Why Tory Burch Would Hire Morgan Stanley To Consider A Sale Or IPO

Women’s Wear Daily reports that fashion designer Tory Burch has hired investment bank Morgan Stanley
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to consider strategic options. In investment banking-speak, that usually means the company is for sale or that it would consider an initial public offering.

Why would a large, successful fashion company, very likely spinning off tons of cash, consider a sale? The company does not appear to be under any major strategic threat or risk so why think about it?

There’s a few reasons why companies do this:

Age

Tory Burch herself is 57 years old. At some point, owners think about their legacy and how to perpetuate their company. She’s a little young to be thinking about that, those kinds of discussions usually start when people are in their 60s but she’s not that far off.

Opportunity

This is the most paradoxical of all reasons.

You think when you start a company that it’s worthless, which it is, and you hope that you can grow it so that you can get success and financial security from it. You take every reasonable risk you can find, you try everything and lo and behold, some of it works, the decisions were mostly good and the company grows.

As years pass, the decision-making process inside the company changes. Instead of taking risks for growth the way you did when it started, you start to avoid some risk because you have to protect what you have. You can’t afford to do everything because it may jeopardize what you’ve built.

But as the company gets more successful, the opportunities can be bigger and better over time. More people want to do business with you but you are taking less opportunities.

Selling a company allows the shareholders and investors to reduce their risk. By taking chips off the table and having less at stake, they can get closer to the kind of decision-making they did when the company was younger.

The new shareholders are usually game for those higher risks. Most likely, they got into the deal understanding that the new opportunities are the right direction for the company and they want growth, they don’t want the business to be stagnant.

When that happens, then everyone’s interest is aligned and the company can have a new stage of growth that it was being held back from before the shareholders took money out.

Divergence Of Interests

When businesses begin, everyone involved has very related goals, to make the business succeed. But over time, people’s life circumstances change and their interests change.

In family businesses, not everyone in the second or third generation wants to be invested in the business. Some family members want their capital out so they can do other things. Resentment builds against the family members who operate the business; I’ve heard people tell me, “they’re doing it to build their own empire.”

Meanwhile, the family members running the business say, “I’m working hard every day to build their equity and no one appreciates it.”

They’re both right and that’s a classic case of a company that needs to be sold.

Tory Burch is divorced from Chris Burch who is a shareholder and known to have backed her when the business was young. It’s easy to imagine how that could create friction that can get resolved by a sale where some shareholders leave the company and others stay in.

Non-family shareholders that are not active in the business may also want to get some benefit from what’s been achieved and it’s normal for them to exert pressure on the company to consider steps toward liquidity.

Next Steps

Right now at Morgan Stanley, you can be sure they’re getting tons of unsolicited inbound emails from every continent from parties that would like to invest in or acquire the Tory Burch business. It is driven by the brand’s success, its potential for future growth all over the world and the scarcity of big, stable, growing fashion businesses available for sale at that size.

The right buyer or investor will be someone who values it highly, who is willing to pay some of the future value to the current shareholders, has the financial resources to close promptly and most important, who shares a vision of how to grow the business in the future that is compatible with management’s point of view.

If the company is to be sold, there will be a spirited competition for it and as in almost any deal, you can’t say at the beginning who will win in the end. If the process is run right, it will give an outlier a chance to emerge to pay the highest value.

Hiring a banker to run the sale will give the company the best chance to reach that highest value. They can run a process at arm’s length without passion and that is the best way for a buyer who will pay the highest price to have the best chance of getting the deal done.