Acquisitions are tricky. Articles routinely are written highlighting the worst deals of all time and the pitfalls that arise. But they also can be transformative, game-changing events. Nowhere is this more apparent than in the retail industry where deals done can send a company on a completely different growth trajectory. Often, this leads to an even greater increase in its stock price. We'll look at five deals in hindsight, grading each on its transformative nature.
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Taking Out The Competition
The first is Tractor Supply (Nasdaq:TSCO). On December 31, 2001, it along with several others successfully bought the bankrupt assets of competitor Quality Stores Inc.
Tractor Supply's portion of the agreement saw it pay $34 million for 87 locations (plus $77 million for renovations and inventories to reopen the stores) in the Midwest and Northeast. The remaining locations were sold off by its partners. In one transaction, it was able to take out a major competitor and expand its store base by 25% for the all-in cost of $111 million or $1.3 million a store. How'd the stock react? It went from $9.40 to $42.16 in just two years. Today, it trades around $70. Considering it was its first acquisition in its 64-year history, I give it a very high mark.
My next example is north of the border in Canada. In 2001, Best Buy (NYSE:BBY) was planning a large expansion into the country, opening 65 stores over three years. Instead, it offered to buy its biggest would-be competitor, Future Shop, for $377 million. Future Shop shareholders accepted the 48% premium. Nine years later, it has revenues of $5.1 billion in Canada and operates 212 stores under both brands. As for the stock, it gained 23.8% over the next two years compared to a 12.6% loss for the S&P 500. Unfortunately, It hasn't done much since.
All Hail The Republic
The Banana Republic that is. Up until Gap (NYSE:GPS) bought the two-store travel and safari outfit in 1983, the San Francisco retailer was a one-trick pony. Banana's revenues at the time were around $10 million, so Gap probably paid no more than $20 million to the founders of the company. By 1987, it had opened its 100th store. Today, it has over 600 worldwide generating revenues of $2.2 billion. Although Banana's revenues dwarf Gap's other main brands, the acquisition moved its average price-point higher and, in my opinion, enabled it to open Old Navy at the discount level several years later.
American Eagle Outfitters (NYSE:AEO) is a second example of a company making a big splash north of the border. It sales in 2009 from 88 Canadian stores were approximately $212 million. Around Christmas 2000, it closed a deal to buy three retail divisions from Dylex Ltd. for $74 million. The main jewel of the purchase was 47 Braemar ladies wear stores, which it converted to the American Eagle banner. Three years later, it sold the Bluenotes chain taking an 8 to 11 cent charge. While the acquisition wasn't perfect, it did give the company a quick entrance into the Canadian market and today these stores make an important contribution to the top line. While the deal itself was a smart move, the brand and its stock have had difficulties in recent years. For this reason I've given it a lower mark.
Lastly, we have the deal of all deals. I'm of course talking about Macy's (NYSE:M) 2005 acquisition of May Department Stores for $11 billion. Considered a last gasp rescue of the struggling retailer, the long-term ramifications were soon felt. Macy's sold, shuttered and rebranded all of May's stores including the venerable Marshall Fields. While Chicagoan's were aghast at the move, it was the right thing to do. Having a laundry list of banners across the country made it look rag tag and tawdry. With one strong brand, it could effectively market itself to all Americans. Only now are the results of this huge undertaking being felt. The future of the department store is on stronger footing as a result.
These deals helped make the companies what they are today. Acquisitions are never easy to implement but in all five instances they've done so with the necessary focus and execution. As a result, shareholders have benefited, some more than others. (Learn how mergers and acquisitions can impact a company's earnings in Accretion / Dilution Analysis: A Merger Mystery)
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