Terrie's Take 424 -- Comsn on the brink, ebiz news from Japan

Mon Jun 11 00:32:42 JST 2007

* * * * * * * * *  T E R R I E 'S   T A K E  * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, June 10, 2007 Issue No. 424

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

On June 6, the Ministry of Health, Labor and Welfare (MHLW)
announced that it would direct local governments around the
country not to renew the operating licenses for 1,655
nursing care facilities owned by Comsn (pronounced
"comsoon"), a Goodwill Group company.

A suspension order of some sort on Comsn's business
operations wasn't totally unexpected, given that the
company inflated its MHLW reports on numbers of employees
to qualify for licences, as well as billing incorrect
amounts on work done, so as to receive higher health
insurance payments from the government.

But nevertheless, since the MHLW order shuts down over the
next four years almost 80% of Comsn's 2,081 branches, and
bans the licencing of any new ones, it is effectively
putting the company out of business. Considering that Comsn
has around 65,000 customers, many of whom are bedridden
elderly, and is currently the nation's largest privately
owned health provider, this punishment seems a bit harsh.
A fine and closure of the offending offices would seem to
have been more appropriate.

In any case, for the 3 business days following the MHLW
bombshell, the unfolding news has been a bit like a soap
opera. First, Goodwill announced that it would move the
caregiver business to a related company called NSS Corp.,
effectively skirting the MHLW cessation order because there
is no law against asset transfers between subsidiaries.
The media decried the move and the MHLW countered on Friday
by saying that it would seek a change in the health law
such that it would prevent any asset transfers to other
parts of the Goodwill group.

Goodwill's Chairman and CEO, Masahiro Origuchi, seeing that
there was no way out, then ceded defeat and amongst the
many apologies was a hint that he would try to sell the
company to someone outside the group.

Or, perhaps not...

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[...Article continues]

No one should think that Origuchi will give up so easily,
especially considering his history as a fighter and
entrepreneur. Add to this the fact that Goodwill has been
both "creative" and aggressive in its own business
structurings, and you can expect that Origuchi will try a
few more strategic moves before he cedes this JPY60bn
(US$500m) business entirely.

To get a sense of what the shell games may look like,
take Goodwill's acquisition last November of the Crystal
Company, at that time the world's 6th largest staffing
company. The initial purchase of Crystal was by a fund
called Corinthian Partners, which then sold its stake to
Goodwill's Human Resources Fund, and then finally on to
Goodwill itself. Involving a fund may not sound like
anything unusual, and indeed, a Goodwill press release on
the company's own website, dated December 28th, says that
Goodwill was "introduced" to Corinthian Partners, the fund
owning Crystal Co., and made a buy-out purchase decision
after being pitched by Corinthian.

That sounds OK, but you can quickly find out from other
press releases that in fact Corinthian is controlled by
Goodwill. So this begs the question, why did the press
release make a big deal about arm-length discussions
when in fact all the parties were controlled by Goodwill?
Certainly they didn't need an "introduction".

Maybe we have the wrong end of this stick, but doesn't this
arrangement of parking assets temporarily with one fund
then to another, before consuming them with the final
company sound remarkably similar to what Horie was doing
with Livedoor Marketing? This is especially so when you
discover that the Human Resources Fund is supposed to have
made about 30% profit on its few weeks of ownership -- at
the expense of the publicly listed parent.

Perhaps the bureaucrats have deeper suspicions about the
Goodwill business and its transactions. If so, we speculate
that they could be getting ready to go after the parent
company itself.

Even if there has been no wrong-doing, the determination
of the MHLW to deal a direct blow to Comsn and indirectly
to Goodwill is quite real. We can only assume that it
serves to be a reminder to all ambitious venture business
CEOs that there are certain parts of the economy that are
out of bounds for unbridled capitalists. Just like
education and law, the health industry is considered
sacrosanct. The bureaucrats see themselves as the righteous
providers of health, and resent private industry being
allowed in -- essentially a Koizumi administration
initiative foisted on the nation in the form of the Home
Nursing Care Law in April 2000.

Of course the bureaucrat's feelings of ownership over
healthcare presume that the government is willing and able
to supply sufficient care to quality them to be the only
provider. But as Origuchi and others have proven, they are
not. In particular, the care of aged people at home seems
to be an area that the government can't find adequate
people to staff. We suppose that washing old people in bed
is not much of a career choice -- and of course the number
of people needing such services is escalating dramatically
with the number of aged over 65 expanding by a million
people a year from this year onwards.

Comsn's solution to the labor shortage problem appears to
have been to find literally anyone off the street who wants
to make some extra money and put them through a short
training course about things like how to turn old people
over in bed. The low level of skills demanded created a
strong flow of recruits to Comsn back in the early days
(2000), thanks especially because there wasn't much other
work around at that time. However, more recently the flow
of candidates has reportedly been drying up, leading to an
even worse slippage of employee quality and motivation.

Media reports of numerous customer complaints include
verbal abuse, rough treatment, drunken caregivers (in at
least one case), tardiness, and no-shows. After numerous
city government warnings, including imminent closure of
Tokyo branches by the Tokyo Metropolitan government, it was
only a matter of time before the MHLW got sick of the
ongoing problems. What they needed was an excuse to slap
Comsn down, and once they found out about the fraudulent
registration of staff at an Aomori branch, when in fact
they were employed at another branch further to the south,
the Ministry decided enough was enough.

After the MHLW cessation order, Goodwill's stock price went
"limit-down" while the stocks of their major competitors
went "limit-up". We guess that investors are excited about
the idea of a forced sale of the Comsn business and
resulting opportunities for its competitors. However, the
euphoria could be premature. Unlike the Horie debacle,
which was more personal between Horie and his persecutors,
the Comsn action seems to be a shot fired across the bow of
the entire industry that they need to improve their ways.

Indeed, cheating the MHLW is an industry-wide phenomena and
even your friendly neighborhood doctor is probably adding
an extra few doses of medicine to your prescription so that
he/she will get better government payments. Unfortunately,
it's a situation that isn't going to change while the
government insists that it should be the only legitimate
provider of health insurance.

As a subset of the overall health sector, the elderly
nursing care program is the fastest growing and most under-
funded segment. Currently about 4m out of Japan's 25m
people aged 65 or older are receiving home nursing care.
This costs the government an estimated JPY7.4trn
(US$61.66bn) a year, double the cost in 2000. This is an
unsustainable situation and as a result, we wouldn't be
surprised to see more actions or at least warnings against
Comsn's competitors over the next few months.

So what will happen to Goodwill now? Since the company has
been on an acquisition spree over the last year or so, it
is no longer so dependent on Comsn for income and profits.
Of course, losing 30% of your sales in one blow would have
to hurt, but right now, most of the group's income comes
from its IT and blue collar outsourcing businesses.

The cynic in us suspects that Goodwill may have realized as
early as 2006, after new changes to the health law
restricting just who can claim for home-help services and
limiting the amounts claimable, that Comsn's business was
headed for a bad spell. Indeed, the last financial report
indicates that Comsn lost JPY2.7bn (US$22.5m) last year,
and losses will probably be at least as much again this
year.

Goodwill has done just what any company moving to the edge
of a precipice would do: take a still valuable stock, and
go out and buy some cash-flow positive businesses. As a
result it is now by far the largest player in the temp
staffing business in Japan and is even a major player
globally.

Which brings us back to the possibly shady Crystal Co.,
transaction done late last year. Goodwill apparently got a
great deal on buying Crystal, paying about 12 times pretax
profits. But it came cheap for a reason. With the purchase
was a warning from the authorities that a Crystal
subsidiary called Collaborate is being investigated by the
Osaka Labor Bureau for fraudulent invoicing...

Do we sense some deja vu coming on here...?

*** Our Feedback section this week is about the commercial
real estate bubble we wrote about in TT422. More at the
bottom of the newsletter.

...The information janitors/

***------------------------****-------------------------***

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-----------------------------------------------------------

+++ NEWS

- Ransom or a DDos attack?
- 13% receive infertility treatment
- Nintendo's DS still going strong
- Who's the richest?
- More love hotel funds

-> Ransom or a DDos attack?

The National Police Agency (NPA) says that a new form of
online extortion involving parties demanding ransoms or
threatening to launch denial of service (DDoS) attacks on
target servers has come to light. The NPA gave the example
of a publishing company that was flooded with DDoS traffic
for 3 days while the perpetrators demanded sums of between
JPY400,000 and JPY600,000 to "fix" the problem. The NPA
reckons that there are about 650,000 servers and PCs in
Japan infected with unauthorized software that can be
awoken to participate in DDos attacks. There were about
16,000 DDoS attacks reported in 2006, 340% more than in
2005. (Source: TT commentary from asahi.com, Jun 9, 2007)

http://www.asahi.com/english/Herald-asahi/TKY200706090084.html

-> 14% receive infertility treatment

Lack of desire to have kids is not the only reason for
Japan's low birth rate. Infertility is another major cause.
According to a survey by the Nikkei, almost 14% of women in
their 30's who gave birth in 2006 have had infertility
treatment. This figure has surged since the government
agreed to cover such treatment through health insurance.
Women in their 30's represent half of all women in the
nation giving birth. (Source: TT commentary, Jun 10, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070609D09JF833.htm

-> Nintendo's DS still going strong

Nintendo's DS Lite console and Wii hardware are still
selling like hotcakes, with the Lite selling 619,434 units
in May. This is about 13 times the number of Sony PS3's and
along with Wii and other models, Nintendo now controls
about 80% of the Japanese hardware market. The company has
sold 17m units of the DS in Japan! ***Ed: An amazing
recovery for Nintendo, a company that was predicted to be
an also-ran just 2 years ago.** (Source: TT commentary from
gamedaily.com, Jun 8, 2007)

http://www.biz.gamedaily.com/industry/feature/?id=16437

-> Who's the richest?

Forbes Asia has just rated the 40 richest Japanese, and
places Akira Mori, CEO of real estate developer Mori Trust,
at the top of the tree thanks to the recovery in real
estate values. 69-year old Mori is reputedly worth
US$5.5bn. Next is Softbank's Masayoshi Son with US$5.45bn,
then Nintendo's Hiroshi Yamauchi with US$4.8bn. At 4th
place was Pachinko maker Sankyo's Kunio Busujima with
US$4.3bn. At 5th was consumer finance company Takefuji's
Hiroko Takei at US$4bn. (Source: TT commentary from
bloomberg.com, Jun 10, 2007)

http://www.bloomberg.com/apps/news?pid=20601101&sid=a0eeg6geNo3Y

-> Another love hotel fund

Tokyo-based Global Finance Support (GFS) has launched its
11th and last fund targeting love hotels. GFS has already
raised JPY11.6bn since 2004, investing in 10 hotels and
paying out 8.4% in annual returns. GFS says its ten earlier
funds all sold out thanks to the high returns possible, due
to rooms being rented out 3-4 times a day. ***Ed: Japan
Inc. magazine covered the nation's very first love hotel
fund, MHS, and the economics driving the investments, back
in 2004. More at
http://www.japaninc.com/article.php?articleID=1367.**
(Source: TT commentary from reuters.com, Jun 7, 207)

http://uk.reuters.com/article/oddlyEnoughNews/idUKT7485920070607

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

***------------------------****-------------------------***

+++ CANDIDATE ROUND UP/VACANCIES

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-----------------------------------------------------------

+++ UPCOMING EVENTS/ANNOUNCEMENTS

=========== Entrepreneur Association of Tokyo =============

4th Year Anniversary Seminar - June 11

Speaker: Yoshito Hori, Chairman and CEO of Globis Group

Join us in celebrating our 4 year anniversary at the Globis
Head Office in Kojimachi with Yoshito Hori of the Globis
Group. Founded in 1992 the Globis Group has five lines of
business: Globis Management School (GMS), Globis
Organization Learning (GOL), Globis Management Institute
(GMI), Globis Management Bank (GMB), and Globis Capital
Partners (GCP) which manages 3 funds with commitments
exceeding JPY38bn (US$360m).

Date/Time: Monday, June 11, 7:00 pm
Location: Globis Head Office
Language: English

Website: www.ea-tokyo.com
Email: info at ea-tokyo.com
===========================================================

---------------- ICA Event - June 21 ----------------------

Speaker:Peter Butterfield
Vice President and General Counsel, KVH Co., Ltd.
Speaker:M.S. Rangaraj
Vice President and Chief Technology Officer, KVH Co., Ltd.

Topic: Off-shoring to India, Key Factors to Consider

Details: Complete event details at
http://www.icajapan.jp/(RSVP Required)
Date: Thursday, June 21, 2007
Time: 6:30 Doors open, Light buffet and Open Bar included
Cost: 3,000 yen (members), 5,500 yen (non-members)
Open to all-location is Ristorante Conca d'Oro
http://www.websanko.com/b_info/akgardencity/details.html

----------------------------------------------------------
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IT events announcements are priced at JPY50,000 per week.
For more information, contact sales at japaninc.com

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors at terrie.com.

-> TT422 -- Commercial Real Estate bubble. We opined that
Japanese commercial real estate is reaching bubble
proportions and that this won't bode well for many of the
new funds coming into Japan recently.

*** Our reader asks: I find your point of view very
interesting, because so many people are bullish about
Japanese real estate recently... I'm not sure if I
understand your conclusions:

1. Is the Japanese real estate market in a bubble right now?
2. Or are only grade A office buildings in a bubble right now?
3. Will real estate prices stabilize (or go down) for Grade
A buildings, while going up elsewhere?
4. Is it too late to buy in now or not?

*** We respond: Thanks very much for your response. The
article was only about commercial real estate, not
residential. And for commercial real estate, we think the
country is in a bubble. In terms of life cycle, we guess
that we're about 1/3 to 1/2 the way through, so this one
still has some distance to go. This means, in our opinion,
if you are in for a quick turn-around, then there is still
money to be made. However, most people buy and hold for
3-5 years, and for them it may already be too late.
Probably a better business would be to lend to those taking
the investment risk, and to impose strict repossession
conditions.

The reason we say this is that while Japan's fundamentals
are improving, the level of health is still relatively
superficial. We don't think most Japanese companies are as
strong as analysts make them out to be. And since they are
the tenants who will be moving into these buildings, you
have to look closely at their health. Everyone is nervous
about just how superficial the recovery is, from the
government on down. That's why there is so much political
pressure on the Bank of Japan to hold down interest rates.

Consumers in particular are not forgetting the lost decade
when their homes fell 60% or more in value, and are thus
still very conservative about spending. They are just as
likely to suddenly stop spending again if anything goes
wrong with the global economy, or if it even seems to go
wrong -- and of course this will have a chilling effect on
all those companies that sell products to those consumers.

Furthermore, high interest rates and REITs demanding
doublings of rent are not something that most companies
are ready for yet, either. My sense is that anything past
2% interest rates and a lot of companies will be in trouble
-- not to mention a lot of real estate speculators who are
highly leveraged...

Another thing we were trying to say is that the smart
money, Morgan Stanley, Goldman Sachs, and others, are
already looking for more complicated plays, where there is
a business to go with the real estate. While this is much
more complicated to pull off, this approach allows them to
operate the real estate at the true market value and also
provides some insulation in the form of operating profits
if the underlying real estate takes a dive for a while.

So will prices drop suddenly or stay flat? We think that
providing there are no sudden disasters, the rises will
start to tail off soon. Indeed they are already for Class
B and lower buildings. Some high-demand areas may still
hit the headlines, but for the bulk of properties there is
a natural pain point beyond which companies, even confident
and highly profitable ones, cannot go beyond. The Class A
building demand will stabilize at an upper range of
JPY50,000-JPY70,000, because there aren't that many
companies around who can afford more. Downside will
probably be limited, though, as we understand that future
supply will continue to be limited because developers
aren't confident enough to start piling on new projects,
either.

Lastly, we think it's important to remember that the
Japanese economy consists of a finite and actually
shrinking number of people and companies. The current
"grade-up" phenomenon is simply a redistribution of wealth
and use of surplus funds. Last year it was upgrades of
plant and R&D, this year it is head office location. But
sooner or later, employees are going to start pushing
companies to start sharing some of the spoils and this
will send companies back to smaller margins. It doesn't
take much of a wage hike in a 10,000-person company to
suck up JPY10bn of profit... In fact, an JPY83,000 rise
per month per employee would kill the entire amount.

OK, it is true that if the profits do get redistributed
then this could have a palliative effect on the economy
by increasing spending. BUT, if the timing of local
and global economic events don't serendipitously coincide,
then you'll have companies faced with employee
dissatisfaction and wage demands and at the same time cut
backs in consumer spending due to fear. In this scenario,
the tenants who have graded up could well be grading down
again pretty quickly.

***********************************************************
END

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+++ ABOUT US

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