An Empire of One

Jeff Hsieh is a builder.

He made his bones in the toy industry over the course of 25 years, mostly as the Hong Kong-based agent for Marvel and Toy Biz—and merely surviving those experiences may have provided him the “how-to” and “how-not-to” manuals of corporate takeovers and buyouts. It seems an otherwise unlikely coincidence that in the last three or four years his entrepreneurial zeal has sent him on an acquisition tear, grabbing up the distressed and forgotten, the undercapitalized and undervalued, along with the underachievers of the toy industry.

Now an emerging power in his own right, with well-established bona fides, Hsieh (pronounced Shay) is hard at work building an empire he hopes will propel him to the upper tiers of the toy business, pushing him into the industry's power elite.

While his firms will produce about (US)$400 million in sales this year (a paltry sum compared to industry giants Mattel and Hasbro) Hsieh estimates that it will only be another few years—four or five, perhaps—before he hits $1 billion in combined revenues. For now, he'll just have to live with being one of the most powerful executives in the toy industry that most people don't know.

Most, perhaps. But Mattel and Wal-Mart are already well-acquainted with Hsieh, as some of his OEM factories inside mainland China provide them contract and private label manufacturing. And Hsieh also counts Marvel's Ike Perlmutter as a good friend and advisor, despite recently walking away from the Marvel master toy license, subsequently given to Hasbro.

Undeniably, Hsieh is already a force to be reckoned with. A Hong Kong investor, he owns and controls a small conglomerate of factories, manufacturers, printers and packaging companies, licensees, wholesalers and even retail businesses—and he makes it clear there's much more to be done.

Hsieh is also clearly capitalizing on the race to embrace all things Chinese in the developing global economy, particularly the push to find and source manufacturing assets on the mainland. But for him it's much more than that.

“I'm very global,” he explains. “What I've tried to do is diversify everything. I'm distributing from my own offices in the U.S., Canada, and in France, which handles the Benelux countries, and Dubai, which handles the Middle East [and, of course, Hong Kong]. I'm also involved in the retail business in China.

“I cannot depend on North America,” Hsieh adds. “I cannot depend on the U.S.A. You know, in the U.S.A. there are very few customers, so I'm diversifying myself to other markets [around the world]. I'm diversifying myself not only to the mass market but the specialty market and the collector market—not only in toys, but also in paper; not only in manufacturing, but also in marketing.”

He harbors no illusions about knocking Mattel or Hasbro off their pedestals—assuming, that is, they don't take some major missteps or he doesn't find some extraordinary company to buy. But he also sees absolutely no reason he can't ascend to the No. 3 position in just a few years' time.

He talks easily about his vision, with engaging warmth in his voice and flaring passion behind his words. He loves what he does.

“I started looking for companies to buy, trying to extend my 'empire,' if I can call it that,” Hsieh explains. “It's my dream to be one of the biggest toy companies in the world; 2003, 2004 and 2005 were very difficult, but they were [also] very exciting, and I acquired quite a few companies. Now I'm getting involved not only in the licensing, but also product development, sales, marketing, distribution, manufacturing and retail.”

Hsieh's holdings are impressive, too, for their expansiveness. He's quick to point out that his developing global empire is vertically and horizontally integrated—both essential to his business model. He wants to have control over every stage of the product cycle. Hsieh wants to mold the plastic and ring up the sale—one is tempted to ask if he plans to carry the bags home for the consumer as well.

Last month, he bought Wham-O, still rebuilding after some difficult years. Deals for additional outdoor toy companies were still pending after that, and he expects a handshake on a deal at this year's Toy Fair. If completed as expected, Hsieh says the agreements could add upwards of $150 million to his companies' top line revenues—creating a $550 million entity.

He's also a partner with creative and marketing savants Roger Shiffman and Marc Rosenberg of Zizzle, last year's upstart that captured the industry's imagination and retailers' hearts and minds, as well as shoppers' wallets this past holiday season with its iZ “animatronic DJ.”

His seven factories in the PRC, employing about 20,000 workers, manufacture plastic, wood, die-cast, plush and paper goods. In addition to their work as OEM contract houses, Hsieh's factories do the toy manufacturing for his companies' branded goods.

Virtually all of his businesses are organized under one or more of his offshore holding companies—Cornerstone Overseas Investments Ltd., Cornerstone Beststep International Ltd. and Centralink Investments Ltd.—which hold direct ownership of some businesses and have also served as an acquistor and incubator for others waiting to be folded into one of the operating divisions. Hsieh says Cornerstone Overseas is the core holding company, but in every event, Hsieh is the beneficial owner of all.

Cornerstone's operating divisions include Toy Biz Worldwide (TBW), China Retail Management (CRM), Grand Toys International and Wham-O. As far as its name is concerned, Toy Biz Worldwide lives in a somewhat murky space, at least to the casual observer. Hsieh founded TBW after receiving the rights for Marvel toys, then provided the design, development, marketing, manufacturing and wholesale distribution of the Marvel products, along with other manufacturing on both a direct and contract basis beyond the Marvel business.

Timing is everything. The instant success of everything Spider-Man, likewise the Hulk along with other Marvel characters propelled Toy Biz Worldwide's revenues into the stratosphere, and became Hsieh's ATM machine when opportunities came to go shopping for additional companies.

The less-than-sharp boundaries between Toy Biz Worldwide, Hsieh's company, and Marvel's Toybiz brand, seem at least a passive oversight and, at most, an intentional one. It was the original Toy Biz, under Ike Perlmutter, that brought Marvel out of bankruptcy in the late '90s after a protracted and painful series of corporate and legal battles with ousted chief Ron Perlman and corporate raider Carl Icahn, who later was also pushed out.

In any event, the blurry edges of where one company ended and the other began didn't seem to matter as long as Toy Biz Worldwide remained a Marvel licensee. It matters more now.

Hsieh said he walked away from a renewal of the Marvel license agreement, scheduled to expire in December 2006, because Marvel was insisting on pushing its royalty demands past 20 percent, a point where it no longer made business sense to keep it. Businessman Hsieh made a businessman's decision, passed on the renewal, and the license is moving to Hasbro. Toy Biz Worldwide will also have a name change within the next year, Hsieh said. It seems self-evident that it will also have a substantially smaller revenue base after that (see accompanying article).

Hsieh says he's just fine with all of that. But the smart money would probably suggest watching for his efforts to further buck up TBW's top line.

“To me, it's just the beginning,” Hsieh reasons. “The toy industry is getting tougher and tougher, and the customer is getting tougher and tougher, not only in the States but around the world. In my opinion I have only two ways to go: either I'm bought, and then I'm out, or I have to keep on growing and getting stronger. Otherwise I cannot survive.”

Hsieh chooses to grow. In December, he appointed himself CEO of publicly-held Grand Toys International, a core holding company he bought a couple of years ago. Grand now includes five of its own operating divisions, after Kord Holdings and Hua Yang Printing Holdings were added to the portfolio. They join Toronto-based Grand Toys U.S., Playwell International, originally part of Hsieh's Hong Kong Toy Center Ltd. and International Playthings.

Hua Yang is a specialty printer of children's books and games and is involved in the production of toy and gift marketing-related specialty printing and packaging. Among other things, it makes pop-up books and touch-and-feel books, along with jigsaw puzzles and board games. Kord is one of the world's largest party and decorative goods manufacturers, both under its own brand and on an OEM basis.

The pair was recently folded into Grand from Cornerstone, which acquired and incubated them for a year, giving them an opportunity to become more profitable and efficient before being integrated into Grand. With combined sales of $75 million, Hua Yang and Kord will push Grand's sales up to about $130 million. But more importantly, they'll contribute to making it a little less profit-challenged.

Hsieh's China Retail Management (CRM) oversees the stores and brand management functions. By his account, the 495-unit Beiliwei infant and preschool stores probably make it the largest toy retailer in China. Those stores, which also extend into Mongolia, are serviced by their network of 10 regional offices and distribution centers, and Hsieh likens their reputation among consumers to that of Fisher-Price.

CRM is also the master licensee and brand manager for the McDonald's McKids line of lifestyle products across Asia, excluding India and Japan. Between Hong Kong, Taiwan, Korea and China, McKids has about 114 stores.

Hsieh's company also manages Disney Corners and sells licensed products for Disney and Warner Bros., as well as exclusively operates Coca-Cola stores in China. He holds the non-beverage master license for Coke in China. With all the additional licensed doors, Hsieh's retail presence comfortably exceeds 600 stores and counters.

The retail opportunities are clearly an indication of a rapidly growing middle class—a consumer class—in China.

“People are just realizing that there's this country called China, and it took all the business away, so maybe we should do business there too,” says Hsieh. “The retail business there is growing big time.” That means China's manufacturers will also develop stronger and more demanding domestic markets.

Moreover, he believes there are few, if any, downside risks associated with such rapid growth. Certainly not the politics; there's simply no looking back to the China of the old days. But what about China's economy?

“Everything is made in China—TVs, DVDs, toys—if China has a problem, the world has a problem,” he says. And, as it stands right now, there is no topside limit for the country or his companies.

“But I know my limits, so right now, this is the year for me to slow down a little and make sure I organize myself,” he adds. If he is slowing down the acquisition and pace of growth, it's indiscernible.

At least in part, that may be because his business model focuses on opportunistic buyouts. It's a formula that requires limited investment—often involving simply the assumption of debt in companies with tangible and valuable assets, turning them around then making the company pay down its own debt.

But he doesn't want just any company.

“When I acquire a company the first thing I do is look at the management and the company itself to make sure it makes sense to be included in my business plan,” Hsieh explains. “I talk to the management to make sure they want to stay and to make sure I feel comfortable with them. In all of the companies I've bought, except the first one, I've kept the management. It becomes a turnkey operation, so that's important unless they prove to me they cannot do the job.”

Finding and keeping strong management is essential to Hsieh, as he doesn't have time to run all of the businesses himself. Yes, he looks for distressed companies, but only those with intrinsic value and high potential no one else sees.

“I look at it as a gold mine,” he offers. “Most people see it only as a rock, but I see the gem inside.”

Hsieh says the best candidates are frequently cash-starved by upstreaming to an insatiable parent or side-streaming cash to spend on another division.

He says he's seen it happen on more than one occasion, when one of these companies is separated from the parent and receives more attention—it will blossom, yielding as much as a 40 percent increase in sales with strong EBITDA.

Finally, Hsieh shops for firms in business segments where he's not represented—no overlaps with his other companies—but where he can achieve synergies by providing central back office support. Conversely, he'll walk away from companies where the price is too high or management is a problem. Still, don't all of these struggling companies—not to mention industry-wide data showing declining sales trends influenced by KGOY (kids getting older younger)—suggest some kind of industry weakness? If they do, Hsieh offers no indication that he notices. On the contrary, he offers blue sky assessments all the way.

“When I was in Taiwan in 1980, I was in the textile industry, and everyone told me to get out of the business [because] it's a sunset industry, and there's no future in it,” he says. “But Taiwan still has a very strong textile business today, because everyone has to wear clothing every day. To me the toy industry is the same. In the last 15 years, everyone has been blindly spending on their businesses, buying machines, and they think the business is just going to chase them. All of a sudden they found out the market is not growing as fast as they thought.”

Hsieh continues: “So I think the toy business will always be there, and every kid in the world will still want to play with toys. But the only companies that will last are the ones that believe you have to be good, you have to be strong and you have to add value to what you sell. Traditional toys will be here forever. But if you want to be a large company, you must have a global vision.”