Global Mergers & Acquisitions of Consumer Brands in 2020: Makeup, mobile gaming & multiplexes
Advising on mergers & acquisitions is part of a commercial law firm's offering to its clients. Companies from all industries seek to merge with or acquire other organisations for a variety of reasons, often in order to expand market share or increase their competitiveness amongst their consumer base.
Advising on mergers & acquisitions is part of commercial law firms offering to its clients. Companies from all industries seek to merge with or acquire other organisations for a variety of reasons, often in order to expand market share or increase their competitiveness amongst their consumer base.
Market expansion, increased competition & trainee roles
Market expansion is the motivation behind Puig’s $1bn acquisition of a majority stake in make-up and skincare brand Charlotte Tilbury. Puig already own luxury fashion brands such as Paco Rabanne and Christian Louboutin but diversify their product offering with the Charlotte Tilbury acquisition. Charlotte Tilbury, a personality-led organisation, epitomises the brands that are increasingly popular with younger audiences on social media. Other examples include Kylie Comestics (founded by Kylie Jenner) and Fenty Beauty (founded by Rihanna), both of which sold majority stakes in 2019. For Charlotte Tilbury, the deal allows for increased manufacturing and supply chain capabilities.
Likewise, Zynga acquired Peak for $1.8bn recently. The acquisition provides Zynga, the organisation behind the popular games Farmville and Words With Friends 2, with a 60% increase in daily active users. The volume of daily active user’s is hugely important for an organisation that generates revenue through users making micro-transactions (also known as in-game purchases). For Peak, the deal allows the organisation to continue to operate as a studio of Zynga, access a wider range of expertise, and increase capabilities for upcoming projects and products.
In both of these situations, commercial law firms and trainee solicitors would have been involved on both sides. Solicitors for the buyer will engage in due diligence, an extensive investigation into virtually every aspect of the seller. ‘Buyer beware’ is the foundation of UK law on mergers & acquisitions, meaning that the buyer is responsible for learning about the company it is buying, which is why due diligence, and the work that lawyers do, is so important and that any protections for the buyer are outlined in a sale and purchase contract.
Therefore, due diligence includes investigating real estate contracts – for Puig and Charlotte Tilbury, this would have involved reviewing each store, counter and office lease. It could also involve investigating commercial contracts, which could include which retailers Charlotte Tilbury currently has a commitment to sell products to.
Employment contracts and pension arrangements need to be investigated too. The Zynga/Peak deal was a 100% acquisition, so Zynga needs all the information they need to decide whether they allow Peak to operate as before or restructure. In the former, a transfer of employees and their existing employment contracts will take place. In the latter, there could be redundancies.
Due diligence will also involve investigating any environmental, reputation and tax issues, as well as any on-going litigation. Solicitors for the buyer send a wide-ranging questionnaire to the seller, requesting information. A virtual data room will also be set up to allow important documents to be examined and shared securely.
Market disruptors, shrinking markets & downturns in activity
Where some mergers & acquisitions happen because of desires to expand, others happen due to the need to survive. In late 2019, Cineworld signalled its intention to buy Canadian company Cineplex, which provide the organisation with the largest number of screens in North America. Whilst on the surface this appears to represent market share expansion, when considered in a wider commercial context, this is a move by Cineworld to add to their revenue streams so it can continue to survive in an environment becoming increasingly dominated by streaming services such as Netflix, Amazon Prime Video and Disney+. The CEO of Cineworld even said at the time “the name of the game now is consolidation”.
Cineworld have since pulled out of the deal due to a larger market disruptor: coronavirus. The pandemic shutdown the entire entertainment industry and wiped out Cineplex’s value. Cineplex signalled their intention to start legal proceedings but Cineworld were covered by the terms of the deal, which stipulated that they would be allowed to pull out if Cineplex amassed $725m in debt.
The Cineworld case is the norm rather than the exception; coronavirus has impacted M&A activity massively with the value of all activity down from $956bn at this point in 2019 to $618bn in 2020. Companies are understandably more concerned about protecting the health of their organisation in the immediate term, shelving growth plans for the time being. However, with some industries affected more than others, including the entertainment industry where Cineworld and Cineplex operate, this could lead to a flurry of deals later in 2020 as buyers’ eye up bargain purchases.
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