In a time of pervasive economic uncertainty, beauty remains a mature and stable industry, relying on innovation as a catalyst to sustain it. Read below as we unpack industry considerations for M&A deal value in beauty. 

Current Market Conditions

Despite a decline in global M&A activity, the beauty industry maintains its resilience. As the industry is expected to generate $646 billion in global revenue in 2024 and modestly rise in years to come, with projections estimating a 3.3% CAGR 2024 – 2028, it contrasts with the broader market. 

Global M&A activity dropped to its lowest level in a decade, falling 18% in 2023 (year-over-year) and 52% since record highs experienced in 2021. This steep decline is largely attributed to economic volatility and rising interest rates, which led to higher financing costs. The uncertainty in markets and increased costs to fund an acquisition have deterred investors from executing more deals. Despite reaching historically low M&A volumes last year, we expect stagnant global M&A activity for the remainder of 2024. 

This projection stems from conflicting signals of optimism of an economic recovery along with the most recent decisions by the Federal Reserve, leaving interest rates unchanged again as of July. This now marks 12 months since the Fed last raised interest rates. Despite the Federal Reserve leaving interest rates unchanged, they still anticipate cuts as soon as this month, given continued improvements in inflation. Although deal activity picked up at the end of 2023 (19% year over year in the 4th quarter), that momentum has not fully carried over to 2024. Global M&A activity is down 12.9%, meanwhile transaction value is up by 11.7% in comparison to the same period last year. This contrasting difference signifies that investors remain active, targeting larger transactions.  

While current market conditions may pose more challenges due to greater economic uncertainty and lower transaction volumes, they are also the most opportunistic. During the 2008 economic downturn, active acquirers (firms that made acquisitions totaling at least 10% of their market cap) outperformed non-active acquirers by 9.8 pts. Investors with strong investment approaches and liquidity positions, will be able to capitalize on a reset of valuations and lower competition for assets.   

Critical Factors for Realizing M&A Deal Value in Beauty

Just making a wise investment decision is not enough; accurately measuring and capturing deal value is instrumental towards achieving success. There are five interconnected factors that can either make or break any deal: Accurate Synergy Realization, Timely and Deep Integration, Merged Culture and Change Management, Rigorous Project Management Execution, and a Value Mindset Throughout the M&A Lifecycle.   

To learn more about each of these deal factors, please read our article “Critical Factors for Realizing M&A Deal Value.” 

Principles in Practice: M&A Deal Value in Beauty 

L’Oréal’s acquisition of IT Cosmetics is an example of a successful acquisition, as it realized value through these critical factors. In 2016, L’Oréal announced an agreement to purchase IT Cosmetics, a fast-growing industry player for $1.2 billion dollars. IT Cosmetics revolutionized the industry by popularizing colorceutical products, or cosmetics with added skincare benefits. Once a point of differentiation in the industry, colorceutical benefits are now a point of parity thanks in large part to IT Cosmetics. In only its eighth year, IT Cosmetics had recorded net sales of $182 million in 2016, a 56% increase from the year prior.  

L’Oréal was drawn to IT Cosmetics not only because of their success and growth potential, but due to a strong complementary fit between the two organizations. IT Cosmetics’ foundational mission was to provide products that work for those with and without skin sensitivity, which directly aligned with L’Oréal’s “Beauty for All” initiative, aiming to meet the needs of every form of beauty. Along with their aligned missions, L’Oréal had a gap in their existing portfolio of brands that IT Cosmetics helped address, allowing them to better serve their current customer base. 

L’Oréal unlocked both Cost and Revenue Synergies through the acquisition. IT Cosmetics folded their brand into L’Oréal’s portfolio, allowing them to achieve economies of scale, reducing costs and realizing operational efficiencies. Furthermore, IT Cosmetics gained access to additional distribution and sales channels, capitalizing on new revenue streams. In 2016, IT Cosmetics was sold through select shopping channels, specialty stores, and their own website, and by 2019, three years after the acquisition, the IT Cosmetics brand had doubled in size, soaring to a #2 ranking in the U.S. selective make-up category. Today, IT Cosmetics can be found in leading retailers like Amazon, Target, and Macy’s as well as over 20 countries in the world. The success of the acquisition for L’Oréal could not have been achieved faster had it not been without Timely and Deep Integration.  

At the time of the acquisition, IT Cosmetics had a product line of over 300 beauty products, utilized a multi-channel distribution model, and achieved net sales of $182 million. The Project Management and Change Management efforts required to integrate a brand of this size successfully cannot be understated. L’Oréal decided to retain IT Cosmetics’ founder and CEO, Jamie Kern Lima, as CEO post-acquisition, which spoke volumes about their commitment to maintain continuity and leverage expertise of key leadership. In doing so, L’Oréal mitigated potential disruptions associated with executive turnover and retention of key employees, effectively supporting the Merging of Both Cultures. L’Oréal even furthered their own internal diversity and inclusion goals by appointing their first female CEO. 

L’Oréal continues to be the leading beauty manufacturer in the world today, with $45 billion in global sales. The continued growth of IT Cosmetics under L’Oréal’s portfolio umbrella indicates that this acquisition can likely be considered a success. This achievement would not have been realized without L’Oréal’s ability to leverage the critical factors for realizing M&A deal value in beauty.  

Looking Ahead and Taking Action   

With low to moderate M&A activity growth expected in 2024, investors have an opportunity to capitalize on this dynamic market and still achieve high ROIs, aligned with their corporate goals. Maximizing deal value is challenging, but more important than ever if targets are to be achieved.    

Target screening, due diligence, cultural assessments, synergy estimations, strategy design, IT, and project management integrations are a sample of services Clarkston regularly provides for clients. To learn more about how Clarkston can help your organization maximize transaction value in a period of economic volatility, reach out to one of our M&A or Health & Beauty experts today. 

Contributions by Alex Hohe, Jack Magee