Magic Holdings faces takeover bid from France's L'Oreal Group

Magic isn't the only Chinese brand to draw L'Oreal's attention. The global cosmetics giant acquired Chinese skincare brand Mininurse in 2003 and completed its second China purchase, that of Yue-Sai, in 2004.

Analysts said these brands build their success on offering local alternatives to big-name international brands.

Mininurse is part of L'Oreal's consumer products division. "We have faced some challenges but we have not given up. On top of the work on the brand, it is important to note that we have developed the original factory in Yichang as L'Oreal Asia's production center for color cosmetics," said Perakis-Valat.

Yue-Sai achieved strong growth in 2012, much faster than the segment average, and this rapid growth is continuing in 2013.

Its positioning around traditional Chinese medicine solutions, powered by advanced extraction technologies, is unique and resonates extremely well in today's China, said Perakis-Valat.

"Domestic brands are purchased mainly for three reasons: to acquire a brand name, to take away brand-loyal customers or to eliminate a competitor," said Qi Xiaozhai, director of the Shanghai Commercial Economic Research Center.

International brands often expand their presence in the local market via acquisition, mainly for the first two reasons, said Qi.

But Qi said that Chinese brand owners should be aware of the negative aspects in the sale of their brands.

A recent example was TJoy, which was purchased by French cosmetics and fragrance group Coty Inc for 2.4 billion yuan ($392 million) in 2011. The revenue of TJoy tumbled by half in 2012, china.com.cn reported.

A big global company can provide strong financial support in rebuilding a local brand, and that should pay off within a few years. But it is more important to buy the right brands, said Cavender.

Chinese business owners traditionally attach great importance to physical assets such as equipment, but they pay little attention to intangible assets such as brands. But for an enterprise, a brand is actually the cornerstone of the business, said Qi.