Merger Meltdown: Ill-Fated Harry’s Deal A Harbinger Of Investing Reset

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Has the flashy “disrupter” label lost its luster? Have direct-to-consumer upstarts been downgraded or outmoded?

Eyebrows rose when Edgewell Personal Care Co., maker of Schick razor blades, announced this week it abandoned the $1.37 billion acquisition of Harry’s Inc., a born-on-the-internet DTC men’s and women’s shaving company.

Some questioned antitrust claims that scuttled the merger, citing similar deals that escaped FTC scrutiny thus far such as Procter & Gamble’s plan to acquire Billie, a subscription-based women’s grooming brand. P&G’s Gillette brand is the U.S. market leader while Edgewell trails a distant second with its Schick and Wilkinson Sword blades.

Others suggested that investments in promising-but-unproven new brands are cooling as venture funds get nervous. And smarter.

“I think we are entering into a new era where digitally enabled businesses will still be important but it won’t be more important to be a disrupter than it is to be actually a good business,” says Andrea Weiss, founding partner of The O Alliance who sits on the boards of four public companies.

“When you see M&A deals that go sideways and IPOs that underperform to expectations,” such as office-space startup WeWork and mattress-in-a-box company Casper Sleep, “they are not just incidents in a bubble. They exist in a much bigger economic ecosystem,” she said in an interview.

Weiss pointed to Japan’s SoftBank Vision Fund whose $100 billion portfolio includes fast-growing, digitally enabled WeWork, Uber and Brandless, the San Francisco DTC that announced its shutdown this week. “The reality is that many of them have yet to show the ability to generate a profit.”

The ill-fated Harry’s merger may be another “early indicator light” signaling companies’ waning appetite for DTC upstarts purely to acquire digital savvy, she says.

Edgewell’s president and CEO Rod Little announced Feb. 10 the Harry’s deal was terminated “given the inherent uncertainty of a potential trial, the required investment of resources and time and the distraction that a continuing court battle would entail.”

The FTC, which objected to the Edgewell-Harry’s merger on the basis it “would remove a critical disruptive rival that has driven down prices,” said the unconsummated deal is “good news” for consumers.

“For years, Edgewell and Procter & Gamble faced little competition on store shelves, and prices rose steadily as a result. The arrival of Harry’s into brick-and-mortar retail disrupted that pattern, bringing lower prices and more options to consumers. Allowing Edgewell to bring that disruptor under control by acquiring Harry’s would have represented a big step back for competition,” said Daniel Francis, deputy director of the FTC Bureau of Competition, in a prepared statement.

New York-based Harry’s, meanwhile, stated it was “perplexed by the FTC’s process and disregard of the facts” and “disappointed by the decision by Edgewell’s board not to see this process to its conclusion.”

Though Edgewell’s CEO told analysts on Monday’s earnings call his company was notified Harry’s would pursue litigation, Harry’s has not confirmed it’s taken action against its suitor.

What is certain is that Edgewell is now seeking leadership to run its North American operations, a role Harry’s co-founders Andy Katz-Mayfield and Jeff Raider were to take on as co-presidents had the merger been finalized.

Scott Friend, partner at Bain Capital Ventures, told me he is disappointed by regulatory opposition to the Edgewell-Harry’s merger. Harry’s co-founders Katz-Mayfield and Raider met while working at Bain & Company.

“I think Harry’s is one of the rare DTC brands that actually had some level of defensibility given the supply dynamics in this space, [having] built both an attractive brand and a solid business,” Friend says.

The Harry’s brand that started as an online subscription-based retailer moved beyond DTC onto store shelves at Target, Walmart, grocery chains and Boots in the United Kingdom. To ensure control over the supply chain and product quality, Harry’s purchased a 93-year-old razor blade factory in Eisfeld, Germany.

In a 2018 blog post, Friend outlined why defensibility matters and why it is uncommon among digitally native brands that might do better growing their business the “old fashioned” way rather than raising a lot of venture capital.

The O Alliance’s Weiss agrees Harry’s has a more balanced business model than many new DTCs. Still, she adds, “I think the important message here is that this is a microcosm of this bigger issue brewing—all these hopeful exits that people have for these unprofitable businesses are going to be scrutinized in a different way.

“We may be looking at a more rationale moment of business investment returning.”