Select a multinational corporation listed on any international stock exchange and answer the following questions. 1) Why this company wants to go international? 2) What are the major risks faced by this company in its international operations 3) How the company manage such risks?
Prada S.p.A. is an Italian fashion label which specializes in luxury goods for men and women. They design and create prêt-a-porter, leather accessories, shoes, luggage and hats. The company began in 1913 by Mario and Martino Prada, two brothers, as a leathergood shop called Fratelli Prada in Milan, Italy. Mario’s daughter, Luisa Prada, became his successor and ran the company for 20 years. Her daughter, Miuccia Prada, joined the company in 1970 and eventually took over the company from her mother in 1978. Miuccia met Patrizio Bertelli in 1977. Patrizio became her advisor then eventually joined the company as her business manager and in due course her husband (they married in 1987).
Miuccia and Patrizio changed the house of Prada and together they brought it up to the high-fashion level where the name “Prada” is now a status symbol. Patrizio advised Miuccia to discontinue the English made goods their store sold and to change the existing luggage styles. Miuccia began using new material, tough military spec black nylon, to create her backpacks and totes. The initial success was not instantaneous as the bags were very difficult to sell because of their high prices and lack of advertising. These lines would eventually become Prada’s first commercial hit. The duo sought out wholesale accounts in upscale department stores and boutiques worldwide. A second store was opened in 1983. When Prada released their black nylon tote, they also expanded across the continental Europe opening stores in prominent shopping districts in Florence, Paris, Madrid and finally they also opened a store in the fashion capital of the world- New York City. Following her success with the bags, Miuccia released a shoe line in 1984 and a ready-to-wear collection in 1989. Prada products have established themselves with the fashion elite as practical and sturdy with an offhand aura of luxury. The appeal of Prada is their image of “reverse snobbery”.
The latter part of 1997 is when the Prada company began their interest in acquiring shares of other luxury groups. Prada acquired shares in the Gucci group. “In June 1998, Bertelli gained 9.5% interests at US0 million. Analysts began to speculate that he was attempting a takeover of the Gucci group. The proposition seemed unlikely, however, because Prada was at the time still a small company and was in debt. Prada purchased 51% of Helmut Lang‘s company based in New York for US million in March 1999. Lang’s company was worth about US0 million. Months later, Prada paid US5 million to have full control of Jil Sander A.G., a German-based company with annual revenue of US0 million. The purchase gained Prada a foothold in Germany, and months later Jil Sander resigned as chairwoman of her namesake company. Church & Company, an English shoes maker, also came under the control of Prada, when Prada bought 83% of the company at US0 million.[3] A joint venture between Prada and the De Rigo group was also formed that year to produce Prada eyewear.[3] In October 1999, Prada joined with LVMH and beat Gucci to buy a 51% stake in the Rome-based Fendi S.p.A.[3] Prada’s share of the purchase (25.5%) was worth US1.5 million out of the reported US0 million total paid by both Prada and LVMH.[3] Prada took on debts of Fendi, as the latter company was not doing well financially. These acquisitions elevated Prada to the top of the luxury goods market in Europe. Revenue tripled from that of 1996, to L 2 trillion. Despite apparent success, the company was still in debt.
The company’s merger and purchasing sprees slowed in the 2000s. However, the company signed a loose agreement with Azzedine Alaia.[5] Skin care products in unit doses were introduced in the United States, Japan and Europe in 2000. A 30-day supply of cleansing lotion was marketed at the retail price of US0.[3] To help pay off debts of over US0 million, the company planned on listing 30% of the company on the Milan Stock Exchange in June 2001. However, the offering slowed down after a decline in spending on luxury goods in the United States and Japan. In 2001, under the pressure of his bankers, Bertelli sold Prada’s entire 25.5% share in Fendi to LVMH. The sale raised only US5 million.
By 2006, the Helmut Lang, Amy Fairclough, and Jil Sander labels were sold. Jil Sander was sold to the private equity firm Change Capital Partners, which was headed by Luc Vandevelde, the chairman of Carrefour, while the Helmut Lang label is now owned by Japanese fashion company Link Theory. Prada is still recovering from the Fendi debt. More recently, a 45% stake of the Church & Company brand has been sold to Equinox. (http://en.wikipedia.org/wiki/Prada, retrieved 4 April 2011).” Prada’s next step is to go IPO (Initial Public Offering).
“Why would Prada want to go public? The attraction of an IPO, of course, is that it not only raises capital to fuel expansions and acquisitions but it helps keep control in the hands of the Prada family. There are very few stand-alone public companies in the fashion business. Some of the biggest–such as LVMH, which owns, among other things, Givenchy, Fendi and Marc Jacobs–are large, diversified corporations where cash-cow divisions can support money-losing critical darlings. These corporations have the management, money and marketing skills to turn small design shops into global powerhouses.
Another type of publicly-traded fashion house would be Hermes. The Paris-based luxury company is listed on the Paris Stock Exchanges and other European bourses though not on the NYSE or Nasdaq–but voting stock is carefully kept in the hands of the Hermes family.
Alternately, a number of design houses–such as Valentino or Tommy Hilfiger–are wholly or partly owned by deep-pocketed private equity groups.
The problem is that there are even fewer big private design houses left anymore. Chanel, Armani, Versace, Benetton and a handful of others are all that is left. It is getting just too expensive to start up a new fashion brand without the significant financial backing that a private equity, a rich parent company or a public offering can provide.
Equally important, the luxury sector is becoming increasingly competitive and comprehensive. As new markets for luxury products and services open up in Russia, China, India and elsewhere, companies like Prada need the money to establish a presence there–building a store, hiring staff, logistics, marketing, etc., etc.–or risk being shut out of those markets. Moreover, no longer do companies focus only on one category, such as shoes or bags or clothes. Now they need to be in all of them.
One potential concern about an IPO at this time would be the soaring value of the euro and the decline of the dollar. Many European luxury companies are keeping their prices artificially low in order to keep dollar-spending customers coming through their doors, especially during the holidays. The deeper the discounts, the lower the margins, which may lead to analysts lowering the company’s offering price. And, of course, once public there is no guarantee that it would be a success. (Public Prada? http://www.businessweek.com/lifestyle/business_luxury/archives/2007/12/public_prada.html , retrieved 4 April, 2011).
In late January of 2011, Prada announced that it was going IPO in HKSE (Hong Kong Stock Exchange). Patrizio commented that the company’s strategy of worldwide expansion has given it strong revenues and profitability, putting the brand in a strong position to go public.
“While Prada may be able to obtain a higher valuation in Hong Kong than in Europe, some analysts said the company risks missing out on investor interest from Europe and the United States.” They will lose investors and coverage in Europe and the U.S.,” one Milan analyst told Reuters “But this is less of an issue for them as the amount of money they will be able to raise.” Others see Prada’s Hong Kong IPO as a strategic move. Armando Branchini, vice-president of Milan-based consulting firm Intercorporate, said: “Asian investors will consider the decision to list in Hong Kong as a kind of recognition of, and tribute to, the importance of the region.” (Prada confirms going public in Hong Kong. http://www.accessoriesmagazine.com/newsletter/article/prada-confirms-going-public-in-hong-kong-1825/ ,retrieved 4 April, 2011.)”
30 March newsflash: “ Prada is set to file a listing application by Friday for a Hong Kong IPO that could be worth around billion, sources with direct knowledge of the plans told Reuters on Wednesday. (Prada to file HK IPO documents by Friday: sources. http://www.reuters.com/article/2011/03/30/us-prada-ipo-idUSTRE72T27M20110330, retrieved 4 April, 2011).
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