Question

LVHM acquires Tiffany

What drives the need for the company to consider merger and acquisitions? Is that a good time to be engaged in merger and acquisition transaction and why?

Answer 1

Why merge and acquire?

There are different motives for merging and acquisitions. The most common motives for mergers/acquistions include the following:

Revenue and Cost Synergies- Synergy essentially means the value of a merged organisation exceeds the sum of the values of two individual organisations. Revenue synergy involves improving the comapny's profitability. Increases reserach and development activities, expansion of the facilities and the market, new products improves the revenue generating capcity of the merged company. Cost synergy involves improving the cost structure of the organsation which leads to elimination of certain costs, economies of scale and thus higher profitabilty and in long term growth prospects of the business.

Diversification- Many company's merge to diversify its business operations to stimulate growth, increase market expansion and to gain a competive advantage over its rivals.

Increasing supply chain power- Sometimes companies acquire its distributors or suppliers to elemiminate an entire tier of supply chain costs. Thus the company can ship off its products at a lower cost and higher profitabilty will prevail.

There is no particular good or bad time to engage in merging/acquistions. Since merging can have a significant impact on a company's long term outlook, a number of of factors have to be kept into account before including the stock prices, the cost structure if the company, and whether proper integration can be carried out or not. It depends on the position of the company, its profitiability, whether the merger will benefit them, whether it will have growth prsspects, whether product diversification and acquring assets of the company will benefit them. For this purpose, deep evaluation of the company and its financial statements have to take place to see the risk benefit trade off from the merger/acquisition.

LVHM acquiring Tiffany will give advantages to both the organisatons. Tiffany is a known and well established luxury jewellery brand. And with this merger, LVHM will get access to a great jewellery brand expanding its product portfolio. It will acquire the manufacturing facilties, the retail stores thus adding to the profitabilty of the business. How Tiffany would benefit from this acquistion? The brand value of Tiffany's have been going down in the past few year. It is beleived that it could not completely adapt to the new generation of the consumers and LVHM has a history of driving growth in the jeweelery segment. Ever since they have acquired Bulgari, it has been doing tremendously well. Hence, this acquisition benefit both the companies.