V.F. Corp Buys Timberland

Acquisitions often are used to change a firm’s product focus rapidly.
Acquisitions of direct competitors often represent significant revenue growth and cost-saving opportunities.
The timely realization of synergies is critical to recovering purchase price premiums.

Widely recognized in the United States and Europe as a maker of rugged outdoor apparel, Timberland (TBL) had stumbled in recent years. Its failure to turn around its money-losing Yellow Boot brand, the limited success of its advertising campaign to encourage consumers to think of Timberland apparel as a year-round brand, and overly ambitious expansion plans in China caused earnings to deteriorate. Despite annual revenues growing to more than $1.6 billion in fiscal year 2011, the firm was losing market share to such competitors as the Gap and Sears Holdings. Timberland’s share price declined as investor confidence in management waned when the firm failed to meet its quarterly earnings forecasts. Timberland was ripe for takeover.

With annual revenue of $7.7 billion, apparel maker V.F. Corporation (VFC), owner of such well-known brands as The North Face, Wrangler, and Lee, was always on the prowl for firms that fit its business strategy. VFC has grown historically by adding highly recognizable brands with significant market share. The strategy has been implemented largely through acquisition rather than through partnering with others or developing its own brands. Furthermore, the firm was shifting its product offering toward the rapidly growing outdoor-apparel business.

With its focus on outdoor apparel, Timberland became a highly attractive target, especially as its share price declined. VFC pounced on the opportunity to add the highly recognizable Timberland trademark to its product portfolio. On June 13, 2011, VFC announced that it had reached an agreement to pay TBL shareholders $43 per share in an all-cash deal, a 43% premium over the prior day’s closing price. The deal valued TBL at about $2 billion.

Including the Timberland acquisition, VFC’s outdoor and action sports product lines were expected to contribute about one-half of the firm’s total annual revenue in 2012, ultimately rising by more than 60% by 2015. In buying Timberland, VFC gained access to new retail outlets and the opportunity to better position TBL as a lifestyle brand in the apparel and accessories market. VFC also hoped to use TBL’s rapidly growing online business to help it achieve its online sales goal of more than $400 million by 2015, more than three times their 2011 total. VFC hoped to accelerate the growth in TBL product sales by expanding their availability through its own e-commerce site and through its international operations. Likewise, VFC expected to achieve substantially larger discounts on raw material purchases than TBL because of its larger bulk purchases and to reduce overhead expenses by eliminating redundant positions.

Xerox Buys ACS to Satisfy Shifting Customer Requirements

In anticipation of a shift from hardware and software spending to technical services by their corporate customers, IBM announced an aggressive move away from its traditional hardware business and into services in the mid-1990s. Having sold its commodity personal computer business to Chinese manufacturer Lenovo in mid-2005, IBM became widely recognized as a largely “hardware neutral” systems integration, technical services, and outsourcing company.

Because information technology (IT) services have tended to be less cyclical than hardware and software sales, the move into services by IBM enabled the firm to tap a steady stream of revenue at a time when customers were keeping computers and peripheral equipment longer to save money. The 2008–2009 recession exacerbated this trend as corporations spent a smaller percentage of their IT budgets on hardware and software.

These developments were not lost on other IT companies. Hewlett-Packard (HP) bought tech services company EDS in 2008 for $13.9 billion. On September 21, 2009, Dell announced its intention to purchase another IT services company, Perot Systems, for $3.9 billion. One week later, Xerox, traditionally an office equipment manufacturer announced a cash and stock bid for Affiliated Computer Systems (ACS) totaling $6.4 billion.

Each firm was moving to position itself as a total solution provider for its customers, achieving differentiation from its competitors by offering a broader range of both hardware and business services. While each firm focused on a somewhat different set of markets, they all shared an increasing focus on the government and healthcare segments. However, by retaining a large proprietary hardware business, each firm faced challenges in convincing customers that they could provide objectively enterprise-wide solutions that reflected the best option for their customers.

Previous Xerox efforts to move beyond selling printers, copiers, and supplies and into services achieved limited success due largely to poor management execution. While some progress in shifting away from the firm’s dependence on printers and copier sales was evident, the pace was far too slow. Xerox was looking for a way to accelerate transitioning from a product-driven company to one whose revenues were more dependent on the delivery of business services.

With annual sales of about $6.5 billion, ACS handles paper-based tasks such as billing and claims processing for governments and private companies. With about one-fourth of ACS’s revenue derived from the healthcare and government sectors through long-term contracts, the acquisition gives Xerox a greater penetration into markets which should benefit from the 2009 government stimulus spending and 2010 healthcare legislation. More than two-thirds of ACS’s revenue comes from the operation of client back office operations such as accounting, human resources, claims management, and other business management outsourcing services, with the rest coming from providing technology consulting services. ACS would also triple Xerox’s service revenues to $10 billion.

Xerox hopes to increases its overall revenue by bundling its document management services with ACS’s client back office operations. Only 20 percent of the two firms’ customers overlap. This allows for significant cross-selling of each firm’s products and services to the other firm’s customers. Xerox is also betting that it can apply its globally recognized brand and worldwide sales presence to expand ACS internationally.

A perceived lack of synergies between the two firms, Xerox’s rising debt levels, and the firm’s struggling printer business fueled concerns about the long-term viability of the merger, sending Xerox’s share price tumbling by almost 10 percent on the news of the transaction. With about $1 billion in cash at closing in early 2010, Xerox needed to borrow about $3 billion. Standard & Poor’s credit rating agency downgraded Xerox’s credit rating to triple-B-minus, one notch above junk.

Integration is Xerox’s major challenge. The two firms’ revenue mixes are very different, as are their customer bases, with government customers often requiring substantially greater effort to close sales than Xerox’s traditional commercial customers. Xerox intends to operate ACS as a standalone business, which will postpone the integration of its operations consisting of 54,000 employees with ACS’s 74,000. If Xerox intends to realize significant incremental revenues by selling ACS services to current Xerox customers, some degree of integration of the sales and marketing organizations would seem to be necessary.

It is hardly a foregone conclusion that customers will buy ACS services simply because ACS sales representatives gain access to current Xerox customers. Presumably, additional incentives are needed, such as some packaging of Xerox hardware with ACS’s IT services. However, this may require significant price discounting at a time when printer and copier profit margins already are under substantial pressure.

Customers are likely to continue, at least in the near term, to view Xerox, Dell, and HP more as product than service companies. The sale of services will require significant spending to rebrand these companies so that they will be increasingly viewed as service vendors. The continued dependence of all three firms on the sale of hardware may retard their ability to sell packages of hardware and IT services to customers. With hardware prices under continued pressure, customers may be more inclined to continue to buy hardware and IT services from separate vendors to pit one vendor against another. Moreover, with all three firms targeting the healthcare and government markets, pressure on profit margins could increase for all three firms. The success of IBM’s services strategy could suggest that pure IT service companies are likely to perform better in the long run than those that continue to have a significant presence in both the production and sale of hardware as well as IT services.
-Discuss the advantages and disadvantages of Xerox's intention to operate ACS as a standalone business. As an investment banker supporting Xerox, would you have argued in support of integrating ACS immediately, at a later date, or to keep the two businesses separate indefinitely? Explain your answer.

Which of the Following Is Not True of Financial Synergy

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