Pier 1 Abandons Cost Plus Bid

by Alexandra Biesada, July 1st, 2008, 7:00 am

The deal never left the dock. After initially insisting that the combination of troubled Pier 1 Imports and Cost Plus was “a marriage made in heaven,” CEO Alex Smith said last week that Pier 1 was abandoning its unsolicited bid to acquire its smaller rival, less than three weeks after making its initial approach. The $88-million offer, which Cost Plus quickly dismissed as “distracting and ill-timed,” got a chilly reception on Wall Street. Goldman Sachs issued a pessimistic view of the proposed acquisition and lowered its earnings and price target, which drove down Pier 1’s stock. With both companies struggling to turn around their shaky businesses in a weak economy, this union looked doomed from the start, despite Smith’s assertion that given the two firms’ “similar customer bases and broadly similar business models” they are “an excellent fit.”

Upon pulling the plug, Pier 1 said it was unlikely it would be able to buy Cost Plus at a price that would make sense for its shareholders.

If there’s a silver lining to the current market malaise it’s that ill-conceived deals, such as the Pier 1/Cost Plus tie-up or the much-maligned Blockbuster/Circuit City combo, are becoming harder to complete. Indeed, a recent report from Thomson Reuters found that global M&A activity dropped 35% in the first half of 2008, as the credit crunch dried up cash needed to complete deals and economic uncertainty made companies and shareholders reluctant to take on additional risk.

Investors reacted to the news of both deals — and the subsequent release of weak financial results by Pier 1 and Circuit City — by driving down the stocks of all those involved. Indeed, Circuit City’s shares have sunk to their lowest level since 1991. As for the Pier 1’s shares, after decreasing 40% since its bid for Cost Plus was announced on June 9, they’ve rebounded a bit.

So for now, the boom in M&A and private equity buyout deals for retailers appears to be over. That’s bad news for investment bankers who’ve feasted on the fees deals generate. On the plus side, it provides an opportunity for struggling retailers to get their own houses in order, before taking on another chain’s problems.