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Introduction:
“The Devil Wears Prada,” they say. Perhaps that’s why even angels couldn’t salvage the attempted union of Tapestry and Capri. A deal poised to create a formidable fashion conglomerate was ultimately blocked by regulatory hurdles that some argue were based on flawed reasoning. This is the third installment in our Deal Postmortem series, where we dissect the collapse of major mergers and explore the implications for the parties involved. You can find all our deal postmortems here and a list of failed deals over a fourteen-year period here.
A Rare Failure in M&A
Mergers rarely fail, with approximately 95% completed successfully. Yet November 2024 saw two high-profile terminations, including the Tapestry-Capri merger and the proposed merger between FirstSun Capital Bancorp (FSUN) and HomeStreet, Inc. (HMST), both due to regulatory intervention.
The $8.5 billion all-cash deal at $57 per share was designed to unite the parent companies of brands like Coach, Kate Spade, Stuart Weitzman, Michael Kors, Versace, and Jimmy Choo. Approved globally—from Australia to the UK and even notoriously slow-moving China—the deal died at the hands of the U.S. Federal Trade Commission (FTC).
The Case for the Merger
Historically, both companies have been skilled acquirers. Capri, formerly Michael Kors, built its brand portfolio by purchasing Jimmy Choo in 2017 and Versace in 2018, rebranding as Capri Holdings in 2019. Similarly, Tapestry transitioned from Coach to a multi-house luxury player after acquiring Stuart Weitzman in 2015 and Kate Spade in 2017.
In some sense the two companies were trying to emulate what Bernard Arnault managed to pull off with Louis Vuitton Moët Hennessy (LVMH), which ended up accumulating a portfolio of 75 brands that range from Dom Pérignon to Sephora. Incidentally LVMH attempted to walk away from its acquisition of U.S. luxury jewelry powerhouse Tiffany & Co. because the agreement to acquire Tiffany was struck right before the COVID-19 pandemic hit. In our November 2020 Merger Arbitrage Mondays article titled “Tiffany Rises From The Dead” we outlined how the companies decided to settle their pending litigation in the Delaware Chancery Court and agreed to a price of $131.50 per share compared to the original deal, which was struck at $135 per share in cash.
The Tapestry and Capri merger made sense on paper. Michael Kors had been struggling with brand fatigue, a loss of exclusivity due to market saturation, and a discount-heavy strategy. Tapestry, which faced similar challenges with Coach, had managed to stabilize its portfolio. The combined entity would help Capri regain momentum while bolstering Tapestry’s market position.
The luxury market landscape also supported the deal. Unlike “true luxury” players like Chanel or Louis Vuitton, Tapestry and Capri operate in the “accessible luxury” category. This mid-tier market is dynamic, trend-driven, and rife with competition, including names like Veronica Beard, Lululemon, Ralph Lauren, and even resale platforms.
When the deal was announced, I noted:
“In terms of regulatory risks, it would be highly unusual for the FTC or the DOJ to find this deal anticompetitive given consumers of luxury goods are not as price sensitive as the general populace and these are discretionary purchases.”
The reasoning seemed sound at that time, as accessible luxury operates in a discretionary segment where customers have plentiful alternatives if prices rise or quality falters. Higher prices also signify exclusivity and aren’t a deterrent as is often the case with regular everyday purchases. However, the FTC’s eventual decision to block the merger came as an unexpected blow, challenging this initial assessment.
FTC’s Objection
The FTC opposed the merger, arguing it would stifle competition in the accessible luxury handbag market. They claimed the union of Tapestry and Capri’s brands would reduce discounts, suppress innovation, and inflate prices, potentially harming consumers and the companies’ combined 33,000 employees.
The FTC also challenged the companies’ assertion that handbags are nonessential items. In its complaint, the agency argued that handbags are vital for many consumers, not only as fashion accessories but also as functional items that support daily life and professional aspirations.
Key Issues in the Trial
Trial Drama
John Idol, CEO of Capri Holdings
Idol testified that Michael Kors and Capri were struggling to remain competitive in a saturated market. He stressed that delays in the merger would further harm Capri’s declining market share, emphasizing that competition in the handbag market was intense and constant. “Michael Kors and Coach must fight every day to maintain their market positions,” he said.
Joanne Crevoiserat, CEO of Tapestry
Crevoiserat argued that customers in the accessible luxury market have numerous alternatives and the merger would not stifle competition. “Customers have hundreds of choices, they can turn anywhere,” she said, naming competitors such as Veronica Beard, Kurt Geiger, Telfar, and even Lululemon.
Michael Kors, Fashion Designer and Founder
Kors provided a candid view of the market, describing its unpredictability. “Sometimes you’ll be the hottest thing on the block, sometimes you’ll be lukewarm, sometimes you’ll be ice cold,” he said. Addressing Capri’s challenges, he admitted, “I think we’ve reached a point of brand fatigue. It’s in a state of stasis at this point.”
Cedric Wilmotte, CEO of Michael Kors
Wilmotte admitted that Capri had paused parts of its reinvention strategy due to financial constraints. He also acknowledged Tapestry’s stronger position, saying, “They are light years away from where we are today.”
Elizabeth Harris, Tapestry’s Senior VP for Global Strategy
Harris testified that Tapestry could potentially raise prices and reduce discounts on Michael Kors products post-merger. This admission played into the FTC’s argument that the merger would harm consumers.
Dr. Loren Smith, Economist for the FTC
Smith presented a detailed economic analysis, warning that the merger could lead to a 17% increase in handbag prices, costing consumers $365 million annually. He argued that if Michael Kors raised prices, many customers would switch to Coach or Kate Spade—brands that would also be part of the merged entity.
Judge Jennifer Rochon
The case was initially assigned to U.S. District Judge John Koeltl, a Clinton appointee, but was later reassigned to Judge Jennifer Rochon, a Biden appointee who has served on the bench since 2022.
Judge Rochon presided over the eight-day trial, during which she repeatedly sought clarity on the FTC’s definition of “accessible luxury.” During the closing arguments of the trial, she asked:
“What are the parameters? There have to be some lines of demarcation.”
In her final ruling, Judge Rochon ultimately sided with the FTC, concluding that the merger would harm competition in the accessible luxury handbag market. Addressing the companies’ defense that handbags are nonessential items, she countered:
“This view ignores that handbags are important to many women, not only to express themselves through fashion but to aid in their daily lives – from supporting their career aspirations by transporting their work materials home or inspiring confidence in professional settings to holding important personal items such as medications or personal hygiene products, to carrying a young child’s snacks or toys.”
Her decision also highlighted the unresolved ambiguity surrounding the term “accessible luxury,” which remained a contentious point throughout the trial and played a critical role in her ruling.
The Aftermath
The fallout was swift. Capri’s stock plummeted 48%, reflecting investor skepticism about its future as a standalone entity. Meanwhile, Tapestry’s stock rose 13%, buoyed by a $2 billion share buyback program—equivalent to roughly 15% of its market cap.
For Capri, the road ahead looks challenging. Its recovery hinges on a focused strategy to rejuvenate its brands and compete effectively in the broader luxury market, which has seen headwinds across the board.
However, there are concerns about Capri’s ability to execute this strategy. If the company’s execution matches the effort put into its latest strategy slides, Tapestry, and other competitors will easily outperform the brand. This abomination of slides, which essentially convey a whole lot of nothing with the same lines copy-pasted into each brand’s strategy, does not inspire confidence in investors or consumers alike.
Regulatory Oversight: A Growing Trend?
One trend that has emerged in recent years, particularly with the FTC, is how prolonged regulatory reviews can drag a merger to a standstill. Companies often become so entangled in battling regulators that they lose focus on their core business operations. As a result, their stock prices can tumble, sometimes falling below the level they were at when the merger was first announced.
We saw a similar situation with WillScot Holdings (WSC) when the FTC delayed approval for its merger with McGrath RentCorp (MGRC). The companies explicitly stated the impact on their business from the lengthy review process as the reason for calling off their merger. This pattern of lost momentum and stock devaluation can be disastrous for the companies involved, particularly those like Capri, which are struggling to regain their footing in a competitive market. The other challenge we see with long drawn out battles is that the underlying dynamics of the industry might change as experienced by Spirit Airlines.
Conclusion
What we learn from these failed mergers is that in today’s regulatory environment, success often depends on the judge’s interpretation of the case at that moment—far more than on the evidence presented. Companies are left in limbo where regulatory approval becomes all consuming, forcing them to endure significant market consequences. Spirit Airlines, for example, saw its post-merger collapse lead to bankruptcy filing shortly after its deal with JetBlue (JBLU) was blocked. A similar fate could await Capri unless it pivots its strategy and reinvents itself in the wake of the failed merger.
For Capri, this is already a harsh reality. Since the merger with Tapestry was announced, Capri has seen both revenue and profits decline sharply. If Capri can generate even half of the earnings it did before this unfortunate merger saga began, the stock is cheap at current levels. It will take time and a strategic shift for the company to recover its pre-merger market position.
Retail analyst Berna Barshay’s recent visit to the mall during Black Friday painted a disappointing outlook for some Capri brands. She noted the following in her article:
“Versace (CPRI) – Walked by twice, zero customers. Worse than Burberry and Gucci, which if you have been following along the luxury space, is scary. I assume zero discounts. You can see a pattern where I am too embarrassed to ask dumb questions, like asking a luxe retailer if anything is on sale.”
Looking ahead, the question of how future mergers will unfold remains uncertain. The landscape may shift under the Trump administration. President-elect Donald Trump has made his opposition to some mergers clear in the past, notably voicing his opposition to the U.S. Steel (X)-Nippon Steel merger, stating, “As President, I will block this deal from happening.”
The narrowing of the spread of the U.S. Steel deal since Trump won the election points to a more favorable environment for corporate M&A in 2025 and beyond.
Editor’s Note: Baranjot Kaur contributed to this article
Disclaimer: I hold a long position in Capri (CPRI). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.