Herman Miller & Knoll USD 1.8bn Tie-up – Deal Synergies
& Home & Office Outlook – 5 May 2021
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Specialist: Nate Connor (NC)
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Former VP, Finance & CFO at Knoll Inc
Agenda:
1. Home and office consumer trends and price elasticity
2. Herman Miller (NASDAQ: MLHR) and Knoll (NYSE: KNL) tie-up – supply chain synergies and
accretive prospects
3. Knoll’s growth strategy and brand depth
4. Furniture demand outlook across office, healthcare and educational environments
Contents
Q: Could you outline the commercial and residential furniture manufacturing industry, highlighting some
key categories, drivers and competitors?
Q: Could you give an overview of Knoll? What are its industry strengths and weaknesses?
Q: What are the dynamics of higher-input costs and how do they differ between channels? How has
coronavirus impacted cost management?
Q: What are your thoughts on Herman Miller’s upcoming acquisition of Knoll
Q: Could you give an overview of what differentiates Herman Miller from Knoll? What are some synergies
that could be realised?
Q: What are your thoughts on the USD 1.8bn valuation given to the Herman Miller-Knoll merger?
Q: What has driven supply in this industry and why haven’t manufacturers reduced supply?
Q: How important is scale to the industry? How could Herman Miller and Knoll leverage scale to take
market share?
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Q: Could you expand on industry fragmentation? Why hasn’t the industry experienced much consolidation
over the past decade?
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Q: How would you assess the timeline of the merger’s first-year synergy goal? Herman Miller expects around
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USD 50m.
Q: Why do you think the industry hasn’t improved efforts to increase D2C and retail ambitions?
Q: How confident are you that Herman Miller’s CEO, Andi Owen, can successfully integrate the deal? Can
you discuss the two companies’ cultures?
Q: What is Herman Miller and Knoll’s international exposure or opportunity? What implications does this
deal have for their international ambitions?
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Q: Which regional markets do you think provide the largest growth opportunity for the combined company?
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Would you say Asia?
Q: What do you think is the most underappreciated aspect of this deal?
Q: Could you give an overview of the combined company’s competitive landscape? Who would it directly
compete with? How might the two standalone companies’ competitive challenges change post-merger?
Q: What are the barriers to entry in Herman Miller and Knoll’s respective categories? How might this
change post-merger?
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Herman Miller & Knoll USD 1.8bn Tie-up – Deal
Synergies & Home & Office Outlook
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Herman Miller & Knoll USD 1.8bn Tie-up – Deal
Synergies & Home & Office Outlook. I’m Nyree Hinton and I will be facilitating today’s conversation with Mr
Nate Connor, former VP of Finance and CFO at Knoll.
Nate, before we get start today’s with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
NC: I agree.
NH: Can you start with a brief overview of your background?
NC: Overview on my background is I’ve spent about 20 years in the manufacturing industry. Started my
career with a consumer products company, holding company, Fortune Brands Inc out of Chicago. Held various
positions at the corporate headquarters, then moved into their kitchen and bath cabinetry manufacturing
space for an operating company known as MasterBrand Cabinets. Held several operational finance positions
there. Director of Financial Planning and analysis and Head of Finance Operations for North America, before
transitioning to Knoll Inc in 2014. I joined Knoll Inc as the Vice President, Corporate Controller, spent about
two years as Corporate Controller of Knoll, dealing with, I’ll call it, the shared service, back end, legal entity,
tax functions, before transitioning into the role of Vice President, Finance, and CFO of Knoll Office at the time.
I believe that they’ve changed the terminology to maybe commercial now, but was focused primarily on
leading the finance function and partnering with the president that oversaw the contract furniture
manufacturing. Did that for about three years and left Knoll in 2018-19 time frame.
[00:02:28]
Q: Could you outline the commercial and residential furniture manufacturing industry, highlighting some key
categories, drivers and competitors?
NC: Two very different, I would say, segments inside the furniture manufacturing industry. The commercial
or contract furniture segment obviously deals primarily with large contracts, big businesses. You think of
someone in the financial space, Bank of America, Goldman Sachs, people that need to or employ thousands of
workers across the globe and need spaces for them to work in. Also in that space are governmental, both state,
local, federal government contracts, healthcare contracts, higher education contracts. The dynamics in this
market differ, I would say, significantly from the residential furniture market, which obviously is starting to
see some bleed, as high-end residential furniture makes its way into mixed-use spaces, I would say, in the
hospitality category and even over into what would traditionally be considered as the contract furniture space,
high-end C-suite offices and things like that. The buying cycle, the buying pattern, the influencers in the
commercial vs residential furniture spaces are very different. There are a lot of, I’ll call it, stakeholders in the
commercial furniture buying process. The architect and design firms play a very, very large role. There’s an
increasingly large role played by the property management companies, or the real estate brokers. You think of
a JRL, a CBRE, those types of entities, the project owner or the end client obviously plays a role as well in that
space and there are a lot of influencers in that purchasing decision, whereas in the residential furniture
industry, it’s really the designer that plays a big part. The designer and the end consumer play a big part in
Private and confidential 3
that buying decision.
Top competitors in this space, I’ll speak more to the commercial space. Those really here in North America
primarily are the large publics, Hon, Steelcase, Herman Miller and Knoll. It’s been a very challenging industry
in the commercial furniture market space really since the financial crisis in ’09. There’s been an over-
capacitisation in the industry between the four large players, which has really led to, I think, a challenging
pricing dynamic. It’s just a pure supply and demand problem in the space. There is an oversupply coming out
of the financial crisis in 2009. We did see some recovery, I would say, really in the ’18-19 time frame, where
demand had returned, but it still not outstripped the supply in the industry and there were major pricing
pressure really, I would say, since that 2009-10 time period that really carried forward through today. Flip
side, on the residential furniture market, it’s a little more fragmented. I would say the larger players in the
high-design category obviously are Knoll and Herman Miller with their product portfolios and their smaller
brands. Herman Miller having Design Within Reach. Knoll having brands such as Holly Hunt, Edelman
Leather, higher-end textiles, those sorts of things. This was really an industry that was strong up until COVID,
and we saw the economy take off from the 2015-16 time frame, really up until the beginning of 2020, there
was a robust demand in this space. I won’t say it outstripped supply. I think that’s a little harder to get a gauge
on, just based on the more numerous smaller players in the industry, but the margins in the residential space
historically have been quite a bit better than the contract furniture space, which led to profitability inside
Knoll and I’m sure inside of Herman Miller as well.
[00:08:22]
Q: Could you give an overview of Knoll? What are its industry strengths and weaknesses?
NC: I think Knoll’s primary strength is its design orientation. Knoll has been a leader in high design since the
founding of the company 80-some years ago, and the quality that comes along with it are the two things that
really define Knoll. Historically you would look at companies that wanted to be employers of choice would
choose Knoll furniture because of the design element, the aesthetics, the workplace environment it created for
their associates, as well as the quality that came along with it. I think it’s on a lot of Knoll’s marketing material
that they are a collection of design-driven brands and I think that that really reads through. It reads through
both in the contractor or commercial furniture market, as well as, and probably more specifically, even in the
residential furniture market with its collection of iconic pieces that have been designed by world-class
architects such Eero Saarinen and Mies van der Rohe.
[00:10:14]
Q: What are the dynamics of higher-input costs and how do they differ between channels? How has
coronavirus impacted cost management?
NC: I think Knoll has been very public about some force reductions and some lean initiatives that it’s put in
place as a result of COVID, but I think looking generally at the marketplace, it’s probably obvious that the
contract as well as the residential furniture market are seeing raw material input prices rise. You look at things
like the lumber market and the steel markets over the last year, the corrugated market for packaging materials,
the price of any product that has a petrochemical input and some of its supply disruptions we’ve seen by the
refinery fire in Lake Charles, Louisiana last year, and those things, as well as the tariff situation with China.
Input costs on the manufacturers have to be rising. It’s easier to pass on those costs to the consumer in the
residential marketplace, or even absorb them, when you have EBITDA margins around 20% from a residential
furniture standpoint. It’s a lot harder to absorb those costs without passing them on in the commercial space
when you’re looking at EBIT margins somewhere in the low to mid single digits. I think, obviously at some
point, the input costs are going to make their way into the commercial channel. Exactly when and how is
probably a function of what’s going on right now, as far as some consolidation in the industry. I know the
proposed combination that we’re talking about here between Miller and Knoll, as well as any other, I’ll call it,
supply reductions that might be taking place as a result of COVID, with rationalising footprints and reducing
Private and confidential 4
output. I think at some point there might be a chance to pass this onto the consumer from a commercial
standpoint, but I just don’t think we’ll see that in the short term here. From a residential standpoint, I think,
given some of the growth that we are starting to see come out of the COVID recovery, it probably will be quite
a bit easier to pass that along in the residential marketplace.
[00:13:55]
Q: What are your thoughts on Herman Miller’s upcoming acquisition of Knoll?
NC: I think it’s a great decision. I mentioned earlier, I think for a long time there’s been an overcapacity from
a supply side, in the marketplace. I think Miller and Knoll share a lot of the same common values from a
design, a high-design standpoint. I think they’ve both positioned themselves as quality leaders over the years
and it’s really an exciting combination. Two iconic brands, I don’t think we’d ever see it in, I’ll say, call it, the
beverage space, but to me it’s almost like a Coke and a Pepsi merging. It’s going to be very, very interesting to
see how that works and what they’re able to do, going forward, with the shared background in design and
quality. I think it’s a great thing for the industry overall.
[00:15:14]
Q: Could you give an overview of what differentiates Herman Miller from Knoll? What are some synergies that
could be realised?
NC: I think when you look at the Knoll and Miller business, they play very, very much in the same spaces. I do
think Herman Miller may be definitely in the residential space, took a lead in marketing directly to the
consumer vs going through the trade, and when I say the trade I mean using a designer. That’s not to say
designers don’t utilise tools, but with their acquisition of Design Within Reach, they acquired a platform that
allowed them to position their furniture directly to the consumer, I think probably, in my opinion, honestly led
the e-commerce in the residential high-design space was a leader more than Knoll was. I think Knoll probably
developed its e-commerce capability and its direct-to-consumer capability a little bit later, so I think it’s going
to be very, very interesting and exciting what that, I’ll call it, core competency of Miller will bring to Knoll.
That’s not to say Knoll hasn’t built out their own e-commerce platforms, I know they have, over the past year
or so, and I think both Andrew and Charles Rayfield have spoken to that in the last couple of quarters, how
they are investing in the digital marketplace, but I think having the history and the learning that Miller has
under its belt with Design Within Reach, not only from an e-commerce standpoint, but also a catalogue, mail,
and just those direct connections with the consumer, I think will benefit both companies from this merger
standpoint. Miller also took a little different take on marketing direct-to-consumer with brick-and-mortar
stores.
I believe they’ve got in the neighbourhood of 40 retail stores or design centres that they market directly to the
trade and to consumers. This is something, a route to market or a channel to market that Knoll hasn’t really
leveraged in the past. Knoll has leveraged more of a dealer market, both for its residential as well as its
contract furniture. While Knoll does have a couple of unique stores on the coast, one in New York, I think the
other is in LA, Beverly Hills area, it had not historically invested in its own brick-and-mortar space to interact
directly with the consumer. It took more of a strategy of using a dealer in market who would install the
furniture and provide the service to have those direct one-on-one conversations with the consumer. I think
really, going forward, in today’s reality is there needs to be more of an omnichannel marketing approach in
interacting with the consumers, whether it be on a B2B, a manufacturer to a dealer end market, or a B2C
manufacturer, direct to the consumer, either through a website, an own store, a catalogue, some sort of
touchpoint there. These are a couple of the areas where I think Herman Miller can share some of its
competencies with Knoll and the combination will work out very nicely.
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[00:20:01]
Q: What are your thoughts on the USD 1.8bn valuation given to the Herman Miller-Knoll merger?
NC: This is just my opinion, I think the USD 1.8bn valuation, or USD 2bn, right in that neighbourhood, that
was announced at the merger, was absolutely amazing, I think. If you would look historically, rarely has Knoll
ever traded above those valuations, so I think Andrew and the board of directors did a nice job achieving the
maximum value for Knoll’s shareholders in this transaction.
[00:20:48]
Q: What has driven supply in this industry and why haven’t manufacturers reduced supply?
NC: I think that supply in the industry was really put in place, I would say, in the late ’90s and contract
furniture, in particular, was a very, very good industry to be in at that time point. When you think about the
size of the workspaces, when you think about the dollars per workspace that companies were investing in their
employees, where you would need some sort of cubical wall partitions, filing systems for hard paper files, a
chair, a desk, some sort of work surface. There was a lot of product that needed to surround each individual
employee, so that, by design, or by necessity, took a lot of supply and the supply was put in at that time in the
markets when the margins in the contract furniture industry, quite frankly, were a lot better than they were.
They looked more like residential furniture margins than they do today. I think the industry was probably
caught off-guard by the shift to a work-from-home environment that started in the mid 2000s from, I’ll say,
large pushes both environmentally, as well as from a cost-savings standpoint, to migrate document retention
online. That reduced the need for large filing systems, for large areas of space. As technology has enabled us to
work remotely to save documents, large amounts of information digitally, I think it caught the industry off-
guard, frankly, and the supply never really came out, because I think there was, in large part, wait-and-see
attitude and, “We don’t feel like people are very effective working from home, and at some point it has to come
back.”
Unfortunately, I think the events of the last year have shown us that, no, in fact probably it can swing further
in other direction, where, basically, I would say the vast majority of companies over the past year have had to
figure out a totally 100% virtual workforce. If you think of large professional service companies, the law firms,
the accounting firms, the financial firms, most of them that I know of are almost, if not totally, virtual,
probably 90-95% virtual at this point. I think that is probably going to have different ramifications, but COVID
has shown us that work-from-home is here to stay. Its not going away. We’re not going to see the transition
back to a more traditional office space that some might have thought. I can think of the last time I was at
NeoCon in the 2018-19 time frame. There were a lot of discussions on which way the large contract
manufacturers were going, contract furniture manufacturers were going. Was it more of an open concept,
workspace, design, which Knoll really led through its Rockwell product offering, which allowed for open
collaborative workspaces that can change throughout the day, or were companies going to move back to maybe
not fully a cubicle environment, more of a configurable environment, but were we going to see more private
offices? That’s just to say, I think up until the last really 20-30 months, there were a couple of different
undercurrents in the industry as far as what’s it going to look like?
What are workspaces going to look like, going forward? Are we going back to a lot of people with private
offices, with a few people in common workspaces? Do we need workspaces that can be configured throughout
the day? I think COVID has answered the question for us and I think when we start to return to work, which
we need to, after about 13-14 months, I think companies are realising that, while they can be productive and
effective in a work-from-home environment, it’s not 100% efficient. There are things lost in the isolation, if
you will, of the meetings, team meetings, not having that organic information sharing that you get from having
a workforce in a shared area. I think it’s going to look very different when we come out of COVID and I think
we’re going to see probably smaller office spaces. I think we’ll see office spaces that need to be reconfigured
throughout the day, throughout the week, depending on a work-from-home cycle. I don’t think we’ll
necessarily see a workforce that is 100% in-office all the time anymore, because the pendulum has swung too
far in the other direction. It wouldn’t surprise me if most companies land on a hybrid environment where
Private and confidential 6
workers are in the office 2-3 days a week, with 2-3 days a week at home. I think that will necessitate the need
for smaller spaces, which will allow flexibility in budgets to trade up, if you will, to some of the more premium
offerings that Knoll and Herman Miller offer. I think it’ll also necessitate the need for workspaces that can be
configured, that are open, that are airy, but may need demountable walls or moveable walls, which fits nicely
in the product portfolio that we’ve seen from Knoll for the last three or four years, and from Miller as well.
[00:29:01]
Q: How important is scale to the industry? How could Herman Miller and Knoll leverage scale to take market
share?
NC: I think specifically in the contract furniture industry, scale is very important. When you’re talking about
winning some of these larger contracts, having the scale to do it and the manufacturing efficiency to execute
on the contracts is definitely important. While I have mentioned an oversupply in the industry, I think across
the four majors, because that oversupply has been there, it’s led to inefficiencies on the other side of the
spectrum. When you turn on these contract furniture factories for a day, basically, you’ve got heavy fixed costs
when you think about the cost structure of the product, the variable labour is maybe 10-12%, but what really
you need to focus on is the material input. We talked about some of the inflationary pressures there, but then
the plant property and equipment, the footprint that you have to have to produce this product. Having the
scale to do it, but having the scale to do it efficiently, I think is the make-or-break item in the contract
furniture market. I think it has been for the last 10 years and will continue to be, going forward. When you
think about Miller’s manufacturing base, relative to Knoll’s manufacturing base, I think there are some
synergies that can be released there that both of the management teams have talked about. It wouldn’t
surprise me to see some footprint consolidation, probably centring around centres of manufacturing
excellence to ensure that when they do compete on these large projects, they have the capacity to execute on
them in a very cost-effective manner. Probably a long-winded answer to say scale is very important. I think
Miller and Knoll’s manufacturing capabilities complement each other nicely. I think there’s probably some
consolidation that will go on as a result of the merger of the two companies, but it will lead to an operational
organisation that has enough scale without having excess capacity to service its clients in a very cost-effective
manner.
[00:32:21]
Q: Could you expand on industry fragmentation? Why hasn’t the industry experienced much consolidation
over the past decade?
NC: I’ve got to tell you, I wish I had an answer for you. Since I came into the industry, I’ve been looking for it
and it’s surprising that it, to me, has taken as long as it has. If I would have to point to one reason why
consolidation hasn’t taken place until now, I really think it comes down to, basically, a very accommodative
monetary policy and low interest rates. I think companies have been able to maintain access to the working
capital to keep themselves going and we just haven’t seen a lot of consolidation. At the end of the day, it’s not a
very high-profile industry. It’s not tech, it’s not software, it’s not social media. I think probably it’s been largely
ignored by, I’ll say, some of the activist shareholders and without outside pressure, we just haven’t seen a lot of
consolidation in it. Very similar to, I have to say, the kitchen and bath cabinetry market, and my time with
MasterBrand Cabinets. In the 2009-14 time frame, a lot of the same market dynamics were in play there.
There was a lot of capacity in the marketplace and you saw it play out in pricing pressure, in discounting
pressure on large jobs and even smaller projects and through the home centres and things like that. That
consolidation has just recently started as well with companies like Masco. It’s probably not a great answer, but
it’s really the only thing that I can point to, there’s just been far too much working capital available and far too
much capital flashed around the market, which has allowed the companies to move along and there hasn’t
really been a focus on consolidation.
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[00:35:16]
Q: How would you assess the timeline of the merger’s first-year synergy goal? Herman Miller expects around
USD 50m. Do you think this is slightly too optimistic?
NC: You think about USD 50m in a year, it’s just my opinion, it’s hard to strip USD 5m in, I’ll call it, synergies
out of an organisation a month, and you think about it’s not going to come out USD 5m straight from the
beginning, so you’ll probably see synergies start to trickle out in the several hundred thousand dollars a month
and then it’ll ramp up. Is it possible? Sure, it’s possible. Is it probable? I think I would give it probably better
than a 50% shot. I think Knoll has done a nice job in rationalising their footprint through COVID. I think they
still need to annualise some of the cost savings that they’ve started to see. I’m sure Miller has taken some
actions already. I think if they do it correctly, it definitely is achievable, but, like everything, the devil is going
to be in the details as far as what plans were put together in the due diligence phase and how quickly they can
start executing them post-deal close.
[00:37:22]
Q: Why do you think the industry hasn’t improved efforts to increase D2C and retail ambitions?
NC: I think it’s largely because of the buying cycle on the products. I think this specifically holds true in the
commercial market and probably, to some extent, holds true in the residential market, although you could see
different things there, but when you think about setting a large commercial space, office space, you’re going to
do that once every 10 or 15 years. Typically, maybe a facilities manager, vice president of operations, whatever,
who’s tasked with leading that project, they might see one or two in their entire career, but it is not something
that is done on a day-to-day basis. Larger companies even, the Googles, the Microsofts, larger multinationals
who are continually building out different regions, may have teams that do this. Other companies, maybe they
have teams that do this, but when they’re setting certain spaces it’s usually at a predetermined interval of time
and you make large investments, obviously, you’ve got to get some utilisation out of those investments, so the
architects who help design the spaces, the designers that help design the spaces, historically have had a lot of
influence in that process. It’s kind of the same analogy of why don’t you go to your general practitioner to have
your hip replaced? Because he, or a general surgeon, who might do one a year, where an orthopaedic surgeon
that specialises in hips will do four or five a day.
There has been a large reliance on the architect and design community in that buying process, to help steer the
consumer to what they want. In large part, there are a lot of different product offerings out there. You can do a
lot of different things with spaces now and you don’t have to do everything uniformly throughout your space,
so you can have a group of private offices. You might need some collaborative workspaces with re-arrangeable
furniture. You might have an area where you need touchdown spaces for people. I think the breadth of the
product offering can be overwhelming to the consumer at times and the infrequency of the purchase leads
them to rely on the architect and design community heavily. I mentioned a little bit earlier, some of the
property management companies have gotten involved in that space and I think you see that. It’s probably
more of an industry-wide trend. When you think about who has the power in the buying decisions, I think
regionally it shifts back and forth between the architect and design firms, or the property management
companies, but they’ll have a large voice in the process as well. Again, it’s because that’s what this group does
all day long. Microsoft builds great software products. They don’t necessarily outfit large spaces on a daily
basis, so you’re going to outsource that to somebody who’s an expert in the field.
[00:41:49]
Q: How confident are you that Herman Miller’s CEO, Andi Owen, can successfully integrate the deal? Can you
discuss the two companies’ cultures?
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NC: Maybe I’ll start with your second question first. The two firms’ cultures. I think while the two firms’
cultures are very complementary, and I’ll go back to my statement on the design focus, I think one of the large
challenges in the integration is going to be to lead those two strong cultures and understand exactly what the
vision is for the company, going forward. Is it to somehow merge those two cultures, or is it to maintain the
brands separately and almost independently, under a common back-office leadership? I have no knowledge of
how they plan to do that, but I think that’s going to be the interesting thing to play out and really probably one
of the linchpins in the whole proposed merger is while the two cultures are design-centric, they’ve been
competitors for a very long time, and I think it’s fair to say probably fierce competitors for a long time.
Changing that mindset overnight, I don’t think is a trivial thing and it’s going to take strong leadership and a
clear, simple, executable plan for those sales forces to really integrate with each other. At the end of the day, I
think if it’s done right there’ll be an absolutely amazing company, probably. You’re taking two iconic furniture
companies, both American furniture companies, and you’re merging them. I think the potential is limitless,
but I think it is going to be a challenge probably initially to at least get the two sales organisations to work
together.
From an operational standpoint, I think the manufacturing folks probably can learn a lot from each other. I’ve
worked in different industries with folks that have come out of Herman Miller from a manufacturing
standpoint and they’re absolutely amazing operators, some of the best that I’ve seen. They’re great Lean
practitioners. I think Knoll, over the last 5-10 years has really been on a Lean journey and invested in its Lean
practitioners, so from an operations standpoint I think the cultures will probably mesh together initially a little
bit better than, I would say, the sales and marketing forces. I think operationally, there’s probably a lot each
company can learn from each other that will just make it more efficient and operationally excellent on the back
end, but I have not heard nor seen anything on exactly what the plan is, because I don’t think they’ve made it
public, to integrate the sales organisations. I really think that’s the key to the deal. From a leadership
standpoint, I think Andi is probably in a very unique position to oversee it. I know one might think coming out
of clothing retail, with Gap, it’s a little bit different walking into the furniture industry, but I think she
understand the brands and the value of the brands probably better than anyone. They saw the potential in this
merger, so I have every confidence that if anybody can pull it off, I think Andi can probably do it.
[00:46:39]
Q: What is Herman Miller and Knoll’s international exposure or opportunity? What implications does this
deal have for their international ambitions?
NC: If you look at both companies and what’s out there publicly, I think you’ll see both of them operate in the
20-30% of their top-line revenue from an international standpoint, which is to say they both primarily derive
their sales in the United States or North America, 70-80% of their sales. It’s going to be very interesting to see
how they approach the international marketplace. I am not as familiar with how Miller goes to market
internationally as I am with how Knoll goes to market internationally. I can tell you Knoll’s international focus
has primarily been in Europe historically. There are contract opportunities that have come up in the Asia-
Pacific region, the Middle East, South America. Knoll deals with those, I would say, in different manners and it
really depends on the size of the project how they would address those and meet those commitments. I think if
you look at, to an earlier question you had, the scale that Miller and Knoll will create in this opportunity, I
think it will obviously reduce the product costs to a point where competing internationally in the contract
market will become a very, very real possibility. I would look for the percent of sales top-line revenue from the
combined company to grow and I would think, if I was sitting in Andi’s position, my goal would be to have
really a 50/50 split vs an 80/20 or a 70/30 from a North America to international standpoint.
[00:49:32]
Q: Which regional markets do you think provide the largest growth opportunity for the combined company?
Would you say Asia?
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NC: I think initially, Europe probably is a huge growth market for the combined company, given Knoll’s
manufacturing footprint in Europe. I think you can always look to Asia just as a great area for growth. You
think of two of the world’s largest countries reside in Asia, India and China, so we’re obviously going to see
growth there. The interesting thing to me will be how does the combined organisation look at some of the
growth that’s going on in South America, as well as Africa, and how do they service that? Can they service that
effectively from North America, with shipping costs, or would that mean putting some sort of manufacturing
infrastructure on those continents as well? I wish I had the answer to that.
[00:50:50]
Q: What do you think is the most underappreciated aspect of this deal?
NC: I think probably the most underappreciated aspect, or maybe it is just to me, because I’ve spent the
majority of my time in the commercial or contract space, are the high-design brands in the residential space. I
think they’re really putting together a strong portfolio of brands there that do not have a lot of price sensitivity,
that are high-end, premium brands in the residential space that offer still a lot of margin. I think it’s
interesting, I know historically we all classify that as residential furniture, but it really does cross the gamut of
what I would call multi-use furniture, where you’re going to see it in high-end homes, you’re going to see it in
high-end hospitality spaces, you are going to see it in C-suites. It’s kind of universal from that standpoint and
there are a lot of brands inside this combined organisation that are iconic, that have stood the test of time and
that return very, very high margins, so I think that’s probably the most underappreciated element of the
combination, is what can they do with these, at times Knoll has called them lifestyle brands? You can think
about them as residential brands, but the Holly Hunts, the Edelman Leathers, KnollTextiles that all go into
these living spaces that return very high margins. If there’s a hidden gem there, that’s what I think it is.
[00:53:13]
Q: Could you give an overview of the combined company’s competitive landscape? Who would it directly
compete with? How might the two standalone companies’ competitive challenges change post-merger?
NC: I think from the commercial standpoint, the competitive landscape doesn’t change all that much, because
you still have two large contract players out there in Steelcase and Hon. The question to me would be how does
the new company deal with the disruptors in the industry? Which are, let’s take one product, for example,
height-adjustable desks. Knoll, Miller, Hon, Steelcase all make height-adjustable desks. A lot of technology in
these desks and they’ve got fairly high price points and can have decent margins associated with them, but
there have been competitors, or disruptors, that have come into the space, low-cost manufacturing countries
that’ll pop up a brand of a height-adjustable desk, ship them by the container load into the United States and
start selling at extremely attractive price points for people. When you view your office furniture or your
workspace as a commodity for your employees, this becomes a very, very attractive option for a buyer to go out
and buy, and I’m just going to make up numbers here, a height-adjustable desk at USD 500 vs USD 1,500 a
copy.
When the USD 500 one breaks, you can just throw it away and get a new one and, because the maths says you
can do that three times before you’re cost-neutral, going with a larger player. That element of the competitive
space and how a combined Miller and Knoll will deal with that disruption, I think is going to be the interesting
part of the industry, going forward, and the combined companies, going forward. The Knoll sales folks know
how to sell against Steelcase and Hon. The Miller sales folks know how to sell against Steelcase and Hon. You
put the two sales organisations together, they’re going to have obviously an advantage, I believe, on selling
against those two larger competitors. The real wildcard to me is those disruptors, small brands that pop up in
the space, that really try to undercut from a price standpoint. At the end of the day, you’ve got to sell your
quality and Knoll and Miller have a far superior product, but it’s that marketplace education that has to go on
and how you tackle that challenge, I think, is the question.
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[00:57:07]
Q: What are the barriers to entry in Herman Miller and Knoll’s respective categories? How might this change
post-merger?
NC: It’s probably a good follow-up with the disruptors. I think the barriers to entry really depend on the
customer profile. You think of a large corporation, a Bank of America, a Microsoft, a Goldman, the barriers to
entry there are huge and a small guy isn’t going to necessarily get in there, but the number of those contracts
that have come up, and continue to come up on an annual basis, is shrinking, and call it the elephant
contracts. What is popping up, or at least had been prior to COVID, are small business and the small business
contracts. That’s where the disruptor comes into play. From a small-business standpoint, if you’re just buying
five or 10 desks, height-adjustable desks, vs 1,500 or 2,000 of them at a pop, it’s easier to make the decision
and you’re probably more price-sensitive, to make the decision to go with an upstart company. Maybe a little
bit of, again, a long-winded answer, but I think the barrier to entry is different, based on the consumer profile
that you’re dealing with. Does that make sense?
[00:59:01]
NH: Yes, sure does. We’re just about out of time. Let me close by saying thank you, Nate, for your input and
thank you, clients, for joining Third Bridge Forum’s Interview today. Goodbye.
Transcription ends at 00:59:12 of the recorded material
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