What's going on?
Luxottica, the company behind sunglass brands like Ray-Ban and Oakley, is joining forces (i.e. merging) with Essilor, a major French lens manufacturer. The combined company will be worth more than €50 billion! (tweet this)
What does this mean?
Essilor is the world’s largest maker of optical lenses, while Luxottica owns popular brands and retailers (such as LensCrafters) and uses Essilor’s lenses in many of its products. The companies say that the complementary nature of their businesses will help achieve cost savings as well as increased revenues (i.e. synergies) of €400-600 million per year (that’s a lot!). Also, the two were recently starting to encroach on each other’s turf in a search for new sources of revenue: Luxottica began making lenses, for example. More than €5 billion was added to the combined value of the two companies on Monday, so investors clearly think harnessing their energies together makes sense.
Why should I care?
For the stocks: The deal might resolve Luxottica’s succession issue.
Apart from the synergies discussed above, the deal might offer a solution to the vexing issue of Luxottica’s controlling shareholder, 81-year old Leonardo Del Vecchio. In the past, some investors have expressed concern over the lack of a clear successor to Del Vecchio. But Essilor’s CEO is setup, perhaps, to eventually take on the leadership of the combined company.
The bigger picture: Lots of big companies are still merging.
One way to engineer corporate profit growth is for companies to decrease expenses and more efficiently distribute their products. As long as companies struggle to grow by increasing revenues (which is hard when economic growth is historically low), they will likely look to pair up with other firms for the sort of synergies this deal involves. The pace of mergers could slow as economic growth picks up (since companies might be unwilling to sell themselves if they think their revenue is about to increase significantly), but that doesn’t seem to be happening yet!