Luxury M&A heats up but not without risks
Oracle Solicitors’ Tim Fongern discusses how to balance the legal intricacies with brand preservation and future growth
Luxury companies love to team up. Recently published deal statistics for 2021 show that the buzz about luxury mergers and acquisitions (M&A) that we saw in 2020 has only intensified and become bigger in 2021 (such as LVMH’s $15.8bn acquisition of Tiffany & Co.). Although reliable figures for 2022 and 2023 are not yet available, it is becoming clear that the strong M&A activity in the luxury goods sector will continue.
Some examples: Richemont recently acquired a majority stake in the Italian footwear brand Gianvito Rossi; Kering is in the process of acquiring a 30% stake in Valentino; and Tapestry (Coach, Kate Spade and Stuart Weitzman) just announced in August this year that it plans to buy rival Capri Holdings (Michael Kors, Jimmy Choo and Versace) for $8.5bn.
In an industry characterised by fierce competition and the need to stay relevant, M&A is a viable option for luxury groups to enter new geographical markets or expand their target audience. However, M&A transactions in the luxury goods sector involve unique considerations due to the specific nature of the industry.
Protection of intellectual property and brand identity
In the luxury goods sector, the strength of a brand is often its most valuable asset. Intellectual property (IP) rights, such as trademarks, copyrights and design patents, play a key role in protecting brand identity and exclusivity. During M&A transactions, it is essential to conduct thorough due diligence on the target company’s IP portfolio. This includes assessing the validity, ownership and enforceability of trademarks and patents. Any potential infringement claims or ongoing disputes need to be identified and addressed to prevent future legal challenges. In addition, assessing the adequacy of licensing agreements, royalty arrangements and co-branding partnerships is critical to ensuring the continued value of the acquired brand.
Supply chain and contractual agreements
The luxury goods industry often relies on complex supply chains involving suppliers, manufacturers, distributors and retailers. In M&A transactions, analysing and understanding existing contractual arrangements is critical to ensuring a seamless post-acquisition integration. Contracts with suppliers and manufacturers must be reviewed to verify terms, pricing, exclusivity and potential penalties for non-compliance. Distribution agreements, including obligations, territorial rights and potential termination clauses, should also be carefully reviewed. Failure to address supply chain issues could disrupt the flow of quality materials, impact production schedules and even lead to litigation.
Regulatory compliance and ESG
The luxury goods sector is subject to unique regulatory requirements designed to maintain product integrity and consumer confidence. These regulations can include labelling and certification of origin to ensure transparency, as well as stringent measures to combat counterfeiting and piracy. In M&A transactions, it is critical to assess the target’s compliance with these regulations. Failure to do so could result in legal penalties, damage to brand reputation and possible product recalls. An effective due diligence process should uncover any regulatory gaps, allowing the acquirer to take corrective action post-transaction.
In this context, it is also very important for luxury goods manufacturers that the target company can be integrated into the environmental, social and governance (ESG) architecture of the acquirer. One focus of the due diligence should therefore be on compliance with predefined ESG standards, or at least their possible implementation in the new structure with as little disruption as possible.
Customer data privacy
In today’s digital age, luxury brands collect and manage customer data for personalised marketing and enhanced customer experiences. With the introduction of regulations such as the EU’s General Data Protection Regulation (GDPR), protecting customer privacy has become paramount. During M&A transactions, it is important to consider how customer data will be handled, transferred and protected. Ensuring compliance with GDPR requires an assessment of data processing agreements, consent mechanisms and data security protocols. Failure to address data privacy concerns can result in significant regulatory fines and reputational damage, especially given the high-profile nature of luxury brands.
Cultural and artistic considerations
Luxury goods often embody artistry, craftsmanship and cultural heritage. For example, luxury fashion brands may have iconic designs that are inextricably linked to their cultural origins. In the case of high-end jewellery, the cultural significance of certain gemstones and motifs needs to be recognised and respected. Understanding and preserving these cultural and artistic elements is essential in M&A transactions. Mishandling or neglecting these aspects can lead to controversy, cultural insensitivity and litigation that can damage the brand’s image. Cultural due diligence can help identify potential issues and guide respectful integration strategies.
Navigating the legal intricacies of M&A transactions in the luxury goods sector requires a comprehensive approach that balances legal expertise with industry-specific knowledge. Recent trends in the marketing of luxury goods also need to be taken into account in the M&A process. Online sales channels, which are also becoming increasingly important in the luxury segment (Richemont/Alibaba-Farfetch; Kering/Tiger Global-Vestiaire Collective), or new contractual arrangements such as the resale or rental of luxury products (Kering-Cocoon) pose their own challenges in terms of review and structuring. Working with legal professionals who understand both M&A practices and the unique dynamics of the luxury goods industry is critical to ensuring a successful and legally compliant transaction that preserves brand value and paves the way for future growth.
Tim Fongern is head of corporate and M&A at Oracle Solicitors in Frankfurt, advising investors, companies and their owners on corporate law matters and M&A transactions.