24 October 2016
Acquiring Netflix would enable Disney to turn a major rival into a growth engine. Photo: Bloomberg
Acquiring Netflix would enable Disney to turn a major rival into a growth engine. Photo: Bloomberg

Why big companies are keen on acquiring fast-growing rivals

Multinational corporations remain very active in merger and acquisition deals despite uncertainties over the US presidential election and Britain’s decision to withdraw from the European Union.

A number of deals are particularly noteworthy.

LVMH, the world’s largest luxury conglomerate, agreed to buy a controlling stake in German luggage maker Rimowa.

Walt Disney, meanwhile, is rumored to be interested in buying Netflix and Twitter.

Big companies appear keen to find new engines of growth through acquisitions against the backdrop of low interest rates and lackluster economic growth.

Founded in Cologne in 1898, Rimowa manufactures luggage and leather accessories.

Despite its long history, the brand only became a household name in the past decade, as its signature aluminum and grooved suitcases gained popularity with the celebrities.

Last year the company reported sales revenue of 350 million euros (US$389.5 million).

Over the past five years, its average annual growth rate exceeded 20 percent, far outstripping the 5 percent growth in the industry.

In the mean time, LVMH saw its sales growth ease to 3 percent in the first half of this year, dragged by sluggish economic growth and China’s anti-corruption campaign.

Sales from its core fashion and leather goods unit declined 1 percent to 5.9 billion euros during the period.

LVMH said it would buy an 80 percent stake in Rimowa for 640 million euros in order to open up a new revenue source.

The luxury conglomerate is sitting on a huge cash pile of 2.9 billion euros as of end-June, which means the company has more than enough money for the acquisition.

Disney, founded in 1923, is also struggling with faltering growth.

The company’s second-quarter revenue growth eased to 4.1 percent from the previous year, and the newly-opened Shanghai Disneyland does not seem to be performing well.

Even during the week-long National Day holiday, the Shanghai theme park failed to attract enough visitors, according to local media, possibly due to its expensive tickets, which are priced of 499 yuan (US$74.79) each, or 10 percent higher than that of Hong Kong Disneyland.

Disney’s other businesses, media and entertainment, have been constantly challenged by internet media in recent years.

In the second quarter, revenue from the unit dropped 1 percent over the same period last year.

Streaming-video giant Netflix, which has been eating into Disney’s ESPN subscriber base, is perhaps Disney’s biggest rival.

Therefore, acquiring Netflix is a sensible move.

Twitter is also quite complementary to Disney’s business.

Owning Twitter would give Disney a strong social-media presence and strengthen its business as a multi-platform media conglomerate.

Netflix and Twitter are currently worth around US$45.7 billion and US$17.3 billion, respectively, based on their share prices on Tuesday.

Disney only has US$5.2 billion in cash as of early July, which means it needs to borrow money or issue equities to finance its acquisition plans.

Yet, in a market flush with funds, it should not be hard for a sound corporation like Disney, which has a gearing ratio of only about 20 percent, to raise cash.

This article appeared in the Hong Kong Economic Journal on Oct. 5.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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