Electrolux AB’s agreement to buy General Electric’s appliance business is a good strategic fit that will improve Electrolux’s position in the global home appliance industry and put the company in contention for leadership in the key U.S. market, according to IHS Technology (NYSE: IHS).
Sweden’s Electrolux managed to strike a deal to acquire the appliance division of U.S.-based General Electric (GE) for $3.3 billion. This is Electrolux’s second attempt to buy the GE business, following an unsuccessful bid in 2008. The deal represents Electrolux’s largest acquisition ever.
The agreement will allow Electrolux to better capitalize on a global home appliance market that shipped a total of 1.2 billion devices in 2013. The major home appliances market alone amounted to nearly 600 million units last year, as shown the in attached figure.
“Electrolux historically has expanded through acquisitions, and its latest purchase reflects the wisdom gained from experience,” said Dinesh Kithany, senior analyst, home appliances at IHS. “From every perspective imaginable, the GE buy represents a good ‘strategic’ fit that will boost Electrolux’s position in global home appliance market. The acquisition will benefit Electrolux in terms of corporate culture, branding, customer base, product line and regional exposure. With GE’s additional sales, Electrolux will be able to close the gap with the market leader Whirlpool in the United States.”
Home appliance harmony
For both Electrolux and GE, having been in the business of manufacturing and marketing home appliances for more than a century, the acquisition is considered to be a great fit from a number of perspectives. The two companies align well in terms of their Western style of management, financial capabilities, manufacturing and operational capabilities, and strategic growth plans. Electrolux is much more compatible with GE compared to past bidders for the General Electric appliances business, including Quirky, Samsung, LG, Arcelik, Haier and Controladora Mabe.
Electrolux also met a very important requirement for GE: capability to maintain relationships with key people.
GE—being a people-oriented organization—is very particular as to whom it hands over its 100-year-old home appliance baby. Of especial concern is how any acquiring company would take care of the company’s reputation, brand name, wide product range, broad customer base, 12,000 employees and the relationship with its business associates.
These components of GE synergize well with Electrolux’s approach to relationships with these groups, according to Jeff Immelt chairman and CEO of GE.
"Electrolux is the right global business for our customers, consumers and employees,” Immelt said. “GE Appliances’ people, valuable home appliances brand, products, distribution and service capabilities make it a perfect fit with Electrolux and its goal of accelerating growth in the U.S.”
This appliance unit was once a core business for GE, but not any longer, as GE has expanded to other industries.
Brand of brothers
GE brands also complement Electrolux’s current product portfolio. While Electrolux, AEG and Zanussi are leading brands in the premium segment and Frigidaire in the medium/mass market, the acquisition of GE’s luxury brand Monogram and mass premium brands like Café and Profile would help Electrolux to widen its product offering further.
More important, this deal also complements Electrolux’s established position within the residential/consumer segment, also considered as replacement segment, of the home appliance market with that of GE, which is the leader in the homebuilders trade, considered new purchases, in the United States. The homebuilders market is considered to be the biggest growth driver for the home appliance market. As part of the deal, Electrolux will also obtain a long-term agreement to use GE’s brand names, which possess very high equity in the market.
Location, location, location
The acquisition also delivers advantages in terms of geography.
Being U.S.-focused, North America accounts for nearly 90 percent of GE’s appliance revenue. With this acquisition, Electrolux’s share of the home appliance business in North America is expected to increase from 29 percent to nearly 50 percent, based on GE’s revenues from North America in 2013.
And the ace point is the inclusion of GE’s 48.4 percent stake in Mabe, a Mexican home appliance company with whom GE has had a joint venture for the last 30 years. This will at minimum add three more benefits for Electrolux. First, it will bring a cost-effective production opportunity in the low-cost Mexican market. Second, it will enable the company to gain access and increase share in the growing Mexico and rest of the Latin America market. And third, it will serve as a regional manufacturing hub serving the Americas and European markets.
Getting closer to the Whirlpool
This deal would place Electrolux on par with the industry leader Whirlpool, which has estimated revenue of $18.8 billion. In terms of market share, Electrolux would now close the gap Whirlpool in the United States.
Power of the purse
Electrolux is expected to achieve cost savings of around $300 million, including savings occurring due to stronger purchasing power to negotiate with suppliers now.
While Electrolux is anticipated to continue to grow through further acquisitions, possibly in Asia and Europe, with some expected within the technology platform, similar to Samsung’s acquisition of SmartThings, it would be interesting to understand Quirky’s position in this deal considering GE had made $30 million investment last November. GE had opened up thousands of patents to Quirky when the two companies formed a partnership last year to develop a line of smart-home devices, including an air conditioner controlled by smartphones.