I believe that the contemplated Estée Lauder and Puig merger was particularly concerning to public market investors for several specific reasons. First, corporate mergers are challenging to execute in general and even harder with family-controlled dynasties. In my opinion, which I believe was shared by many investors, that sounds like a recipe for trouble, regardless of any potential strategic benefits, which require focus and alignment to achieve.

Second, EL has been working overtime to sell investors on its profit improvement plan, led by new execs and already well underway. This plan does not include merging with a competitor. The proposed merger thus raised serious credibility questions for EL management, an unfortunate outcome given how hard EL had sold the market on its plan to improve growth and margins.

Why the sudden change of plans? This made management look undisciplined and distracted. Lastly, EL continues to have many fundamental business challenges, including its China business, U.S. department store reliance, late embrace of e-commerce and need for portfolio pruning. Merging with Puig would not fix any of these problems. Rather, it might even create new ones. The company needs to get its own house in order first.

In contrast, L’Oreal’s acquisition of Kering Beauté does not raise governance concerns and it is aligned with L’Oreal’s stated business strategy, which is well understood by the market. While L’Oreal paid $4.6 billion for Kering’s beauty division, this number is small against its $240 billion-plus market cap. This stands in stark contrast to EL and Puig, which are much closer in size.

The latter transaction would have been a merger, whereas the L’Oreal/Kering deal was structurally an acquisition, certainly sizable, but fundamentally a transaction that is well within L’Oreal’s wheelhouse. This is L’Oreal’s business model, and the market has confidence in management’s ability to execute against it, even at multibillion-dollar scale.

Notwithstanding the unique challenges associated with the contemplated EL/Puig merger, I do believe that the market rewards scale and diversification in the consumer sector. But the market dislikes complexity, distraction and margin dilution when evaluating these types of corporate acquisitions.

To that end, I think that EL should indeed pursue acquisitions, particularly those that bring diversification across geographies, channels and categories. I think that EL may ultimately expand its portfolio to include masstige beauty and wellness brands. That would provide greater diversification and unlock significant scale opportunities that will be difficult to achieve in prestige beauty alone, in my opinion. E.l.f. would be an interesting target, for example.

Beyond these large public corporations, there are many beauty and wellness companies that would be stronger together. In fact, given today’s challenging operating environment, which includes escalating costs across many line items, making operating expense leverage and growth challenging, I would argue that the market is ripe for major consolidation.

$100 million-plus sales brands with healthy profitability could form holding companies and acquire smaller high-growth brands. Mammoth Brands is executing against this type of strategy. At $500 million-plus in sales with healthy profitability, these types of companies could go public, but they don’t necessarily need to do so in order to be successful. It depends on the capital structure and growth strategy.

Big picture, growth via acquisition is a proven model in the consumer sector. The market understands it and can evaluate management teams’ track records for integrating brands. On the other hand, true mergers tend to make investors nervous, and the data is mixed on whether they ultimately create shareholder value. This has been studied extensively. Large consumer companies like EL should focus on acquisitions that align with growth priorities, enhance diversification and are margin accretive.