Chinese-US M&A: three years after IBM-Lenovo, large consumer brand takeovers remain elusive – analysis27 March 2007

One of the most disappointing aspects of the M&A wave that has swept through the US corporate sector in recent years has been the absence of Chinese acquirers. It was widely anticipated that Chinese companies would follow in the footsteps of Japanese companies in the 1980s, and European companies in the late 1990s, by stepping forward and acquiring large US brands, particularly in the consumer sector.
China’s emergence as a major economic power has been largely based on its ability to produce cheap goods as an original equipment manufacturer (OEM) on behalf of established Western brands. However, as China's industrialization has gained scale and sophistication the view has emerged that Chinese companies will look to get closer to the ultimate consumer by acquiring the brand names they supply as OEMs. The 2004 acquisition of IBM’s PC division by Lenovo, the Chinese computer manufacturer, was widely heralded as the first of many such deals.
Yet three years later few, if any, sizeable transactions have come to pass.
DaimlerChrysler’s recent decision to put its Chrysler division up for sale would have presented China’s fledgling automotive industry with the perfect opportunity to gain direct access to the US market. However, all the main Chinese vehicle manufacturers simply lack the scale and management resource required to make a viable standalone bid.
The same issues confront Chinese furniture manufacturers, which given their significant industrial competitive advantages, would be expected to emerge as consolidators of US furniture brands. La-Z-Boy, the Michigan-based manufacturer of the eponymous armchairs, has been selling off non-core operations and its well-established brand would in theory represent an ideal takeover opportunity in this context. However, if any deal were to take place, the current market dynamics make it more likely that it would take the form of a leveraged buy-out, as in the case of Chrysler.
La-Z-Boy, which has a market capitalization of USD 680m, declined to comment on any potential M&A activity.
Chinese OEM furniture companies Yihua Timber and Markor International have an interest in making acquisitions in the US, according to sources at these companies. However, these sources both stated that a transaction of this size was beyond their means. Markor is currently in the process of a complex restructuring process that will result in it increasing its size and share liquidity, but the firm is more likely to look within China for acquisition targets than overseas, sources familiar with the situation say.
An executive at Kasen International Holdings, the Hong-Kong listed company which is a supplier to La-Z-Boy, agreed that it, like most Chinese furniture companies, was too small to acquire La-Z-Boy. He said that Kasen was more interested in La-Z-Boy, and other US furniture companies, as a distribution partner than as an M&A target.
Chinese firms are likely to face issues that go beyond scale. A US investment banker active in the US furniture sector has confirmed that he is aware of Chinese companies that have “a real interest in acquiring here.” He says that some have come to realize that it may be preferable to acquire a US manufacturer and/or retailer than to assume the risks and time that accompany building their own distribution networks. However, he argues that any such deals would be less advantageous to a US-based target because most companies are already sourcing their products from multiple facilities in Asia.
“If the company were to sell to one Asian buyer it could lose the competitive advantage to get the best deal on its sourcing, since the buyer will be locked into sourcing all of its products from its parent entity,” the banker said.
Herein lies the paradox of globalization: a Chinese acquirer of a US company would gain the retail distribution advantages it needs, but would be disadvantaged by being left to compete against US firms able to continue sourcing from multiple Chinese suppliers.
Chinese firms also have a reputation for making ‘low-ball’ bids and retreating in the face of competing offers, as Haier, the world’s fourth largest white goods manufacturer, did in 2005 when its US rival Whirlpool emerged with a knock out bid for Maytag. The second US-based furniture banker said that he often reaches out to potential Asian bidders on deals but they have not yet completed one because these companies have historically bid conservatively. To be competitive in the auction process, Asian companies would have to pay the 4.5X to 6.5X EBITDA multiples that US-based furniture companies typically sell for, the banker said.
Another US-based sector banker said that in his experience Chinese bidders were willing to pay up but were typically looking for something very specific. He said that most Chinese companies were unused to competing with private equity firms in an auction process.
Chinese companies have shown themselves to be ‘thin-skinned’ when acquiring in the US, as was the case in 2005 when China’s third largest energy company, CNOOC, abandoned its well-planned bid for the US oil and gas firm, Unocal, after the first signs of political opposition emerged.
There are other issues that make Chinese-US deals less probable. A number of the Chinese companies interviewed for this article stated that they were more focused on Europe as a region for making acquisitions. The US bankers agreed that this was the case, citing the fact that the Chinese currency has been tied to the weak US dollar, which made their products more competitive in Europe than in the US. A Shanghai-based sector analyst specifically identified Italian furniture manufacturers as more appealing acquisition targets for Chinese companies because of the latter’s superior design, techniques and production. American companies would be acquired “mainly for their brand,” the analyst said.
An executive at Huahe Group, a Chinese furniture manufacturer, confirmed that the firm had no plans to acquire in the US. The executive said Huahe was focused on its domestic investment and production bases in Beijing and Xinjiang’s Qiqihar and pointed out that the US housing slump did not make takeovers there very compelling .
“I believe very few Chinese furniture maker would go to buy US furniture companies,” said the executive. “The current situation is that the US furniture market is declining,..Making profit is the first thing we consider when making investment decisions. From this angle, buying into the US seems not so realistic.”

Reporting by Erin Griffith in New York; Lisha Zhou and Samuel Wang in Shanghai

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