Why Estee Lauder Is Talking About Buying Tom Ford

The Tom Ford brand was reported to be for sale earlier this month and today The Wall Street Journal reported that beauty giant Estee Lauder is in talks to buy it.

Would Would They Do That?

There’s a few reasons why Estee Lauder would buy Tom Ford. The first is that they know the company well because Estee Lauder has been working with Tom Ford on its fragrances for years.

You might say – knowing a company is not a good reason to buy it, acquisitions should be based on economics. That’s true but one of the reasons many deals fail is because of culture. Knowing a company’s culture from the inside is valuable and it reduces risk of acquisition failure. It also means that Estee Lauder has been able to see opportunities in the business that aren’t immediately apparent to others. If that’s true, it’s an opportunity that gives it an advantage in an acquisition process.

Just as important, it’s a diversification that’s logical. Estee Lauder is producing an enormous amount of cash, their most recent earnings were over $3 billion. That cash has to go somewhere to be productive and an acquisition is a logical place to put the cash to generate growth.

What’s surprising about an acquisition of Tom Ford by Estee Lauder is what it implies about Lauder’s strategic thinking. This deal would imply that Lauder believes it’s in the luxury business. That would be the only way to describe a combined company, whereas in the past Lauder has always been described as a beauty business. That redefinition points to likely other moves that Lauder would make if a Tom Ford deal happens. It may also mean that they look at luxury companies like LVMH and Kering and aspire to that positioning, growth and status.

What it doesn’t say about how Lauder thinks of itself is also interesting. Beauty and wellness have been moving closer for the last several years. The way consumers, view themselves and think about their appearance is part of their emotional state and maintaining a healthy emotional state is what wellness is about. With this deal, Lauder would be moving away from wellness and focusing more on luxury. That doesn’t mean they won’t make a wellness acquisition but it’s surprising that a pure luxury brand is where Lauder might go next.

There’s no assurance that a deal will happen, other bidders for Tom Ford could emerge and it’s possible that the story about a Lauder-Ford deal isn’t absolutely correct. Mergers and acquisitions processes can change fast and winners can emerge quickly if they are motivated so you never know. But if it’s true that Lauder is negotiating for the acquisition, it puts a new spin on how beauty companies might evolve into the future.