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What It Means For Our Country When Gap Sells The Rights To Its Brand In China

In the mergers and acquisitions business, there are questions that buyers ask about companies that go in and out of fashion. Until a few years ago, the most fashionable question was: Do you own your brand and other intellectual property in China?

You see, Chinese law is not like American law. If you own a well-known, worldwide brand but someone else registers ownership of the brand name in China, the Chinese rights to the name belong to them and not to you. You have to buy it from the brand “squatter.”

Buyers of brands would be deathly afraid of that. Knowing that China was on its way to being the world’s largest market, no buyer wanted to have to pay an extortionist to get rights they thought they were buying in an acquisition.

Registering brands you had nothing to do with became a big business in China. Extortionists would see which brands were gaining traction on the big online marketplaces, TMall and TaoBao, register the names, and wait for the call from the rightful owner of the brand.

If we ever had a client we were selling and our client didn’t own the Chinese rights to the brand, no one would touch it. The idea that a buyer would buy a brand, not have the Chinese rights to it and worse, have someone else in China operate it with a different branding message, was poison.

No more. The attention focused on China as an opportunity for brands being acquired is far diminished from what it was.

Today we hear about Gap
GPS
having sold the rights to its entire China business, at retail and online, to a local group for a mere $50 million. While it’s true that Gap isn’t what it was, it’s still a company with an almost $10 billion enterprise value. The idea that a consumer branded business of that scale would not have the rights to the Chinese business with its brand name would have been impossible only a few years ago.

And yet, here we are. Investors don’t seem to care very much. The market hasn’t given a strong reaction to the news, so far today the stock is up by 21 cents. A few years ago it would have been a huge story and investors would have wondered what Gap management was thinking.

There’s lots to say about China and how it’s evolved economically and politically. We’re not going to say it.

But here’s the bottom line: If investors don’t care that a brand can have a different message and product line in China than in the rest of the world, then China has lost a lot of importance in the world economy. Whatever China thinks it’s accomplishing politically, it means that China is more of an island economically and what happens there is less impactful.

In my lifetime, there were many years where I was told the Europeans will pass us by, the Soviets will bury us, the Japanese will own us and the Chinese will grow beyond us. So far, they’re all wrong.

Today is election day and whatever your position, it’s easy to agree that our politics is a mess. But however bad it seems, the market reaction, or non-reaction, to the Gap news tells us that this is still the center of everything. When I talk to entrepreneurs, so many of whom come from other countries to be founders here, it’s clear that this is where opportunity and creativity come to develop.

What will happen to Gap is not clear, it’s been through a lot and whether it can return to past glory is uncertain. But whatever happens to it, there are new brands and new thinking that are coming into the market and the place where they are focused is right here.

Our politics looks hopeless but our people and our culture of creativity isn’t. There’s a lot to be worried about in America but the market’s indifference to Gap’s lopping off of its opportunity in China says that right here is still the hope of the world.