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Will Lina Khan be left holding the bag? On Monday, the US Federal Trade Commission sued to block Tapestry’s $8.5bn acquisition of rival Capri Holdings. The pair are best known for their handbag brands. Tapestry owns Coach and Kate Spade while Capri sells Michael Kors.
When the deal was announced last summer, there was little concern that the combination would be blocked. Shares of Capri traded up to $54 per share, just short of the $57 deal price. Now they hover around $37.
Khan and her counterpart at the Department Justice, Jonathan Kanter, are advancing novel theories of harm from M&A in order to challenge transactions. The US government has codified its scepticism in revised “merger guidelines”. Beyond the traditional consumer price framework, the new school of thought examines effects on innovation, workers and the broader economy.
Tapestry/Capri offers a fairly straightforward case. One fewer handbag maker will be negative for everyone other than shareholders of the acquirer.
But to make its case, the FTC defines a specific market of “accessible luxury.” Coach, Kate Spade and Michael Kors target strivers. The truly wealthy prefer Chanel and Louis Vuitton. In the accessible luxury market, price competition is constant and fierce. It will fade if this deal goes through, says the FTC.
The FTC intimates that Tapestry can watch for competition across challenger brands in order to determine a winner and then pick it off. The agency cites the case of designer Rebecca Minkoff, whose eponymous bag company was acquired for less than $20mn, a figure so modest to perhaps leave her in the accessible luxury demographic.
The agency further argues that there is a specific labour market for handbag store workers that will soften.
Most interestingly, the FTC refers to Tapestry as a serial acquirer, a business model it says deserves particular scrutiny. This could extend beyond luxury. Many companies across multiple industries seek to become consolidators that create platforms to extract synergies, increasingly funded by private equity. If such an approach is suddenly invalidated by US federal courts it will be a watershed.
Tapestry and Capri will both argue that the FTC has de facto fabricated a market in accessible luxury. They will say that even a combined company faces competition on all sides, from expensive Birkin bags to Costco backpacks.
Consumers in luxury like well-known brands even across otherwise commodified products. This dispute is heralded as a bellwether, but fashion may prove to be a unique sub-market.
