By Carol Ryan
Having skin in the game won't always stop family founders from making bad decisions. Estée Lauder's minority investors might soon find that out the hard way.
Shares in the U.S. cosmetics giant have slumped 16% since management said it is in talks to buy Spanish fragrance company Puig. The move blindsided shareholders and came after a profit warning and the war in Iran had already hammered the stock this year.
Estée Lauder simply has too much on its hands fixing its existing business to take on its biggest acquisition ever. The problem: The Lauder family owns around a third of the stock but controls the company through supervoting shares. So family members can ram a deal through, and force the bill for a misguided move onto outside investors.
The company has been a poor investment for a long time, but was starting to show signs of turning a corner. Estée Lauder's stock is down more than 70% over the past five years and operating margins have slid from 20% in the company's financial year through June 2022, to 8% in its last.
The business suffered after becoming too reliant on China, travel retail and U.S. department stores -- all areas where growth has slowed. Rival L'Oréal is also family- controlled but has fared better during a tough spell for beauty companies.
Estée Lauder launched a makeover plan a year ago that is showing promise. The business returned to growth in the second half of 2025 after four consecutive quarters of shrinking sales.
Investors are scratching their heads about why Estée Lauder would take on a complicated acquisition before the turnaround has really taken hold. It is the corporate equivalent of applying a full face of makeup without doing the necessary skin-care prep beforehand.
True, some aspects of a tie-up with Puig make sense. The Spanish company gets most of its sales from luxury fragrances, a category that has grown 13% a year on average since 2020, data from Euromonitor shows. Demand for high-end fragrances is slowing, but is still outperforming luxury skin care, which Estée Lauder dominates. A combined company would also have a better geographic mix.
Then there is L'Oréal. A deal would help Estée Lauder and Puig compete with their larger, nimbler French rival. This is especially important given that L'Oréal is doubling down on luxury fragrances and cosmetics.
Puig is probably more open to a deal than in the past because other opportunities have slipped through its fingers. Last year, L'Oréal outbid the Spanish company in a EUR4 billion -- or roughly $4.66 billion -- purchase of Kering's luxury beauty business, which includes the rights to develop makeup and perfume for Gucci.
The deal with Puig is a distraction for Estée Lauder, though. The company has been slow to adapt to new sales channels such as TikTok Shop where consumers now do more of their beauty spending.
It risks losing market share to independent brands such as Rhode -- founded by model and influencer Hailey Bieber -- that attract young consumers by building massive followings on social media. Estée Lauder has launched 12 brands on Amazon Premium Beauty, which is a good start. But it needs more time to fix its distribution.
The company's record with mergers and acquisitions is also patchy. Estée Lauder recently took an impairment charge of $773 million on Tom Ford, the makeup company it purchased for $2.8 billion in 2023.
And investor unease over the deal could make its economics worse. Since around $5 billion has been wiped off the stock recently, Estée Lauder might have to pony up more cash for Puig in any cash-and-share offer.
That would increase the combined company's net debt to earnings before interest, taxes, depreciation and amortization. This could prove another point of concern for investors if debt levels grow too high.
One of the supposed benefits of investing in family-controlled businesses is that their brands are managed for the long term. And the thinking goes that with personal wealth on the line, family members should make better decisions than external executives.
The downside is that outside shareholders have little leverage when they dislike the direction the company is taking. These stocks can quickly turn into value traps if the family starts making bad decisions.
Write to Carol Ryan at carol.ryan@wsj.com
(END) Dow Jones Newswires
April 09, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments