Today's Business Growth Strategy: The Big Deal
Three case studies, including Target's partnership with Prabal Gurung, show how companies are using big deals to drive growth.
Business travelers live and breathe dealmaking every day. Most are on the plane because they need to get face-to-face to negotiate or sell or soothe a customer or potential partner. They fly with airlines that are stumbling in the aftermath of major merger deals. When they get to the rental car lot, they can’t remember which company they’ve booked with, because they’ve all partnered up.
Lots of deals go very sour, especially in this era’s turbulent times. Hewlett-Packard and its $11 billion merger in 2011 with software maker Autonomy. Target Stores and its holiday 2012 lash-up with Neiman Marcus. Martha Stewart and her deals with Macy’s and J. C. Penney. Busts all, and there are so many more that could be itemized.
But then there are the ones that seem to work to the benefit of all sides. Below are three cases in point that, collectively, illustrate how deals come together today: the quick acquisition of multiple hotels by New York–based Loews, a luxury hotelier that is bulking up at a time when many others can’t seem to close; Cisco Systems’ $5 billion acquisition of video company NDS in 2012, one of the year’s biggest IT deals; and the February 2013 Target joint venture with Nepalese designer Prabal Gurung, a sold-out event that has put the gloss back on Target’s designer specials.
First, however, understand one fact about dealmaking in 2013: Expect more of it. That’s the prediction of Jeanne Brett, a professor at the Kellogg School of Management at Northwestern University. Many companies, she says, are sitting on thick bankrolls, and conventional investments are generating scant returns—so dealmaking has moved high up the to-do list.
Prabal Gurung Sharpens Target’s Edge
Main Street retailer Target desperately needed good news on the fashion front. It had basically invented the flash-sale promotion of high-end designers, who created bargain-priced garbs for sale in Target, but now other players (think H&M) were doing likewise and doing it better, in the view of many experts.
Then there was the disastrous holiday 2012 flash promotion of goods from Neiman Marcus—which sold so badly, according to many accounts, that much of the merchandise eventually was discounted by half or more to get it off the shelves.
Enter Prabal Gurung, a 38-year-old, Nepal-born designer who had won notice for producing smart, edgy fashion. Target zeroed in on him for a February 2013 flash promotion. It was risky, it was bold (Gurung is well known among fashionistas, less so on Main Street)—and it turned into a home run for both parties. Within days, many Target stores had sold out of the collection, which featured $39.99 dresses, $29.99 shoes and a $24.99 scoop-neck tank top. There were dozens of items, even $14.99 earrings. (Neither Gurung nor Target chose to be interviewed for this article. Nor have financial terms of the partnership been revealed.)
“This was a very smart mixing of high and low,” says Barr. “Both sides got to reach consumers they would not ordinarily contact.” For Target, Gurung’s fashionistas flocked in. For Gurung, he gained a huge spike in name recognition on Main Street.
“This might rehabilitate Target’s designer collaborations,” says Kimberly Chun, a fashion blogger on SFGate.com, a website operated by the San Francisco Chronicle. As for Gurung, “he got a lot of press coverage out of this.”
Chun added that in her opinion, the Gurung collection “offered good quality for the price.”
Retail expert Carol Spieckerman, president of consulting firm Newmarketbuilders, elaborated that nowadays it usually is easy for Target to sign up designers. “Designers used to wring their hands over going low end. You could lose cachet. That just isn’t a worry anymore.” For the designers tapped by Target, the upside is that “they benefit from all of the Target marketing platform,” says Spieckerman, who explained that means much more than store space. It also includes print and digital ads, a social media presence and more. In a short time—if all clicks—a comparatively unknown designer can become a household name, and some of that has already rubbed off on Gurung.
Target, too, Spieckerman says, gains from “the buzz factor” when a fashion-forward collection spikes conversation about Target that might not have been heard without such edgy items on the racks.
Loews Goes Big
It is very hard today to buy a high-end, four-star hotel property, mainly because few go on the market, and when they do, they command high prices and, always, lots of interest from would-be buyers.
Thus the problem faced by New York–based Loews Hotels in 2012. It had around 15 properties, but at that size it was too small to continue to compete with luxury portfolios that had expanded dramatically in the last decade. So Loews entered 2012 determined to bulk up, despite the difficulties in closing deals.
Loews did exactly that, by buying three trophy properties in the span of about a year: the Renaissance Hotel in Hollywood, Back Bay Hotel in Boston (the building formerly was the police department headquarters) and the Madison Hotel in Washington, D.C. (short blocks from the White House).
There will be more deals. “Our goal is to double in size in the next three to five years,” says Loews’ chief marketing officer, Bruce Himelstein.
What is letting Loews succeed where so many others falter?
A key advantage Loews brings when it sizes up an acquisition: It comes to the market with a substantial acquisitions war chest. How big is not divulged. But in a world where many buyers want to tie up a property while they seek to arrange financing, Loews, a subsidiary of Loews Corporation, is known to have the cash in pocket, and that gives it a seat at the table and a seller who is willing to listen. Money talks.
Loews also has built up a skilled senior executive team—including a new CEO, industry veteran Paul Whetsell, and CMO Himelstein—and those hires, suggest experts, let it confidently spend on properties in the belief it has the talents needed to achieve financial goals.
Does it make good deals? Detailed information is available about the purchase of the Renaissance Hollywood in particular. Alan Reay, president of Atlas Hospitality Group, an Irvine, Calif., specialist in hotel sales, broke out his analysis: The prior owner had paid $88 million for the hotel in 2004. Loews paid $169 million, by Atlas’ reckoning (a price has not been released by Loews). “The seller did extremely well,” says Reay.
But he stresses: “Loews will also do well. The price is high because there was a lot of interest in the property. But I believe Loews will see good returns on this investment.”
Reay adds that Loews wanted into the hot Hollywood market, and at $169 million, it paid what he sees as a bargain amount.
Geoff Davis, president of HREC Investment Advisors, which specializes in hotel sales, says:
“Loews is very careful about going into an asset, and making sure that it is consistent with their other assets. When they see that, they have the money to buy. They can come into an acquisition and create value, and that is what they will likely do here.”
Cisco Marries NDS
Call this the showstopper tech deal of 2012, because, in a few signatures and the passing of almost $5 billion, Cisco transformed itself from a set-top box company to a video anywhere, on any device pacesetter. That transformation was what drove the acquisition, says Hilton Romanski, a Cisco vice president who as head of corporate business development is in charge of acquisitions.
Understand, too, that with Cisco, deals of this magnitude are in effect partnerships that Cisco forges with the leaders of the acquired company. Before Cisco signs on the dotted line, it collects lots of signed employment contracts from key personnel. “The idea of signing up key employees is important in every deal we do. That was important with NDS. We wanted to feel the NDS team was committed,” says Romanski.
As for why Cisco pursued this deal, Romanski says Cisco wanted to plant a big stake in the cloud-based video distribution universe, and NDS lets it do that. Video is rapidly moving from a world where it is delivered to one device via set-top box—a business Cisco has excelled at—to a more fluid environment where users want their videos delivered to any device, wherever they are. That is NDS’s strong suit. Thus the appeal of the deal to Cisco.
As for what Cisco brought to NDS to persuade its investors to support the acquisition: “They saw we shared a vision and that we have the capability to bring their technology to a bigger platform,” says Romanski.
Cisco, by the way, is a deals machine. Romanski indicated the company has done 160 acquisitions since it started in 1984. That averages out to eight a year.
Because it is so prolific, it also is highly competent. “Cisco has a matter-of-factness to its acquisitions. They know how to do this right,” says Robert Willis, president of Philadelphia-based merchant banking firm Foxcode.
Romanski, for his part, says that even when an acquisition may seem to have faltered—and Cisco certainly has those (think Flip video camera)—the deal possibly still worked out well for the company because in most deals Cisco is seeking products, patents and people. Even when products falter, the company has the patents and people, and that may be a win, says Romanski.
Cisco is a frequent dealmaker but it also is very serious about its approaches to targets, stresses Romanski. “When we present a company with a term sheet, we plan to close the deal.”
A bottom-line verdict on the NDS deal from Katherine Barr, a partner in Silicon Valley venture capital firm Mohr Davidow Ventures: “This is a really smart move for Cisco. It will help them stay relevant as video goes on many kinds of devices.”
The Bottom Line
Making successful deals is definitely not easy today—there remain so many global uncertainties that leave many parties nervously on the sidelines—but for players with vision, confidence and a plan, good things still flourish from deals well made.
Robert McGarvey covers business, technology and travel for outlets ranging from The New York Times to the Harvard Business Review.