With flurry of deals, office furniture companies seek to fill product gaps
Whether via acquisition or partnership agreements, West Michigan’s office furniture makers are looking to fill product holes with their recent spate of deals.
In the span of about six months, Grand Rapids-based Steelcase Inc. (NYSE: SCS) and Zeeland-based Herman Miller Inc. (Nasdaq: MLHR) announced nearly $286 million in acquisitions. The deals signaled to industry watchers that the largest office furniture OEMs were getting serious about adding new capabilities, chasing sales and rounding out their product portfolios.
“I think most of the larger companies in the industry are actively pursuing acquisitions currently,” said John Kerschen, managing partner and president of Charter Capital Partners, a Grand Rapidsbased investment banking firm that includes an M&A practice focused on the office furniture industry.
“A fair share of that (dealmaking) is this transition from selling furniture to being space solution providers for the entire space,” Kerschen said. “It’s about having product and solutions for the entire space, not just desk chairs.”
Just this month, Steelcase signed a $145 million definitive agreement to acquire Texas-based education furniture maker Smith Systems. The company entered into a pair of partnerships involving West Elm, a New York-based furnishings designer, and Extremis, a Belgium-based designer of outdoor furniture. The announcements follow a deal in November in which Steelcase acquired AMQ Solutions, a California-based maker of heightadjustable desking, benching and seating, for $69.9 million, according to a federal securities disclosure.
Crosstown rival Herman Miller also announced a pair of minority acquisitions in June: a $66 million deal for a 33-percent equity interest in Nine United Denmark A/S and a deal valued at $6 million for 48 percent of the equity in Maars Living Walls of the Netherlands.
According to Todd Custer, president and CEO of Custer Inc., the deals prove that OEMs are paying attention to feedback from their dealer networks to identify product portfolio holes. The Grand Rapids-based Custer Inc. is an authorized dealer of Steelcase products.
“Steelcase is listening to the dealers, listening in on the market and saying, ‘Hey, we’ve got gaps in our portfolio. To fill it out, we either do product launches and come out with a new product, or we partner with West Elm, or we go acquire like with Smith Systems,’” Custer said. “I think you will start to see more of that happening — where the larger manufacturers are looking to see what our clients are buying … and fill those holes up.”
According to Custer, dealers are the “front lines, feet on the street” for the industry, so it becomes imperative that OEMs listen to their feedback to “arm themselves with the best possible arsenal” of products and solutions.
“If you’re a Haworth, a Steelcase, whatever it is, you want to give (dealers) as much good product (as possible) that they can sell to clients and bring it all together,” Custer said.
While Steelcase President Jim Keane said it’s true that the dealmaking process often starts with the possibility of filling a product gap, the conversation goes well beyond the OEM’s portfolio.
“When we do an acquisition, we’re not just trying to fill a gap, we’re trying to add new capabilities that will create new innovation, new products in the future,” Keane told MiBiz in Chicago at the NeoCon trade show. “So the acquisition we announced … with Smith System, it’s not just for the products they have today, but it’s their understanding of K-12 education. We’re really excited about the opportunity to take some of our research and combine it with their understanding of that marketplace and serve new customers in new ways.”
Similarly, Herman Miller President and CEO Brian Walker said the company’s recent minority stakes in Nine United Denmark — the makers of the HAY brand of office furniture — and modular walls manufacturer Maars were more than a short-term “now thing.” Instead, the deals point to the company’s consistent long-term strategy, one that includes making a “shift to the consumer market,” he said.
“We’ve been working on that for a long time,” Walker told MiBiz. “We’ve had a long-standing drive in this thing we call The Living Office, knowing that interiors of offices were going to become much more of a crossover between residential and what we used to think about as individual space. As we’ve seen the space change and we’ve talked more and more about new styles of placemaking, we knew that while we wanted these open spaces, we need to find some way to have topography and enclosure.”
Taken together, Herman Miller’s two recent deals give the company “a much broader product portfolio,” Walker said.
“We see (Maars) as a continuum of ways to create enclosed space or delineate space,” Walker added. “It’s part of an ongoing strategy. In the case of HAY, what’s exciting (is) it’s probably one of the hottest (brands) in the globe right now. It gives us more content and more capabilities in Europe and in Asia. They have a good presence there. It really feeds what we call the HENRY segment of the home, which is ‘High Earners Not Rich Yet.’”
BUY, PARTNER OR ALIGN
While OEMs have been active recently with acquisitions in the office furniture industry, executives said they’re also open to other business arrangements — including partnerships and alliances — to gain new capabilities or market insight.
“Every CEO I talk to, the conversation quickly moves to growth,” Steelcase’s Keane said. “That’s their number one objective. And as they think about growth, they need to find ways to innovate. So, like us, they’re doing acquisitions as well, but it’s what you do after you make the acquisition that really matters.”
Keane said it’s up to companies to create value for shareholders, and one way to do this is by broadening their scope of products through acquisition so they’re more attractive in the marketplace.
“We … use acquisitions when appropriate to add to our portfolio, but also use partnerships when appropriate to add to our portfolio,” Keane said. “We want to be able to deliver a seamless experience to our customers.”
The same is true at Holland-based Haworth Inc., said Paul Nemschoff, the manufacturer’s vice president of global strategy and marketing. While Haworth has not announced any recent acquisitions, the company acquired Italy-based Poltrona Frau Group, a producer of luxury furnishings, for about $600 million in 2014, and purchased Los Angeles-based outdoor furniture manufacturer JANUS et Cie in 2016 for an undisclosed amount.
Overall, Nemschoff said moves by the industry to adapt to an ever-changing market are important and crucial to ensure growth.
“People are looking at how they can leverage their footprint better,” Nemschoff said. “Through a variety of acquisitions, we have the Haworth Collection, which has seven different partners in it, which allows us to work with customers almost in any type of environment that they are trying to do.”
Aside from adding to product solutions via acquisitions, office furniture OEMs also seem to be seeking out deals as a way to advance sales amid slow growth in the industry.
The Business and Institutional Furniture Manufacturers Association, a Grand Rapidsbased trade group, projected that the overall office, education and health care furniture market grew about 2 percent in 2017, which followed a year of 1.5-percent growth.
Don Heeringa, CEO of Holland-based Trendway Corp., sees the recent M&A activity by the larger OEMs as a way to “advance sales” and find additional growth, despite some “flat growth in the market.”
“(Office furniture makers) are finding ways to grow without actual market growth,” he told MiBiz. “I think we are going to see more (acquisitions) where smaller companies are struggling to survive.
“From the flattening out of (growth) in the industry, margins are tighter (and) new players put pressure on the industry. Are those companies up for the challenge? We will see.”
Kerschen at Charter Capital Partners expects the dealmaking in the office furniture industry to continue this year, buoyed by a strong economy and available capital. As well, a lack of available skilled labor on the construction side has started to accelerate some of the dealmaking among office furniture OEMs, he said.
The shortage of carpenters, plumbers and electricians can cause project delays for office furniture customers, so OEMs are looking at ways to offer more complete pre-manufactured systems to reduce the need for on-site tradesmen.
“In your typical space where you might build six walls, the furniture companies are bringing a solution for that where you can use pre-constructed walls and flooring, and different configurations or furniture-like products,” he said. “They’re built in a factory and shipped to a site as opposed to site-built that would rely heavily on the trades.”
As well, Kerschen expects private equity and family office buyers to become more active in the office furniture industry.
“They hadn’t really invested heavily into furniture, but we are seeing that as that industry becomes hungrier — and there’s still more capital to be deployed — that they’re definitely investing in the space,” he said of private equity firms. “I would even extend that to family offices, as family offices continue to become a bigger and bigger force in these transactions.
“There’s opportunity and there’s interested parties looking in the furniture and the furniture dealer space.”