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September 01, 2010

Acquisitions/Mergers

Sterling Strategy: Avon Acquires Silpada

by Barbara Seale

Accomplished Leaders

Avon is a company that is accustomed to being led by executives with star power, as well as solid management skills. And while they lead their company with skill and vision, they also contribute substantially to the direct selling industry. Silpada Co-Founder and CEO Jerry Kelly continues that tradition.

Kelly started the company with partners and company co-founders Bonnie Kelly (Jerry’s wife of 32 years) and Teresa Walsh in 1997.
During the 18 years prior to starting Silpada Designs, Kelly owned, operated and managed several consumer products mail order catalog companies. He earned a BSBA in business management from the University of Denver and an MBA in direct marketing from the University of Missouri-Kansas City. Kelly is an active member of the Direct Selling Association, where he serves as vice chairman of the Board of Directors of the DSA, and on the Board of Directors of the Direct Selling Education Foundation. He chairs the DSA’s 2011 Annual Meeting committee.
Andrea Jung joined Avon in January 1994, was appointed CEO in 1999 and was elected Chairman in 2001. She has been a member of the Board of Directors since January 1998. Before joining Avon, she held executive positions at Neiman Marcus and at I. Magnin.
In 2008 Jung was appointed Chair of the World Federation of Direct Selling Associations (WFDSA). At DSA’s recent annual meeting, she accepted the Founder’s Award on behalf of Avon, given in recognition of its role in the DSA since the association’s inception. She became the first woman elected chair of the Cosmetic, Toiletry, and Fragrance Association in March 2001, a role she held until early 2005. She currently serves on the Board of Directors of the General Electric Company and Apple and is a member of the New York Presbyterian Hospital Board of Trustees and the Catalyst Board of Directors.

In 2009, Jung was ranked #2 on the Financial Times inaugural “Top Women in World Business” list, #5 on Fortune magazine’s “50 Most Powerful Women in Business” list, which she has been on since the list’s inception, and #25 on the Forbes list of “The World’s 100 Most Powerful Women.” Jung is a magna cum laude graduate of Princeton University and is fluent in Chinese (Mandarin).

In the fall of 2009 Silpada Designs Co-Founders Bonnie Kelly, Teresa Walsh and Co-Founder and CEO Jerry Kelly began to consider partnerships that would help their sterling silver jewelry company continue to thrive for years to come. They had lofty standards. Their high expectations paid off in early July, when Avon announced that it would acquire Silpada Designs for $650 million.

The transaction was structured as an all-cash asset acquisition. Avon will also make a potential additional payment in early 2015 to current Silpada shareholders if certain earnings growth targets are achieved.

Since it was launched in 1997, Silpada has become the largest and fastest-growing direct seller of sterling silver jewelry. It has operations in the United States, Canada and—launched this year—the United Kingdom. It has more than 32,000 independent representatives and recorded $230 million in sales during 2009.

Its new parent company, global beauty company Avon, is the world’s largest direct seller, with more than $10 billion in annual revenue. It markets in more than 100 countries through approximately 6.2 million independent sales representatives. Jewelry is a small part of Avon’s current product line, which focuses primarily on beauty products. But Avon’s jewelry offerings typically are in the $20 price range, while Silpada’s average price for a single piece of sterling silver jewelry is $68. Silpada’s jewelry prices range from $12 to $279.

Bigger Than Bling

This acquisition runs much deeper than products, as both Jerry Kelly and Avon CEO Andrea Jung noted in a recent conversation with Direct Selling News. They said that, at its core, the union brings strengths from each company to benefit the other.
Those strengths became evident early in the process.

“What’s so attractive about Silpada is obviously the extraordinary talent and vision of Jerry, Bonnie and Teresa, but also the strength of their management team and their commitment to growth,” Jung said. “What we believe we can do at Avon is leverage some of the strength we’ve built as the leading direct sales company in terms of branding, brand awareness and marketing analytics.”

She noted that consumer insights have been critical to Avon as it has grown to a $10 billion company. Even during the due diligence process they realized that additional insights Silpada had gained on its consumers would help both companies boost market penetration in North America.

“Down the road I think that Avon’s global footprint, infrastructure and expertise in opening markets will be something that Jerry and the team can leverage when they’re ready to go further into international markets,” Jung said.

That expertise was part of the reason Silpada was eager to join the Avon family of companies. Kelly sings Avon’s praises, noting that the company expects the new marriage with Avon to help Silpada accelerate the growth of its brand throughout the United States and Canada, as well as expand globally and provide even better support and resources to its representatives and customers through the partnership.

Goal: Generational Growth

Silpada’s leadership had a well-thought-out list of must-haves for any prospective parent company. The three have always been long-term planners, and their ultimate goal was to ensure that their company would be able to thrive, even beyond their lifetimes.
“We began to look at this in earnest in the fall of ’09 and to urge ourselves—as emotional as it was—to structure that process to make sure that we did this in a very thoughtful, prudent and transparent way,” Kelly said. “We began to identify those characteristics and fundamentals that we thought were important. Number one, we wanted to remain a standalone brand with our own culture. Number two, Bonnie, Teresa and I, and our management team, wanted to stay intact to continue to lead the company. We wanted to affiliate ourselves for the future of Silpada with the most stable, significant direct selling company focused on women in the world that knew how to grow a brand and eventually to grow our brand globally. One company stood out, and that was Avon Products.”

Silpada stood out for Avon, too. It had 100 percent annual growth in each of its first eight years and has increased average annual sales by 27 percent a year since 2004. Its $950 per-party sales average is one of the highest in the industry. Avon told Dow Jones that it expects the purchase of Silpada to boost earnings by 3 to 5 cents a share next year. But beyond finances, Silpada offered the X Factor.

“We’re about to celebrate our 125th year next year,” Jung said. “But the belief and desire to understand what it’s going to take to make sure that Silpada has a 125-year anniversary, and to do it at a time where they can leverage some of the learning and resources of a strategic partner, not many have that foresight.” She added, “I have very rarely met a founder and CEO who has that much of a disciplined and yet visionary approach to growth.”

Selling the Salesforce

Of course, one of the keys to making the new partnership a success is the support of each company’s salesforce—particularly Silpada’s, since it’s the company being acquired. The acquisition was not yet complete, but Avon and Silpada made the decision to issue an announcement ahead of time so that executives could speak directly with the Silpada salesforce as soon as possible. The timing of the announcement allowed Kelly and Jung to speak in person to Silpada representatives who attended Silpada Designs’ annual National Conferences in Kansas City and Toronto. Kelly told representatives that he believes that the acquisition marks a seminal moment in the company’s history.

“I believe that history will judge this as one of the most sound, significant business decisions that we could have ever made on behalf of Silpada, its representatives and their futures, and that Silpada will, as a result, be a wonderful company for decades and generations to come,” he told Direct Selling News.

During Silpada’s annual U.S. and Canadian National Conferences, he emphasized to 5,000 representatives in Kansas City and 1,500 gathered in Toronto that the partnership gave the company access to the resources and acumen of “the most iconic, largest, most respected direct sales company in the industry.”

“The presentations that Andrea made have really opened the eyes of people who didn’t really know as much about Avon as they could have,” he told Direct Selling News, “and I think that our representatives in the United States and Canada have a much deeper and greater appreciation for Avon and the values and the iconic brand and the wonderful company that it is. Our representatives are as excited as I’ve ever seen them.”

Jung fully acknowledged the importance of making those presentations. But even more important was the opportunity to stand before the audiences and put her own integrity and that of Avon on the line. She emphasized that honesty and transparency were part of the Avon culture—as sterling as Silpada’s high-quality jewelry.

“I was able to express person-to-person, in front of 6,500 Silpada representatives, that our word is our word, that we cherish the special and unique business and company that Silpada is, and that this is an intention not to change it but only to add value where we can and let Jerry take advantage of the resources,” she said. “The feedback that I think both of us got after [the first meeting in] Kansas City is that, once any anxiety is gone, then it all becomes a complete celebration of what the possibilities can be.”

Don’t Mess With Success

Just as the Silpada founders required, the two companies will operate independently, while both contribute to the same balance sheet. Silpada sells its merchandise through the party plan method, while Avon uses a person-to-person model. Avon has no intention of meddling with Silpada’s success. In fact, Jung underscored that the acquisition reflects Avon’s confidence in the entire direct selling channel.

Industry leaders agree. “The acquisition by Avon of Silpada, which was built from the entrepreneurial spirit of three dynamic co-founders, is an affirmation of the strength of the direct selling model,” comments Direct Selling Association President Neil Offen. “It is a melding of tradition, wisdom and stability with vision, energy and innovation.”

“When I look at the landscape in terms of industries and channels, I think that the power of direct sales, both here in North America as well as around the world—well, I don’t think we’ve seen anything yet,” she said. “This acquisition demonstrates our strategic belief in the power of direct sales, and that doesn’t need to be limited to just our traditional one-on-one selling. Instead, we’re partnering with a company that has proven to be best in class. It’s a way to help accelerate growth.”

 For Jung, the exact direct selling model that Silpada used wasn’t a factor in the merger. But the fact that both Avon and Silpada share the proud spirit of the same industry was a big plus.

Avon is no stranger to acquisitions, having invested in several companies over the years. In addition to Silpada, earlier this year it acquired Liz Earle Beauty Company, a primarily online seller of natural skincare products, and also purchased the trademark of baby care brand Tina Tillia. Jung said that Avon has taken a disciplined approach to acquisitions, always focusing on its core business.

“Most important, it’s not just about strategic sense or financial sense. It’s also about fit, and it’s about leadership,” Jung said. “It did take me to my 11th year [as CEO of Avon] to find Bonnie, Teresa,  Jerry and Silpada, but it was worth the wait, because it’s the right company and the right leaders. They add to the capacity of the Avon corporation in terms of thought leadership and direct sales excellence.”

She noted that Avon has worked hard to restructure its business in order to free up enough investments to funnel funds back into brand building and the company’s compensation plan. She estimates that the company has put more than $700 million back into brand and channel investments over the last few years.

While growth has slowed recently in North America, Jung said she believes that Avon will continue to grow both domestically and in new markets. Acquisitions such as Silpada contribute to her forecast.

“We look at it as how many more women we can reach from every walk of life whose lives we can change,” Jung said. “That gives us a full plate for the company to focus on for another decade.”