Lowe’s DIY project gone wrong
Lowe’s bid for Rona reveals some troubling structural issues.
Lowe's hostile takeover bid for Canada's largest home improvement retailer, Rona, is the corporate equivalent of a DIY project gone wrong. Standing on the sidewalk and surveying the scene, you can almost see the shingles fly off and the porch begins to sag.
As these things do, it started with a plan that must have seemed like a good idea at the time.
About a year ago, Lowe's began eyeing Rona, which was admittedly in need of a renovation. But by the time it broke ground with an unsolicited $1.76 billion offer for the Quebec-based company, the ground had shifted. The takeover campaign launched just as a provincial election campaign was getting underway — which is the equivalent of starting to build in hurricane season.
To be fair, executives based in Mooresville, N.C., may be forgiven for failing to fully grasp the thunder and winds that characterize Quebec politics on a good day. But the notion of embarking on a hostile bid for a local company in the midst of a political storm is astonishingly bad judgment.
More precisely, it's exactly the sort of mistake that cuts right to the heart of a key issue in cross-border transactions: cultural nuance — and a sensitivity to it — can make or break a deal.
It's certainly something that investors on all sides of this deal need to track very carefully. After all, if the senior team at the acquiring company and their advisors can't get the early steps right, chances are there could be some even bigger stumbles ahead.
It certainly didn't take long for Lowe's bid to turn toxic — despite the fact it didn't come as a particular surprise.
Within hours, Quebec's finance minister, Raymond Bachand, was on his high horse, declaring: "This transaction does not appear to be in the interests of either Quebec or Canada. Rona is a major player in Quebec's economy, particularly in the manufacturing industry because of its extensive network of suppliers and strong links with many regional players across Canada."
The Liberal government, which is set to fight a bitter battle for another term in office, can't afford to ignore the fact that almost half of Rona's purchases — worth about $2 billion annually — are made in Quebec.
Neither does it intend to ignore it. It's already looking for ways to mobilize the provincial investment agency, Investissement Quebec, as well as unleashing the might of the massive provincial pension fund, the Caisse de dépôt et placement. (The Caisse has already increased its stake in Rona by two percentage points to 14.2 per cent, noting the economic benefits of having Rona's head office in the province.)
Lowe's commitment to keeping Canadian headquarters in Boucherville, Que., and retaining 30,000 existing employees was immediately dismissed by Minister Bachand. And not surprisingly, Rona management quickly rejected the offer of $14.50 a share.
Lowe's appears confident that it can expand its relatively small presence in Canada, where it now has 31 stores (mostly in Ontario) and generates just two per cent of its revenues. But what it clearly needs to consider - especially in the midst of this fraught situation - is whether it understands the Canadian market sufficiently well to accomplish its goals.
For one thing, Rona is already struggling in an intensely competitive and rapidly evolving DIY market. It has a mix of big box and smaller stores as well as a distribution business. It has closed 20 stores and sales have declined over seven consecutive quarters and even though it has trimmed its losses, in the first quarter of 2012 it lost $13.3 million or 10 cents per share (down from a 13 cent loss a year earlier when net losses were $17.6 million).
Lowe's hasn't exactly been cleaning the clock of its principal rival, Home Depot, either.
A big part of the issue here, however, is one that transcends this increasingly messy undertaking: fewer people have the time or the training to embark on DIY home improvement projects. And in Canada, an increasingly multicultural, urban population is amplifying that trend.
That reality is reflected in the increasingly simplified tools on offer and the growing emphasis on providing services. The business model has shifted to one that encourages people to select a tile or countertop, but then relies on the retailer to install it.
The decline of the North American manufacturing sector, the drop in traditional vocational training in secondary schools, and the dearth of opportunities for apprenticeships are among the forces cited for this change — a change that has significant long-term impact on Lowe's offer for Rona.
With companies as with renovation projects, the foundation has to be solid if the structure is going to survive.
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