A surprising possibility for lululemon athletica (LULU 0.07%) made a foray into the market yesterday.
The research firm ISI Group suggested that the yoga-gear retailer would be an excellent acquisition target for VF Corp (VFC 0.94%), the parent of brands such as North Face and Timberland. Lululemon shares were up as much as 4.5% on the news yesterday morning as analyst Omar Saad said the two companies would be a good fit. He argued that VF "lacks a foothold in the performance athletic apparel market," while Lululemon could benefit from VF's "brand-building capabilities, an excellent supply chain, and a strong product innovation platform."
With Lululemon shares getting beaten down recently, the company might seem ripe for a buyer, but I wouldn't expect a deal to emerge, be it with VF or any other clothing company. As for VF, Lululemon may be a bit out of its price range, as the yoga-apparel retailer still carries a market value at north of $6 billion. The North Face parent has just over $300 million in cash on its balance sheet, meaning a potential deal would have to be almost entirely debt-financed, and VF would likely be loath to take on an additional annual interest expense of $300 million. To date, VF's biggest acquisition was of Timberland for $2.3 billion in 2011, significantly less than Lululemon's value.
Don't count out the culture
But the bigger reason that Lululemon is unlikely to be acquired has to do with the company's distinct culture.
Many of the components of Lululemon's operations are unique, starting with its corporate culture. The company's aspirational philosophy extends to its employees as well as customers, as job applicants are often asked to fill out a goal sheet in addition to submitting a resume, and the company's manifesto is a central piece of the brand. Many of its fabrics, such as its trademark Luon blend, are patented, and the company seems to pride itself on its independent spirit. Its mission statement, "To elevate the world from mediocrity to greatness," is also imbued with that spirit of independence and unique sense of purpose. In addition, Lululemon's culture has garnered controversy over the years, as some former employees have said the work environment is cultlike, and its founder, Chip Wilson, has made several off-color remarks over the years that seemed to be blaming women's bodies for problems with the clothes. He recently stepped down from his chairmanship after the comments went viral.
Combining cultures is always tricky in M&A deals, and that controversy and unique culture would likely make it especially difficult to integrate Lululemon into a large enterprise. An acquisition could easily result in the company losing much of its authenticity with both its customers and employees, as its mission would seem lost. If the company is truly elevating the world from mediocrity to greatness, can it really do so as part of the same company that owns Vans and Jansport?
Although 2013 was a forgettable year for the company, Lululemon still has plenty of opportunity ahead of it with its international expansion just kicking off and the recent introduction of its new &Go line of clothing. CEO Laurent Potdevin has just stepped into the leadership role and has a lot to prove. Not only for himself, but also for shareholders who are counting on him to return the company and share price to its former glory.
Rumors may continue to swirl about a deal with VF or another company as long as Lululemon shares are this cheap. You can ignore them.
