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mergers & acquisitions | Jul 21, 2022 |
Industry acquisitions suggest a healthy market for home brands, despite challenges

Despite the onset of some serious supply chain issues, 2021 was a good year to be in the home business. Demand skyrocketed, sales surged—and even if there were a long wait to get a sofa delivered, the interest and intent to buy was clearly there.

That rosy forecast may have dimmed somewhat—look no further than retailers now overloaded with inventory. Growth has slowed this year, triggered by an increase in prices, lingering supply chain woes and spreading hesitation among many buyers who are keen to conserve cash while waiting for a volatile economy to stabilize. But a new report, released yesterday by investment banking firm Capstone Partners, offers a glass-half-full assessment of the home industry’s health, at least where acquisitions are concerned. The verdict? Strategic buyers—companies acquiring another company in the same industry in order to broaden their abilities or scale up—are fueling an increase in M&A activity and contributing to the market’s resiliency.

According to the report, there has been a 15 percent increase in M&A activity over the past year compared to the same period in the year prior, with 53 transactions announced or completed to date. These figures come after a decline in transactions across the market from 2018 to 2020, followed by a relative frenzy of activity—117 transactions in 2021 compared to 66 in 2020.

That the report focuses on strategic buyers should come as no surprise, as their activity accounts for 75.5 percent of all transactions so far this year. Nearly two-thirds of these transactions are headed by private strategic buyers seeking strong product diversification and synergies, like an already-established CFO or sales force.

Some of the deals that closed will be familiar to industry professionals, like Maitland-Smith’s purchase of luxury case goods manufacturer Scarborough House, which expanded the former brand’s offerings into a new category; Hooker Furniture’s expansion into outdoor offerings through the acquisition of Sunset West; and online design platform Havenly’s decision to snap up buzzy direct-to-consumer fast furniture brand The Inside. Others are more obscure, like The Container Store’s purchase of Closet Works, which manufactures wood-based organizational systems.

For Ken Wasik, head of consumer investment banking at Capstone Partners, all of this activity is a sign of a healthy market. “When strategic buyers are the predominant buyers, that means that larger corporations are incentivized to buy something versus building something,” he says, citing this behavior as a sign that CEOs believe there is room for future growth. The acquisition is a way to obtain certain capabilities that they do not already have or can help a company scale quickly, to meet the demands of a shifting marketplace.

High-end furniture companies that have plenty of capital to compete in this market are looking to make purchases for a number of reasons, according to Randy Eller, president and principal of Eller Enterprises, a Tennessee-based advisory firm that specializes in the gift and home industry: to increase product variation or to buy out a competitor. In the environment where manufacturers and retailers are facing sagging demand, he says, the industry is poised to enter a period where the weak get weaker and the strong get stronger.

“No matter how bad things get, somebody’s still got money,” says Eller. “Some people are going to need to sell, and some people are just going to want to sell. It is a great time to pick up categories of products that you’ve been thinking about getting into—it might be cheaper at this point to acquire a new category of product through an acquisition than to try to do it organically, especially with the lead times involved and the supply chain the way it is.”

This activity is also favorable for sellers too. “Typically, strategic buyers pay more than financial buyers,” says Wasik. “The reason for that is quite simple: A strategic buyer has a lot of things called synergies—[for example,] they’re selling nationally, where something they acquire might be selling regionally, so they’re able to get instant gains. A financial buyer is just buying the existing company with no synergies.” Typically, a strategic buyer offers a higher value for sellers compared to financial buyers—regardless of ownership—because of the synergies they provide.

Regardless of what’s motivating industry players to make moves amid an uncertain economy, Wasik emphasizes that the strategic acquisition trend is a boon for the home market at large: “It tells me that CEOs are optimistic about the future,” he says. “If you think there are bad times ahead—for either your company or for the underlying industry—the last thing you’re going to do is go out and buy other companies.”

Homepage photo: ©Prostock-studio/Adobe Stock

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