Who’s Ripping Off Whom?

Rich foreigners keep buying lousy American companies. Who’s winning?

Pier 1 is the sad sack of the home-furnishings industry. Americans seem to have had their fill of wicker chairs and funky candles some years ago. The company has reported losses for six straight quarters, and the stock even slumped during the late housing boom. Same-store sales in October were down 13.7 percent. Back in May, it hired J.P. Morgan to explore strategic alternatives. (Read: Someone buy us, please!) Yet even at a time when hedge funds and private equity firms are aggressively buying retailers whose struggling stores occupy valuable real estate, no bids were forthcoming.

But today news came that Jakup Jacobsen, a Danish retailing magnate who already owns a stake in the company, may bid for the whole thing.

That suggests that things must be really bad at Pier 1 and likely to get worse—the recent record of foreign companies buying well-known U.S. consumer brands is a sorry one.

On Jan. 31, 2006, German footwear giant Adidas, seeking to bolster its presence in the United States, completed its $3.8 billion acquisition of Reebok. But the shoe doesn’t exactly fit. Last week, Adidas reported results for the first nine months of 2006, which showed that sales of Reebok fell 7 percent in euro terms from 2005 while sales of Adidas shoes rose 15 percent. Because of the slump, Adidas last week said it would have to invest more in Reebok to improve the unit’s performance, and consequently reduced 2007 earnings expectations for the whole company.

In the spring of 2005, Chinese personal-computer maker Lenovo scored a major coup when it acquired IBM’s PC business for $1.25 billion in cash and stock. By doing so, the Chinese company gained substantial assets: the world’s original PC brand, a foothold in the U.S. market, and the unit’s American management. But the same day Adidas reported its Reebok woes, Lenovo reported interim results indicating its U.S. arm is sagging. In China, demand for Lenovo PCs grew 25 percent. But its PC “shipments in the Americasdecreased 9 percent in the second fiscal quarter.”

What gives? It’s not that dim foreign owners are screwing up the healthy American brands they acquire. Rather, they are buying brands that are already on a downward trajectory. To foreigners, these companies may seem like iconic, big brands. IBM did invent the PC. Reebok is a pioneer in fitness. And Pier 1 is the biggest independent home furnishings chain—as of February 2006, it had more than 1,100 stores in the United States (plus 43 Pier 1 Kids stores) and $1.78 billion in annual sales. Foreign companies like these brands not because they’re global icons, although Reebok and IBM have international presences, but because of their domestic cachet. It would take immense sums of money to build such brands in the United States from scratch.

And to these foreign owners, the U.S. market represents the holy grail. American consumer-oriented firms that have saturated the U.S. market, such as Coca-Cola, McDonald’s, and Nike, look to developing markets for their growth. But these foreign buyers see a different kind of opportunity here—an unmatched combination of wealth and growth that doesn’t exist in Germany, or China, or Denmark. The U.S. domestic market, 300 million people strong, is composed of wealthy consumers who routinely spend more than they make.

But iconic American brands only tend to come up for sale when they’re damaged. IBM may have invented the PC in 1981. But by 2005, its parent regarded PCs as a low-margin business, one in which it didn’t want to compete with Dell and HP. Reebok was facing tough competition from much-larger companies such as Nike and Adidas in the trendy footwear and athletic-apparel business. Pier 1 has simply been unable to compete with Target, Wal-Mart, and Lowe’s.

Foreign buyers tend to get a look at such brands only after legions of domestic buyers have passed. The U.S. has an extremely lively market for corporate control—publicly held companies, activist shareholders such as Carl Icahn, private equity funds such as the Blackstone Group, and hedge funds spend their days and nights seeking takeover candidates. Any time an asset with any trace of value comes on the market, it inspires a frenzy of due diligence and meetings. With their deep pockets and willingness to use leverage, these players rarely get outbid. For six months, U.S. investors have had an opportunity to check out the aisles of Pier 1. None found it worthy of purchase.

So, it’s no surprise foreign buyers of iconic companies find themselves losing dollars and customers. They’ve generally had to overpay for a damaged brand. The short-term prospects for these deals do indeed look grim. Anybody expecting Pier 1’s fortune to revive quickly is hopelessly optimistic. For Jacobsen and other foreign investors, the opportunity lies in a tactic American financiers and entrepreneurs have pioneered: turning around castoff broken-down companies that have a viable core business. But those turnarounds don’t happen quickly, and sometimes they don’t happen at all.