Recall the recent bidding war between Valeant Pharmaceuticals International Inc. (NYSE: VRX) and Merz Pharma Group to buy Obagi Medical Products Inc. (Nasdaq: OMPI), maker of aesthetic and therapeutic skin products. The victory for Valeant, which won after it increased its offer to $418 million from $360 million, portends a larger trend where competition is likely to intensify among strategic buyers in the cosmetics space.

A handful of players in the space are becoming more vocal about putting cash to work. German consumer goods group Henkel AG & Co. KGaA, for example, hasn't made an acquisition since 2008 when it purchased National Starch for €3.7 billion (U.S. $5.7 billion). Today, facilitating larger purchases is once again an option, according to chief executive Kasper Rorsted (pictured). "Large acquisitions are not ruled out," Rorsted said at Henkel's recent annual meeting. The Dusseldorf company has roughly $5 billion on its balance sheet reserved for deals. Henkel's beauty care unit - consisting of hair cosmetics, body care, skin care and oral hygiene products - brings in 21 percent of the company's sales.

"They've been silent over the years," says Steven Davis, head of the beauty and personal care practice at Intrepid Investment Bankers LLC, regarding Henkel. The reason, he explains, is that strategic buyers have gotten pickier. "Strategic buyers are now asking: 'Does it fit in my portfolio?' They want a good reason to buy it." Tokyo-based Kao Corp. (TYO: 4452), New York-based Estee Lauder Cos. Inc. (NYSE: EL) and Cincinnati-based Procter & Gamble Co. (NYSE: PG) were also unusually quiet, but are now expected to once again shop for targets, Davis adds.

Buyers are looking to improve distribution channels, gain access to high-growth product categories - such as anti-aging skin care products - and take advantage of the pharma/onsumer brand overlap.

A string of ripe private-equity-backed targets in the skin repair and rejuvenation sector are also expected to come to market in 2013, brands that were expected to be for sale in 2012, providing a pickup in M&A. Catterton Partners, the Greenwich, Conn.-based firm that typically makes majority investments of up to $30 million in equity, is believed to be actively selling StriVectin, an anti-aging brand it acquired in July 2009 for undisclosed terms.

San Francisco Equity Partners is expected to once again explore a sale of Yes To Inc., a cosmetics company that makes products from natural ingredients, such as fruits and vegetables. The financial sponsor tried selling it in 2012, hiring Deutsche Bank to run the auction, but canceled after Yes To reported more than $40 million in sales growth. Tarte Cosmetics, backed by Encore Consumer Capital, has reportedly been up for sale since July.

Strategic buyers, Davis predicts, will begin to "re-enter the fray in terms of pursuing these acquisition opportunities."

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