(Author: Chang Xing, Guest Writer, LEDinsidehttp://Editor: Judy Lin, Chief Editor, LEDinside)

Osram announced after one year of carefully selecting bidders that it would sell its general LED lighting business LEDVANCE to MLS for EUR 40 million (US $44.7 million), about three days ago. Chinese press have compared the deal to a marriage between couples, where MLS paid a hefty dowry to win over the German lighting giant’s general lighting division.

The acquisition value fetched much lower than the estimated RMB 6.9 billion (US $980 million), mainly because Osram terminated selling its patents, covering a scope of several thousand patents was excluded from the recent MLS and Osram LED chip procurement agreement.

However, the focus of the deal is not the “empty shell” LEDVANCE, but the spotlight is shone down on granting 10-year access and usage of Osram Sylvania’s distribution and sales channels. The deal is really about the two organizations making a connection. Considering Osram is a century old lighting enterprise, its new partnership with MLS was compared to a marriage between an elderly woman and a younger guy. Even though the acquisition was lauded with praises throughout the industry, there were also those that sighed worringly, shook their heads in dismay, or even lifted a questionable eyebrow.

There are those that are concerned MLS takeover of LEDVANCE is aimed at becoming one of the three global leaders in the LED lighting market. Under the new power structure, LED companies will be ravaged by the three new lighting giants Philips, Osram, and MLS, which would intensify LED manufacturers survival pressure.

Some skeptics noted Foshan Lighting and Osram collaborated for many years without delivering visible results. Osram’s general lighting business’s EBITA was in the red for consecutive quarters, which indicates MLS will have to immediately pump emergency funds after all business and legal transactions are completed. Not only would this make the acquisition unworthy, it might also accompany significant losses.

Other skeptics analyzed, MLS aggressive developments and unique market operation strategies, might eventually squeeze out Osram position as the world’s second largest LED lighting company, making the acquisition deal a honey coated “romantic trap” for the German lighting company.

Has Osram lost its splendor, or is it still a charming enterprise?

Osram’s sale of its general lighting business LEDVANCE’s product portfolio mainly covers light sources, including traditional and LED lights, luminaires, and smart residential lighting businesses. Heated debate regarding the acquisition value has continued in China’s LED industry, following conclusion of the acquisition deal.

Has Osram lost its attractiveness, or is it still alluring? Skeptics focused on the following points:

1) Osram’s most valuable core business was not included in the spin-off to form LEDVANCE, and the acquisition value was lower than thought?

Only an idiot would sell their core businesses, so it is going to be impossible to acquire Osram’s key operations, unless you buy the entire lighting group, or if it left the industry for a new one. Another possibility is if the German lighting company formed a new core business to replace the old one.

2) Is a decade usage of Osram brand a good deal for MLS?

Prosperity never lasts, if something can last for 10 years, it can change many things. By using Osram and Sylvania brand names, MLS will be able to shorten the distance between it and international giants. However, if MLS can utilize the brand in the right places to enable it to reach its real potential, implement good governance, than it might take less than a decade for it to catch up with international companies. It would not matter if Osram reclaimed the trademark rights after 10 years.

Sadly, Osram only authorized its trademark rights, and did not sell a single patent to MLS. The Chinese company needs to make the most of its remaining time to improve its core technology. It can be seen, though, that using Osram’s product patents will enable MLS to break through international patent barriers and effectively promote its products on the international market.

3) Why is Osram giving up LEDVANCE? If this brand has a bright outlook would Osram have abandoned it? If the future is dim, should MLS still takeover the business?

To solve bureaucracy and other issues stemming from a large organizational structure, Osram decided to focus on core businesses, while ridding unprofitable general light source businesses, such as Ledvance. It would be wrong to assume the company is valueless, the company estimated its revenues reached RMB 14.7 billion in 2016.

4) Is MLS insecure by pairing up with a “declining aristocrat” in the lighting industry to decorate its brand?

MLS is not stupid enough to spend RMB 3 billion merely to renovate the entrance of its office building, in that case it should just build the world’s most impressive lighting museum and skyscraper.

In reality, “value” is a type of “demand.” Osram’s general lighting business, LEDVANCE’s, value depends on who is assessing its worth based on their demands. It depends on who “needs” this business. An organization becomes valuable once someone needs it, so Osram’s light source business is valuable in the eyes of MLS.

Is Osram-MLS partnership a good relationship or a disastrous romantic trap?

In response to MLS acquisition of Ledvance, the Chinese company implemented a complementary strategy, which emphasizes the two companies “complementary structure”. However, from a business competition aspect there are many uncertainties related to Osram’s sale of its light sources to MLS. Whether the two companies partnership outcome will be good or tragic depends on the two companies managements future attitudes and wisdom.

1) Osram is different from the “neighboring auntie” Philips Lighting, the latter is pessimistic about the LED industry, while the German company is upbeat about LED industry developments.

The situation of LEDVANCE’s recent acquisition deal, and Philips Group’s decision to sell Lumileds in 2015 is completely different. Lumileds was sold by the Philips Group instead of Philips Lighting, which reflects the group’s decision to completely withdraw from the LED business. Since Philips is not involved in the LED industry, it did not need to evaluate too many factors regarding Lumileds buyer.

Siemens is Osram’s largest shareholder, but it did not sell LEDVANCE. Osram was the main decision maker, so despite Siemens negative outlook of the LED industry, Osram never pressured Siemens to invest in LED production expansions. The German lighting giant intends to continue developments in the LED industry, so more thought was put into the sale of LEDVANCE business.

2) Osram’s previous less than ideal complementary partnership with a Chinese enterprise ended terribly.

When the Chinese government decided to sell the state-owned Foshan Lighting to Osram, it was considering forming a complementary partnership. Osram intended to use Foshan Lighting’s market position as a “luminaire king” in China’s marketing and distribution channels to raise its market share in the local lighting market. Foshan Lighting on the other hand hoped to use Osram’s distribution channels in Europe and U.S. to enter international markets, but in the end the German lighting giant suppressed Foshan Lighting’s development, and the Chinese company was unable to successfully expand its overseas market. Even though Osram yielded significant profits from Foshan Lighting, it failed to achieve its initial aim.

Osram’s “failed partnership” with Chinese luminaire king Foshan Lighting, and its new agreement with the popular MLS in the LED industry. Osram and MLS immature partnership still requires openness, thoroughly assessing conditions of interest exchange, ensuring they reached an unanimous agreement that can be implemented.

3) MLS shows its “love” to Osram, but it’s just really “taking advantage” of it.

Osram and MLS are not on equal footing, the German company is a century old lighting company, but MLS is just an emerging company in the industry. MLS emphasizes its cooperation with Osram is complementary, but it just wants to leverage the latter’s market power. MLS is vying to acquire Osram’s marketing and distribution channels to accelerate its market position, and quickly acquire large market shares. It is hard to say whether Osram eventually will have to return the money received from the acquisition back to MLS.

4) Osram and MLS’s subsidiaries have competing relationships

Osram only sold its general lighting business, its remaining three businesses pillars include semiconductor lighting arm Osram Opto, Lighting Solutions, and Specialty Lighting. Chinese partner MLS three main businesses are LED package, luminaire end products, and its own lighting brand Forest Lighting’s business. MLS acquisition of LEDVANCE brand business is mostly out of its consideration of using the Osram’s brand and distribution channels to expand its Forest Lighting brand’s lighting products export market.

However, MLS first two businesses arms and Osram’s two businesses have a competitive relationship. Based on TrendForce subsidiary LEDinside’s report, Osram’s global LED package revenue in 2015 ranks in second, and MLS in ninth place. In 2015, MLS revenue from its LED package business, landed it among the top three spot in the Chinese LED package market, while Osram placed in fifth. In general, MLS LED package market position is nearing Osram’s.

It can be noted, once MLS acquires Osram’s end market lighting distribution channels, its LED package and lighting application products and production capacity will be released onto the market. In the aftermath, MLS will acquire new financing to expand production capacity, which would cause Osram to lose its status as the world’s second largest LED package manufacturer. There is no doubt Osram’s luminaire business will also be impacted.

MLS still does not have products such as those found in Osram’s automotive LED lighting, IR LED and Specialty Lighting businesses, but if MLS continues its current development trend of improving its technology and capabilities, it could eventually grab market shares in specialty lighting sector that have higher gross margins.

MLS also agreed it would purchase LED chips from Osram’s new fab in Malaysia, once it enters the mass production phase. Yet, MLS’s long term partner Epistar is also planning to build a new LED chip manufacturing plant in Malaysia. Osram and Epistar are rivals in the LED chip market and have a fiercely competitive relationship. MLS will be able to benefit the most by shifting its chip demands between the two LED chip companies. MLS’s LED chip sources and deployment includes Epistar, Osram, HC Semitek, and Kaistar.

5) In the Osram and MLS partnership, the Chinese company is still very “young” has insufficient enterprise cultural foundation, and lacks large scale multinational partnership experiences. Whether MLS operations can meet Osram’s expected results is still a big issue.

LEDVANCE, the general lighting business sold by Osram, mostly consists of European and American employees, even though they were able to keep their management team, there are fundamental cultural differences in Eastern and Western management concepts.

MLS was not very well-known brand after its founding in 1997 up till 2011, when it rapidly ascended the industry ranks. The company lacks enterprise culture sedimentation, which is incompatible with the century old Osram. Nearly all MLS senior managers lack international management experience. Even MLS’s branch in India relies on Epistar managers for help, and a senior officer from Epistar was appointed to deal with operations.

MLS still has to improve its technology, management, and branding. Its successful acquisition of Osram’s general lighting business, in theory could strengthen MLS’s distribution channels, branding, technology, and different types of capacity. However, to convert theory into reality requires a sophisticated, proper, and effective integration process.

If Osram is a cougar feeding on the youthful vibes of MLS, the two parties have negotiated their market deployment strategies to meet their respective needs, and if they treat each other respectfully then this “couple” of the century could become a legendary tale in the industry. Yet, if the two companies partnership drifts away from its intended plan then Osram’s market position will be challenged by MLS, and its market share and services in products mentioned in the acquisition agreement might be stolen by the latter. In the end, Osram might deeply regret falling for MLS “romantic trap”.