Short- and long-term analysis of merger success in the fashion industry

The fashion industry accounts for more than $500 billion, or more than 4%, of the world's annual trade volumes, underscoring its great importance to global commerce. Moreover, the industry has also seen a large number of mergers over the past decades; however, these have not been the subject of recent empirical studies in corporate finance research. The objective of this paper is to shed light on the short- and long-term, as well as capital market- and accounting-based performance of M&A transactions in the international fashion and leather accessories industry from 1994 to 2007. It also analyzes the key drivers of successful mergers and provides an outlook on future M&A activity in the industry.

Features of the fashion industry

The fact that the fashion industry is an industrial segment with significant shares in world trade is due to the fact that it serves the basic human need for clothing. At the same time, the industry is also developing luxury products designed exclusively for affluent consumer groups. The luxury industry has benefited primarily from a sharp increase in sales volumes in recent decades, supported by the rise of the BRIC (Brazil, Russia, India and China) nations and other emerging markets in Eastern Europe and Southeast Asia. This has also led to a strong consolidation of the market with the four European groups LVMH, PPR, Richemont and Swatch Group currently dominating the international luxury industry.

Nevertheless, the lower and mid-price segments of the fashion market have also shown strong growth of 5% (CAGR) in the first decade of the 21st century. Although consolidation was not as strong as in the luxury segment, fashion groups such as Philipps-Van Heusen, VF Corp and Warnaco Group were able to assert themselves through a strong brand strategy and with their business models, establishing large multi-brand fashion companies. In addition to these fashion conglomerates, which mostly originate from North America, there are also some European companies with high market shares, such as Adidas, Inditex and Hennes & Mauritz. Despite large sales volumes and strong growth prospects, there has not yet been a comprehensive study of merger successes in this particular industry segment. In view of the inherent idiosyncratic risk based on a business model with two to four changing collections per year, an independent analysis of the fashion industry is worthwhile. Thus, M&A activity in this context also seems to depend largely on fashion companies' efforts to diversify these idiosyncratic risks by acquiring companies horizontally, thereby stabilizing free cash flows over time.