3. Introducing the Merger Case

Overview

ShirtShop is a fictional clothing retailer that wants to acquire another retailer TrouserTown. In this lesson, we learn the motivation behind the proposed transaction and the synergies that ShirtShop hopes to achieve.

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Summary

  1. Lesson Goal (00:04)

    The goal of this lesson is to learn about the two companies in this course’s case study. 

  2. Introducing the Companies (00:11)

    The acquirer in this deal is called ShirtShop, a retailer of men’s shirts. They have had slow growth in revenue and EBITDA in recent years. Companies like this with little or no organic growth often look to mergers and acquisitions as a method of “buying growth”. While these transactions can boost revenue and earnings, they come with a cost and a risk. As a result organic growth is generally seen as preferable.

    The target company in this transaction is called TrouserTown, a retailer of men’s trousers. There is partial geographic overlap in the areas where the two companies operate, and both companies have a limited online presence.

  3. Synergies From the Deal (01:48)

    There are several possible cost synergies from this deal. Various costs, such as general and administrative, can be reduced by combining the two companies. There are also potential savings in developing an e-commerce platform. There is also a single revenue synergy, namely increased sales per store where certain stores will sell both shirts and trousers.

    Revenue synergies are usually harder to measure than cost synergies. As a result, the market tends to be more cynical of revenue synergies. You should always analyze proposed revenue synergies carefully to ensure they are realistic.

Transcript

In this lesson, I'll introduce our case beginning with the acquirer which is a company called ShirtShop.

ShirtShop sells predominantly men's shirts. It has a presence in the United States, on the East Coast and in the MidWest, and in total it has 538 stores.

With the company founded in 1988. If we look at ShirtShop's revenue and EBITDA growth over the past couple of years, we can see that both have been sluggish. As a result management are under pressure to do something that will substantially impact the share price. Management have struggled to do this by growing organically through opening new stores, and so have turned to mergers and acquisitions. This approach is often called buying growth, it normally happens when organic growth slows. And M&A can potential boost both revenue and earnings, however it costs money to do deals like this, and as a consequence, organic growth is seen as preferable. And obviously more profitable. After meeting with it's investment bankers, ShirtShop has identified a target, TrouserTown. Another men's retailer that just sells trousers to men. TrouserTown also has a presence in the MidWest and in the Southwest, but not on the East Coast where ShirtShop has its headquarters. Both companies have a very poultry online shopping offering, but aim to improve this in the coming years. It's also worth noting that TrouserTown has 317 stores, is privately help by investors, and was founded in 1955. Through the acquisition, ShirtShop has identified a number of potential synergies. Cost of goods sold, on the cost side, along with general and administative, savings due to combining certain stores, savings due to launching an E-commerce platform, and lastly, sales through combining advertising budgets. On the revenue side, we have a single synergy, which is going to be increased sales per store. Where certain stores have been earmarked for selling both trousers and shirts. As a rule, revenue synergies are typically harder to quantify than cost synergies, and the market tends to be more cynical of revenue synergies than cost synergies. When you're building a model, or analyzing companies that are about to merge, always be sure to cast a skeptical eye on certain revenue synergies because they can be very hard to predict.