China Focus  

The Failure of RedStar Maccalline & JSWB M&A

By Dr Lim Cheok Sin

ATEND MARCH, our Council of Asian Furniture Associations (CAFA) had a council meeting at JSWB, where many of our members wanted to find out whether its furniture village in ZhaoXiang is suitable for the establishment of an Asian Furniture pavilion.

Mr Zou Wenlong, the boss of JSWB, invited us to lunch. Seated beside him, he passed me a business card, and said, “30 years ago, I gave you my first card when I set off to Singapore while preparing to start JSWB. Now this is the last business card. JSWB has been acquired by Red Star Macalline.”

I have already learnt the news on the internet. But felt rather emotional hearing it from him. This M&A has been baffling me since the day I knew it but I could not ask him the reason in front of so many people. Moreover, he was in a light mood at the moment.

Soon, news came that the M&A had failed. There were many guesses most of which claim it was due to Red Star’s shortage of funds. The M&A is turned into a “strategic alliance”. First of all, I would like to discuss what an M&A is, the reasons for M&As. We will then return to talk about why this particular M&A had failed.

There is a western saying “don’t put all your eggs in one basket”. So this is often taken as a basis for strategic plans in the west: 60’s - Conglomerization;
70’s - Diversification;
80’s - Synergy;
90’s onwards - Convergence

This is the so-called M&A or strategic alliance which was first introduced and applied by NEC, a Japanese electronics corporation which set up the C&C Computer & Communications aiming at incorporating telephone, television and computers into one company. However at the end of the day, C&C dragged down NEC and resulted in NEC stocks’ sustained poor performance in the Japanese market.

Actually, integration violates the law of nature. In biology, according to the theory of evolution, the formation of new species’ is based on the division of a single species. Integration is the combination of the two species and creates a new species, like Catdog, a strange and unimaginable thing. Catdog is unreal. However, new breeds of dogs are continuously produced. Now there are more than 150 kinds of dog in the world with an average of one new kind appearing each year. Today, the impetus for international business is no longer integration but division.

Some Cases of M&A failures:
1984, IBM took over Rolm and sold it in 1989.
1982, Coca-Cola acquired Columbia Pictures and sold it in 1989.
1985, metropolitan life bought out Century 21real Estate and sold it in 1995.
1985, Chrysler purchased Gulfstream Aerospace and sold it in 1990.
1988, Eastman Kodak acquired Sterling Drug and sold it in 1994.
1989, Dow Chemical bought Marion Dow and sold it in 1995.
1990, Matsushita took over MCA and sold it out in 1995.

Michael Porter, a professor at Harvard Business School, did a study of 33 large corporations in the USA. He reached the conclusion that diversity causes more damage to shareholders’ equity then the benefits it brings.

How does the M&A in same industry work? Some say the growth of capitalistic enterprises is dependant on M&A. Only through M&A can an enterprise scale up rapidly.

Here are some objectives of M&A:
• expansion of size and generation of economies of scale;
• extension into upstream and downstream activities;
• access to technology, management, brands and markets;
• extension of brand effects;
• removal of vicious competition;
• Creation of monopoly on market.

Lenovo’s endeavour to buy IBM’s personal computer business was a move to enter international markets and take advantage of the strong branding as well as gain access to management and technology.

What can Red Star gain by acquiring JSWB?

Scale - When it comes to scale, Red Star has 130 malls while JSWB has only six. Management - Both are quite similar and perhaps Red Star appears more progressive Branding – Red Star has a superior brand due to its many branches. Market Segregation - There is no market segregation because they sell similar products.

It is irrelevant to speak of any attempt to monopolise the market. There is Easyhome in north China and HOBA located in the South. Both have regional malls in many cities and it is not possible for anyone to build any monopoly.

Furthermore, even if the large furniture malls business is not yet a “sunset” sector, this is where the industry is heading. Rumors have it that Red Star is even considering transforming some poor performing malls into shopping malls. I do not understand the shocking news of Red Star acquiring JSWB.

What was supposed to be a subtraction became an addition - I am stunned!

Now that Red Star is seemingly unable to fund the acquisition, the M&A has turned into a “strategic alliance”. I cannot see any area that might benefit from the strategic alliance.

I am concerned that having spent so much money which was all in vain, will Red Star harbour ideas about its customers?

God bless us!

President, Council of Asian Furniture Associations Professor, Beijing forestry University , currently the Chairman of the Council of Asian Furniture Association (CAFA). He read at Nanyang University in Singapore and completed his PHD at Beijing University of Forestry. He holds a Post Doctorate from Michigan State University and is a visiting scholar there. Dr Lim has been active in the Singapore furniture industry, chairing both the Singapore Furniture Association and Furniture Association of Asia and Pacific previously.