving economies desire new investments that will generate returns. Mature retail companies may need to acquire other companies in order to grow the businesses and remain competitive.
Companies may decide to diversify their retail formats by acquiring companies outside of their core concept.
Advantages of Mergers and Acquisitions Mergers and acquisitions benefit retailers in many ways: Mergers bring an opportunity to capitalize on the strengths of both companies. The increased base of retail knowledge created when two companies join forces may make the organization more competitive. Economies of scale may be realized in many functional and managerial areas. Companies may significantly increase market share. Prime retail locations may be gained. The company’s retail position may be strengthened in the marketplace. Partnership conflicts may be eliminated. The business can expand for longrange investment potential.
Disadvantages of Mergers and Acquisitions There are several negative effects of mergers and acquisitions: Long-standing customers may be reticent to shop at what they perceive as a new store. Changes of ownership causing changes in policies and procedures may be unsettling to employees. Long-standing retail chains may lose their identity in the proceedings. History was made when Federated Department Stores decided to fold many of its regional chains into its nationally recognized Macy’s division. When mergers abound, human resource cutbacks are inevitable. Takeover activity may bring in non-retailers as retail partners.
Dynamics of Divestiture When retailers make the decision to sell off existing companies or divisions, several factors are considered. Divestiture is used to: Enable companies to sell off unrelated businesses and concentrate on their core concepts. Help retailers raise capital in times of economic distress. Preclude possible bankruptcy proceedings or facilitate the reorganization process.
Acquisition and Divestiture Parameters Retailers attempting to acquire other companies do so with care. They must be able to negotiate well and not pay too much for a company. Attention must be paid to locations, leasing arrangements, financial details, and competition. The process of preparing
“
in-depth evaluations before a merger or acquisition can occur is called due diligence. Sound and sensible business decisions are the best reasons for undertaking mergers or acquisitions. However, some merger participants have been accused of greed and ego gratification—perhaps the most negative attributes of a capitalist economy. No socially responsible business organization should condone selling assets to cover excessive debt, causing the loss of thousands of jobs in the process. Leveraged buyouts, bankruptcy, and other aspects of ownership or company dissolution force changes in strategic direction for many retail companies. Commonly, retail suitors that are not as directly involved in the retailing industry become owners, as discussed in the next section.
Rise of Private Equity Ownership A major trend in the past decade was the emergence of nonretail companies as retail partners. Real-estate investment companies like Vornado Realty Trust, and private equity firms such as Bain Capital Partners, Texas Pacific Group, and Apollo Management became active participants in retail ownership. For example Vornado was the key investor in Toys “R” Us when it was sold in 2005.Bain Capital Partners owns several retail properties, including Burlington Coat Factory, Guitar center, And one-third of Home Depot’s wholesale supply business. Apollo Management owns Claire’s Stores, General Nutrition Centers, Zales jewelers, and Rent-a-Center. The company owned Linens ‘n Things when the home goods retailer filed for bankruptcy protection in 2008. At the start of the 21st century, investment partners opened doors for retailers that needed infusions of cash to continue to grow their businesses. Such partners became less of an advantage later in the decade as many
countries grappled with recession and investment capital became scarce or nonexistent.
Leveraged Buyouts The most complicated and controversial or hostile takeovers are called leveraged buyouts. These are purchases in which the acquiring company borrows large sums of money, using the yet-to-be-owned assets or debt as collateral, in order to finance the deal. A classic case involved Canadian realestate developer Robert Campeau. It started with his acquisition of Allied Stores in 1986 and continued until his final disposition in 1990 as head of a multibillion-dollar empire. His actions affected many retail institutions and individuals, and reverberations continued into the 1990s. This saga involved Campeau, Allied, Federated, Macy’s, and scores of other companies, and was considered one of the most embroiled ownership transitions in retail history.
Bankruptcy Proceedings Bankruptcy proceedings are not new, but escalate during periods of economic slowdown. Bankruptcy is a legal declaration to inform the public of the financial insolvency of a company. Filing for Chapter 11 bankruptcy protection allows a company to enter a grace period in which it attempts to reorganize its financial affairs. After filing, companies have 120 days to prepare a plan for reorganization and may wait up to 180 days after the receipt of the plan to obtain acceptance from the court. Extensions of up to 180 months may be granted upon just cause. Many retailers believe that a fair assessment of retail performance and turnaround efforts id dependent on experiencing a full year’s sales cycle. In contrast, Chapter 7 of the federal bankruptcy code indicates that a company is unable to sustain its business, and seeks to file bankruptcy in order to liquidate stock and close its doors.
Indications of a retailers’ impending failure may include changes in a store’s regular ordering, irregular or slow payments to vendors, sparse inventories, and employee layoffs. These conditions may be apparent whether the retailer is a huge corporation of a single store. Both divestiture and bankruptcy protection practices became strategic devices wielded by some companies that attempt to sustain sinking businesses. Developing entirely new formats is another way retailers remain competitive and expand their holdings. All strategies are important to retailers that are in the mature phase of their existence.
Impact of Ownership Change The bubbling brew of merger, acquisitions, and divestiture activity and related issues has not cooled in the second decade of the new millennium. New patterns have emerged as retailers vie for position in the industry. Three examples illustrating trends in ownership changes are reviewed here. The acquisitions activities of Proffitt’s and Ralph Lauren Polo and the diversification and subsequent divestiture of Limited Brands show how many dimensions of strategic planning involving ownership.
Proffitt’s Purchase of Saks Fifth Avenue When Proffitt’s purchased Saks Fifth Avenue (SFA) for $2.14 billion in 1998, some viewed this as the action of an upstart. Proffitt’s, whoever, had been preparing fo rthe acquisition for some time. The Birmingham, Alabama retailer had previously purchased several strong regional department stores,
“
including McRae’s in 1994; Parks-Belk in 1995; and Parisia, Younkers, and Herberger’s in 1996. It also merged with Chicago retailer Carson Pirie Scott in 1997. Al became part of the Saks Department Store Group (SDSG) when RBM Venture Company, headed by R. Brad Martin, completed a merger between Proffitt’s and Saks Holdings, Inc., owner of Saks Fifth Avenue. Investcorp, a Bahrain company, had operated Saks Fifth Avenue since 1990. Before that, the company was owned by B.A.T. Industries in the United Kingdom. The SFA acquisition propelled Proffitt’s—intent on becoming a national powerhouse—toward its goal of attracting a more upscale market. Because of the high recognition and regard for the Saks brand, Proffitt’s officially changed its name to Saks, Inc. in 1998. By 2004, the company operated approximately 390 stores in the United States and one in Saudi Arabia. At that point, changing market conditions and stagnant performance led the company to begin divesting its mid-market department store businesses. In 2008, looking to divest divisions not related to its core Saks business, the company dissolved Club Libby Lu, an experiential retail chain with a preteen customer base. Steve Sadove, chairman and CEO of Saks, Inc., gave the following rational for the closure: “… it was a better strategic fit with our department store business…now we can focus 100 percent of our time and resources executing the strategies of our core Saks Fifth Avenue business.” Other sources cited poor performance and eroding retail markets due to the recession. As sales declined among top luxury retailers, the company faced possible acquisition by other retailers. In this situation, some retailers invoke a poison pill to protect their namesake assets and shareholders, and avoid a takeover. A poison pill is a tactic that allows other shareholders to purchase
stock at a reduced price, thus thwarting a takeover by a major shareholder. Although Saks did not implement this option, it is often exercised when an unfriendly takeover is imminent. At the time of this writing, the company operated 45 SFA stores in the United States and two SFA stores in Mexico City. In addition it has licensed stores in Saudi Arabia, Dubai (United Arab Emirates), and Bahrain. One of the Saks stores in the Middle East is illustrate din Figure 3.6. A store is planned for San Juan, Puerto Rico and is slated to open in 2014. This evolutionary tale illustrates the intricacies of acquisition strategy and the complexities of ownership from both a historical and contemporary viewpoint.
Ralph Lauren Polo’s Acquisition of Club Monaco Ralph Lauren Polo made an unprecedented move when it acquired the Canadian specialty retailer Club Monaco in 1999. Club Monaco carries understated, contemporary merchandise that is stylish, yet ageless, for women, men, and the home. Its growth potential was optimal, and Ralph Lauren Polo felt an affinity for the retailer since both cater to customers with refined taste levels. Buoyed by the infusion of capital, Club Monaco now operates 120 stores worldwide. The company had earlier expanded to Hong Kong, Korea, and Dubai and, through a strategic partnership with Browns Shop 24 in London, had opened an in-store shop there in early 2011.
Limited Brands’ Diversification, Divestiture, and Acquisition The practice of acquiring or developing companies or stores that are not directly related to a firm’s core business is called diversification. Some department store groups have added specialty store chains; mass merchandisers followed suit, adding stores and retail services.
Specialty store chains have built their businesses selling apparel, later acquiring accessory, lingerie, bath-product shops, sporting-goods chains, and catalogues. Diversification strategy works best when the economy is strong and competition is low. The example of Limited Brands illustrates these points. When it formed its Intimate Brands division in the mid-1990s, The Limited crated an environment where Victoria’s Secret, Bath & Body Works, C.O. Bigelow, White Barn Candle, and Henri Bendel could flourish. The limited sold its Brylane catalogue businesses to French company Redoute to concentrate on its store business, and earlier had spun off Abercrombie & Fitch, which remains a separate entity. In 2002, however, The Limited bought back its outstanding stock in Intimate Brands and changed its corporate name to Limited Brands. Later in the decade, the Victoria’s Secret brand Pink was launched (eventually becoming a group of stand-alone stores), Express, Limited Stores, and C.O. Bigelow were divested, and the Canadian lingerie chain, La Senza, was acquired. Continuing the saga, as of 2012, Limited Brands operated 2,902 stores in the United States and Canada as well as international franchised stores and online. Victoria’s Secret store and online sales combined account for almost 60 percent of Limited Brands $10.36 billion revenue. Diversification and divestiture remain tools that retailers use to gain or reacquire a competitive edge. Timing, company goals, and conditions in the retail environment dictate which technique should be used. As these examples have shown, acquisitions, bankruptcies, and ownership conflicts are propelled by a variety of factors. One fact remains constant: the face of retailing will change. Stores that survive challenges may become larger, more powerful, and more profitable operations; conversely, they may become smaller, more highly focused, and likewise profitable firms. These dynamics are expected to continue to influence retail strategy in the 21st century, bringing more surprises for retailers and customers alike.
“
Feature Paper
SBANC Staff
Rural Sourcing: A North Carolina Governmental Agency Example
Executive Director Dr. Don B. Bradley III
Development Intern James Vire
Offshore outsourcing has become a primary tool to gain a competitive edge in almost every sector of the global environment, including pro-profit and notfor-profit enterprises. An alternative to offshore outsourcing known as rural sourcing has begun to gain traction, particularly in the United States. An example of this new model is presented from the arena of government, as the North Carolina Division of Motor Vehicles’ successful transition from a metropolitan area to a rural area is chronicled. (pg. 37)
Read Entire Paper Here
Development Intern Daniel Champion
Comments? The Small Business Advancement National has recently made immense changes to the layout of its website, SBAER.UCA.EDU, as well as its Newsletter. We welcome constructive criticism, comments, and of course, all questions throughout this transition.
Contact Us Email: SBANC@UCA.EDU Phone: 1 (501) 450-5300 Mail:
Tip of the Week Source: Retailing Principles: Global, Multichannel, and Managerial Viewpoints
UCA Box 5018 201 Donaghey Avenue Conway, AR 72035-0001
Second Edition Lynda Rose Poloian Fairchild Books Page 85-89
To Subscribe, please click HERE.
To Unsubscribe, please click HERE.