Adam Ismail05.01.06
The Colgate, Tom’s of Maine Deal
Did Tom’s of Maine ‘sell out’ to a company out of sync with its core values?
By Adam Ismail
It seems that more often in this industry strange bedfellows end up together through mergers and acquisitions. Last month Tom’s of Maine became another one of these stories, when it sold 84% of the company to Colgate-Palmolive for $100 million in cash. It wasn’t long ago that Tom’s of Maine criticized large personal care companies for putting non-natural additives in their products, so it is interesting that the company ended up selling to one of THE largest non-natural personal care companies in the world. This doesn’t necessarily mean the company sold out at the expense of its core values, though.
Tom Chappell, the founder and owner of Tom’s of Maine, was very careful to structure the deal so that the values behind the natural personal care company remained intact. Mr. Chappell formed the family company as one which looks after its consumers by offering them safe and natural products. In short, the core values of the company are based on trust. So in its deal with Colgate, Tom’s of Maine sought to preserve that trust. Colgate even guaranteed that the synergies it planned to get from the deal would not come at the expense of its employees. It also assured that the overall structure of the organization would not change.
Some would say the simple fact that Tom’s of Maine wanted to sell meant that it was betraying its core values by doing it for the money, but the reality is the company had some real challenges it could not solve on its own.
The natural personal care category is growing 15% per year, and by most accounts Tom’s of Maine was growing faster than that. However, the company had basically penetrated its existing distribution channels as well as it could, and as a result it was not reaching all of the consumers that it felt it could.
Mr. Chappell told the Associated Press that 25% of consumers were interested in natural personal care products, and to reach them the company needed to broaden its strategy. Getting into new distribution channels and targeting these new consumers takes a lot of capital, more than Tom’s of Maine had.
The company reportedly considered going public, but it backed away from the idea because money alone would not help it grow to its fullest potential. That’s when Tom’s of Maine started looking for the right partner to help it grow.
Colgate topped its list of potential acquirers because it treated Tom’s of Maine with trust and respect, which are the same values that embody the Tom’s of Maine brand. Colgate certainly has the logistics, distribution and marketing sophistication Tom’s of Maine needed, but Tom’s actually brings a lot to Colgate as well.
There are the normal synergies of reducing the costs of media spending and distribution, but as most people who have studied this industry’s consumers know, there is a great potential to get more margin for Colgate products. The Tom’s of Maine consumers tend to have higher incomes and spend more money than a core Colgate consumer, so Colgate can learn a lot about this portion of the market.
So it seems Tom’s of Maine is not “selling-out” after all because it is approaching this deal as a partnership rather than a takeover. Takeovers imply dominance by one company, but both Colgate and Tom’s of Maine have a lot to gain through this acquisition.
The valuation of this deal may seem high to some, at more than two times Tom’s of Maine’s revenues. But it is important to re-member that Tom’s of Maine is growing be-tween 15-20% per year in its existing distribution channels. This growth alone is worthy of a high valuation, especially if the co-mpany is doing it profitably. Add to that the anticipated growth of extending the brand to other channels, and this kind of valuation is well within range. Some analysts even believe that Tom’s of Maine could have received a higher valuation had it sold to another company, but as the Tom’s of Maine team came to realize, it probably would not have been as much of a partnership.
So, just because Tom’s of Maine sold for $100 million to a company that is its antithesis in personal care doesn’t mean it “sold out.” Actually, in many ways Tom’s of Maine stayed truer to its values by selling to Colgate versus going it alone because it will now be able offer its products to a whole new group of consumers.NW