Midea Acquires Toshiba's Home Appliance Business: Five Key QuestionsOn the evening of March 30, Midea Group announced that, following negotiations, it intends to acquire an 80.1% stake in Toshiba's home appliance business using its own funds for approximately 53.7 billion yen (approx. $473 million USD).Through this transaction, Midea will receive a 40-year global license for the Toshiba brand, over 5,000 home appliance-related patents, as well as Toshiba Home Appliance's market channels and manufacturing bases in Japan, China, and Southeast Asia.However, Midea will also assume approximately 25 billion yen (approx. $220 million USD) of debt from Toshiba's home appliance business.The announcement stated that the acquisition is subject to approval from Japan's anti-monopoly regulatory body, the Japan Fair Trade Commission. Midea must also complete filing procedures with China's Ministry of Commerce and the National Development and Reform Commission, and register with the State Administration of Foreign Exchange.Interestingly, on the same afternoon, Hon Hai (Foxconn) announced an investment of 22.5 billion RMB to increase its stake in Sharp, giving it a 66% shareholding post-investment.Two Chinese companies simultaneously announcing acquisitions of two major Japanese consumer electronics firms led to online exclamations of "Is China buying Japan?!"Setting aside Hon Hai's increase in Sharp, let's focus on Midea's acquisition of Toshiba. First, let's examine the state of Toshiba's home appliance business.As of the third quarter of 2015, Toshiba Home Appliance had over 5,000 employees and generated revenue of approximately $1 billion USD in the first half of the 2015 fiscal year (April-September). It operated nine production bases in Japan, China, and Thailand, noted for their complete facilities, advanced production technology, and leading management models. In Japan alone, it had 34 sales bases and 95 service centers, with additional sales networks in regions like the Middle East and Egypt.Approximately 70% of the revenue from Toshiba's home appliance business came from Japan, with 30% from overseas. By product category: 26% came from refrigerators, 23% from washing machines, 15% from residential air conditioners, 13% from vacuum cleaners, 10% from microwave ovens, and 13% from other small household appliances.In 2014, Toshiba sold a total of 8.5 million home appliance units, including: 2.3 million refrigerators, 2.58 million washing machines, 1.65 million vacuum cleaners, 650,000 residential air conditioners, and 1.35 million kitchen appliances.Toshiba's home appliance influence is strongest in Japan, Southeast Asia, and the Middle East. In the Japanese market, Toshiba and a few other domestic manufacturers have long held leading positions. According to GFK and Euromonitor data, Toshiba's market share in Japan for 2014 was: 20% for washing machines (ranked 3rd), 15.3% for refrigerators (ranked 3rd), 22% for microwave ovens (ranked 4th), 13.7% for vacuum cleaners (ranked 4th), and 11.5% for rice cookers (ranked 4th).In short, Toshiba's market position in Japan is roughly equivalent to GE's position in the US home appliance market.The acquisition cost of 53.7 billion yen (approx. 473millionUSD),plustheassumptionof25billionyen(approx.220 million USD) in debt, brings Midea's total cost for this acquisition to approximately $693 million USD.The most frequently asked question by the media is: "Is it worth it?"Here's my perspective: For the 2015 fiscal year, Toshiba's white goods business revenue is estimated to be around 2billionUSD(profitdetailsareunknown).Consideringitstop?three/fourmarketshareinJapan,plusthe40?yearglobalbrandlicenseandthetransferof5,000patents,thispriceseemsjustified.Inmyview,thevalueofthe40?yearbrandlicenseandthe5,000technicalpatentsalonecouldeasilybeworth700 million USD.Many are comparing Midea's acquisition of Toshiba's appliance business to Haier's acquisition of GE's appliance business and Hon Hai's acquisition of Sharp.Data shows GE Appliances generated revenue of 6.3billionUSDin2015,andHaier′sacquisitioncostwas5.4 billion USD.Hon Hai's investment to increase its stake in Sharp was 22.4 billion RMB (approx. $3.45 billion USD at the time), giving it a 66% share post-investment.What is the Value of Toshiba to Midea?I believe the greatest value lies in providing Midea access to the Japanese market. Japan remains one of the most challenging markets globally to enter, especially for home appliances. For three decades prior to 2005, Japan was the undisputed global leader in home appliances. Even today, Japan remains a major holder of key patents in technologies like inverter motor control and OLED display.I have previously expressed the view that the decline of Japanese appliance makers is not due to a decline in technology or product quality, but rather a decline in management models and market adaptability. Japan's long tenure as the global leader fostered strong consumer confidence in domestic products and technology, making it difficult for foreign brands – even a powerhouse like Samsung – to gain significant traction. Midea's indirect entry into the Japanese market through Toshiba is highly significant.Midea's official statement expresses it this way: "This cooperation is a crucial strategic step in implementing Midea's global operations. Through complementary advantages and synergies with Toshiba, we will significantly enhance Midea's global influence and comprehensive competitiveness in terms of brand, technology, channels, and production manufacturing."Secondly, there is the technological value. Midea states that the over 5,000 white goods-related patents significantly expand its existing portfolio. These patents, primarily registered in overseas markets like Japan and South Korea, will effectively extend Midea's patent footprint abroad.Thirdly, there is channel value, helping Midea enter the Southeast Asian market. Toshiba maintains a premium brand image in Southeast Asia, with well-established production bases and sales channels that Midea can leverage.Finally, there are synergy values. The combination can lead to sharing in technology, manufacturing, procurement, and channels, potentially creating a 1+1>2 effect.It is estimated that in 2016, Toshiba will contribute no less than $2.5 billion USD in revenue to Midea Group, approximately 16-17 billion RMB, representing pure incremental growth.What are the Benefits for Toshiba within the Midea System?A successful partnership is mutually beneficial. For Toshiba, joining the Midea group ensures the continued existence of its home appliance business. Furthermore, by leveraging Midea's strong manufacturing, sales, procurement, logistics, and service capabilities in China, Toshiba home appliances have the potential to achieve more in the Chinese market, possibly even staging a comeback. It's foreseeable that we will soon see Toshiba products in Midea's exclusive stores and dealer channels.How Will the Acquired Business Be Operated?As I predicted, Midea's announcement stated that following the transaction, it will "maximize the maintenance of Toshiba Home Appliance's existing operational mode, continue adhering to Toshiba's high-standard brand image, product quality, and customer service." No major adjustments are planned in the short term. Midea intends to maintain continuous investment in the brand, technology, marketing, and employees to fully realize the business's potential.Independent operation is a common model in international mergers and acquisitions recently, aimed at avoiding the "hemolytic reaction" often seen – the so-called "cross-cultural integration syndrome." Geely's acquisition of Volvo Cars followed a similar pattern.This approach is born from past lessons. Twelve years ago, when two famous Chinese companies acquired IBM's PC business and Thomson SA's CRT TV business respectively, they immediately tried to integrate them according to their own ways, leading to significant employee backlash, operational difficulties, and years of losses.Naturally, I believe that whether it's Midea, Haier, or Hon Hai, they will not take a completely hands-off approach, but they will certainly give the acquired company considerable trust and a high degree of operational autonomy. Deep integration will likely be planned only after both sides have adapted and achieved cultural and emotional alignment. That is a matter for the next stage.Are There Risks in the Merger?"Are there risks?" is the most common question regarding international M&A. The only answer is that any endeavor carries risk; a completely risk-free venture isn't worth pursuing.Today, the risks for Chinese companies acquiring international firms are significantly lower than a decade ago. Firstly, the strength of Chinese companies is now incomparable to the past. Acquisitions now resemble large companies acquiring smaller ones, or strong players acquiring weaker ones, unlike the "snake trying to swallow an elephant" scenarios of ten years ago. Secondly, lessons have been learned from past precedents. Chinese companies have observed numerous international M&A cases over the years, leading to a more balanced mindset and the incorporation of many lessons, allowing risks to be controlled within more manageable limits.Of course, if one must pinpoint a specific risk for Midea in acquiring Toshiba's appliance business, I believe it lies in the need for Midea to effectively differentiate the two brands comprehensively, from product to image, achieving differentiated operation. How to achieve this differentiation requires careful deliberation; it's not as simple as positioning one as premium and the other as low-end.
