Terrie's Take 436 -- Changing attitudes in M&A, ebiz news from Japan

Mon Sep 10 00:10:35 JST 2007

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

General Edition Sunday, September 9, 2007 Issue No. 436

+++ INDEX

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

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+++ WHAT'S NEW

The market for mergers and acquisitions (M&A) in Japan is
moving apace, with the announcement by the Nikkei in late
July that Nomura Holdings had already advised on 97 of the
nation's almost 400 deals for the first half of the year.
Although by value the deals was up by only 3% to
JPY9.43trn (US$81.3bn), analysts say that the volume of
smaller and mid-size deals is expected to increase
significantly over the coming months.

And don't forget that these numbers only include deals valued
over JPY1bn (US$8.6m). There is significantly more volume at
the under-the-radar end of the market.

M&As of Japanese companies by foreign ones are also on the
rise. In July alone, there were 27 M&As of Japanese firms
by foreigners, up 93% over the same period a year earlier.
Notable transactions included two investment funds: DKR
Oasis Management bought a large stake in real estate firm
Banners, while D.B. Zwirn increased its stake in
condominium developer Dynacity.

But will the rise in M&A numbers continue? While the
subprime mess in the USA appears to be drying up the type
of leveraged financing needed for M&As overseas, it is our view
that the trend to buy companies here, and especially buying on
credit (LBOs) will not only continue but in fact increase.

[Continued below...]

------------ Relaxing in the Yaeyama Islands --------------

"As I look into the clear blue sky,
across the crystal blue waters of Okinawa
I had not known anywhere could be so peaceful and pure."

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surrounded by the beautiful coral reefs, mangrove jungles,
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...And don't forget the awamori!

Hirata Tourism Inc.
http://www.hirata-group.co.jp/english/
Tel: 09-8082-6711 Fax: 09-8088-6945

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

[...Article continues]

The three main reasons why Japan is becoming much
more supportive of M&As are: pent-up demand,
demographics, and economics.

Let's take a closer look.

1. Pent-up demand. As readers will know, we have been
forecasting increased demand for M&A for some time now,
based on the excellent financial results of first-tier
exporting companies and their downlines. These firms have
learned some painful lessons about retaining earnings
instead of splurging them on real estate or just giving it all
back to the employees.

But keeping cash in the bank is dangerous from a greenmail
point of view, and so most firms are converting their profits
into assets of some other kind. In 2005/2006 the asset class
was factories, infrastructure, and R&D, and now in 2007 it
is all of those plus M&A.

Such is the corporate interest in M&A as a means to grow
and to put cash to work, some companies have set themselves
some very ambitious targets. The company behind the Uniqlo
brand, Fast Retailing, has apparently set internal targets
to spend its way to JPY1trn (US$8.62bn) of sales by 2010,
preparing a war chest of up to JPY400bn (US$3.45bn) for
M&As. Fast Retailing found its way into the headlines back
in August after unsuccessfully bidding for Barneys of New
York. More recently, last week in fact, they did
successfully take over Cabin Inc., another Japanese apparel
firm for the sum of JPY13.03bn (US$112.3m).

Not only buyers, but the advisors helping them are also
ramping up their presence in the market. Nomura and Mizuho
are doubling their advisory teams over the next 1-3 years,
and Nomura has said that in the April-June quarter alone
its M&A fee income rose 250% to JPY18bn. Nikko Cordial says
that it will be at 210 staff by the end of the year, up 40%
since 2005.

2. Demographics. Interest in M&A is not just coming from
the buy-side though, the sell-side is also starting to gel.
Japan has traditionally been a nation that has considered
the sale of one's firm as an act of betrayal -- with
owners selfishly taking the money and leaving a vulnerable
"family" of loyal staff behind to be preyed on by some
unscrupulous buyer. While this attitude is still
widespread, the fact is that many of the nation's post-war
companies are now headed by CEOs in their 60's or 70's.
And with none of their kids interested in the business,
succession planning is becoming a major issue.

Such an issue in fact, that banks and securities firms
around the nation are going into overdrive to influence
this segment of company owners that they should in fact
sell FOR THE SAKE of their employees. The owners are being
told that if they sell while they and their companies are
still healthy, they're much more likely to be desirable to
a major player with the depth of finances, staff, and
commitment to take in the acquired entity and nurture/look
after it properly.

Note that foreign firms don't usually fit this image of
nurturing and desirability...! :-)

In a good example of how critical the succession issue is
becoming, Shikoku's Iyo Bank mid last year started holding
seminars for local business owners. Shikoku is not exactly
downtown Tokyo, but the seminars have been a big success
and the bank has received proposals from 23 potential
sellers and 288 prospective buyers in the last 4 months
alone. Not just enquiries, the bank has also already
managed 10 transactions, 7 from last year and another 3 so
far this year. As a bank official noted in a Nikkei
interview, "Demand is growing as customers' resistance
wanes."

Yep, just gotta breakdown those cultural values... and
hundreds of eager advisors is the right way to do it.

3. Economics. The financing of M&A deals has traditionally
been viewed as a matter of how to cover one's risks while
repaying the acquisition costs. Thus, if there wasn't the
earnings to cover a 3-5 year amortization of the purchase,
then there wasn't a buy out.

However, now that raising capital has become a lot easier
and the cost of that capital in Japan at least is rather
cheap, there appears to be a realization among financiers
and acquirers that it is OK to pay much higher prices --
so long as there is sufficient free cash flow after
servicing acquisition costs and interest. This is quite a
big sea change in attitude for Japanese acquirers and
financiers.

The thinking behind making money out of cash flow rather
than increased asset value is simple. If the cost of
financing a buy out is 5% per annum, for example, and the
business yields 15% in pre-tax profits, then the 10% net
return is a valid final product of the deal -- assuming of
course that you can eventually sell the asset on later for
the same price as you bought it for.

Certainly 10% annual income is not shabby, being at least
double what you would earn holding real estate or buying
US treasuries. This type of "cash flow is as good as
capital gains" thinking was highlighted recently with two
major deals in the news: the massive but still-in-progress
JPY71bn (US$612m) buy-out of  the Yayoi accounting software
business from Livedoor by Korean Private Equity fund MBK
Partners, and the JPY37bn (US$318m) buy-out of Tiffany
Japan's Ginza store by Goldman Sachs. Both of these deals
were severely overpriced by regular market values, but make
a lot of sense from an ongoing cashflow point of view.

Another example of change in the M&A space is in how the
banks themselves are changing their attitudes to valuing
alternative forms of assets, such as cash flow and
Intellectual Property (IP).

In the past, if you wanted to buy another company you had
to have tangible assets such as real estate, securities,
or equivalent cash deposits. However, a deal done just last
week on the behalf of listed online realtor IDU, saw the
Development Bank of Japan, Resona Bank, and Shizuoka Bank
among three others, give IDU a JPY3bn syndicated loan based
on collateral made up purely of the internet firm's own IP,
including its Web site, site name, copyrights, and other
intangibles.

What these changes in M&A and financing attitudes mean for
foreign firms is that not only are there more M&A
opportunities to be had these days, despite the setbacks
that some such as Steel Partners have experienced, but also
that the means to finance these deals are also to be found
here. While organic growth is always a desirable form of
improving one's business, in Japan for the next couple of
years at least, the improving availability of leveraged
credit means that M&A should definitely be on the menu of
options for foreign CEOs.

...The information janitors/

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

+++ NEWS

- Funds say no bubble
- Waking before 05:00am is unhealthy
- Concrete cracks be-gone
- Online gaming expected to slow
- Tokyo office vacancies down again

-> Funds say no bubble

Earlier this week, the Chairman of Daiwa House, Japan's
second largest house builder, said that the housing market
was in a bubble that he was expecting to burst. Reuters
did a follow-up series of interviews with foreign fund
managers and found that most of the funds disagree and
think the market still has a long way to go. The funds
point out that the vacancy rate for office space is now
2.67%, the lowest since 1992, and that returns from office
rentals are ahead of government bond rates, a situation
that exists in few other countries. ***Ed: Well, readers
know what we think. The Daiwa guy is right to be worried.
A concentration of demand in the inner suburbs of Tokyo
does not a recovery make. And with real wages actually
dropping, things in the domestic housing space in
particular are not getting any better. Maybe the office
rental business will stay up for another year or two,
providing exports do as well. But if they don't, we
predict that market sentiment will fall off quickly and
demand for sparkling new office high rises will also
plummet.** (Source: TT commentary from reuters.co.uk, Sep
6, 2007)

http://tinyurl.com/ypqs9l

-> Waking before 05:00am is unhealthy

A study by the Kyoto Prefectural University of Medicine has
found that people rising before 05:00am have 170% higher
blood pressure than those waking later. As you know, high
blood pressure can lead to heart attacks and strokes. The
study, which was conducted on 3,017 adults, also found that
early morning exercise contributed to increased blood
pressure as well. (Source: TT commentary from
bloomberg.com, Sep 6, 2007)

http://www.bloomberg.com/apps/news?pid=20601101&sid=aB2_ACYeW6GA&refer=japan

-> Concrete cracks be-gone

Lion Corporation has developed a new concrete surface
treatment which prevents cracks forming in high-strength
concrete when it is drying. Lion uses a solution of
silicon, derived from its Ban antiperspirant, mixed with
high-purity palm oil normally used for laundry detergents.
The treatment forms a layer over the drying concrete,
cutting water evaporation to about half and thus retarding
the formation of cracks. Lion reckons the market for
surface treatments for high-strength concrete buildings is
about JPY300m a year. (Source: TT commentary from
nikkei.co.jp, Sep 6, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070906D05JSN04.htm

-> Online gaming expected to slow

Three of the 4 major Japanese online game operators have
given guidance that increasing development costs are
expected to slow down their businesses. GungHo and GameOn
are saying that while existing business is driven by titles
licenced from elsewhere, the market demands new titles and
the companies are having to develop locally. Of the
remaining two firms, CyberStep and Gamepot, only Gamepot is
forecasting a strong increase in profits, up 71% to
JPY800m, thanks to its popular golf game. ***Ed: The gaming
industry is probably the most advanced in terms of
offshoring and outsourcing its development to China and
Korea. We know of multi-100-person software factories in
China that produce exclusively for the Japanese games
market.** (Source: TT commentary from nikkei.co.jp, Sep 6,
2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070906D06JFN04.htm

-> Tokyo office vacancies down again

The availability of office space in Tokyo continues to
shrink as companies expand their operations in the current
buoyant economy. Real estate brokage Miki Shoji has said
that the office vacancy rate in central Tokyo was just
2.67% in August, less than 1/3 of the office space vacant
during the glut back in 2003. (Source: TT commentary from
nikkei.co.jp, Sep 6, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070906D06JFN01.htm

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.

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+++ CANDIDATE ROUND UP/VACANCIES

=> LINC Japan Ltd., an affiliate of the LINC Media group,
is actively marketing the following positions for market
entry customers setting up in Japan, as well as other
employers of bilinguals.

** HIGHLIGHTED POSITION

Kansai Account Manager (with promotion prospects)

A major global dental instrument manufacturing company is
seeking a Regional Account Manager (Sales) based in
the Kansai region. They want someone who can develop and
implement strategies to increase sales through and manage
an extremely important distributor. This role comes with
excellent promotion prospects over the next 3-5 years.
The position also involves frequent interaction with the
primary customer base of dental universities, hygienist
schools, and dental clinics and requires regular in-country
travel.

The successful candidate will have relevant sales
experience, preferably in the dental or medical field.
Looking for a self-starter who can work with limited
supervision. Either a Japanese national with some English
conversational ability or a non-Japanese with fluent
Japanese and a work permit.

The remuneration will be JPY6.5m-7.5m.

Candidates can contact keiko.watanabe at lincjapan.net for
more information.

POSITIONS VACANT

* On-site Project Coordinator, bilingual -- JPY6-7m
* Enterprise software salesperson, bilingual -- JPY10-12m
* Oracle, open source SQL DBA, bilingual -- JPY6-10m
* Applications support engineer, SQL experience -- JPY6-8m
* Sales development manager, bilingual -- JPY10-12m
* Inside sales representative, bilingual -- JPY7-8m
* Datacenter operator, bilingual - JPY7m
* Jr. System Administrator, bilingual -- JPY6-8m
* IT software solution sales, bilingual -- JPY6-7m
* IT Administrative Officer, bilingual -- JPY6-7m

CANDIDATES AVAILABLE

* Trilingual (E/J/ Mandarin) Japanese female with strong
marketing and sales experience in the media and
publications industry. Excellent background in planning,
research and management of new business and projects, with
strong connections to advertisers and marketers in various
industries. Available Sep-Oct, target salary of JPY10M plus
commission.

* Japanese national, male, in mid 30's, raised in US. Has
over 6 years experience as manager in IT industry.
Especially strong in planning, analysis, consulting, and
business development. Available Sep-Oct, target salary of
JPY11M plus commission.

Interested Japanese or foreign candidates may e-mail
resumes to: keiko.watanabe at lincjapan.net
-----------------------------------------------------------

+++ UPCOMING EVENTS/ANNOUNCEMENTS

----------------- YMCA Charity Ball -----------------------

YMCA Foreign Community Support Committee (FCSC) Charity
Ball on September 28th at Hilton Shinjuku. Donation of
25,000yen person. Table of 10 = 10% discount.

Champagne, wine, dinner, live band and dancing, raffle
draw, and auction featuring authentic signed items:
Guitars by Eric Clapton and Keith Richards, David Beckham's
jersey, Michael Schumacher's F1 Glove, baseball bat by
Ichiro, photo Johnny Depp, Brad Pitt, Valentino Rossi, and
much more!

Bid on these rare items from Aug 23rd at
http://www1.ymcajapan.org/content/01_home
All proceeds to benefit YMCA's Challenged Children Project.
Please contact: 03-5367-6640 fcsc at ymcajapan.org

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

------------------- ICA Event-Sept 20 -------------------

SPECIAL JOINT EVENT with the AUSTRALIAN NEW ZEALAND CHAMBER

Speaker: Tim Williams, Founder & Director of Value Commerce
Topic: Japan Success Stories - Value Commerce

Details: Complete event details at http://www.icajapan.jp/
(RSVP Required)
Date: Thursday, September 20, 2007
Time: 6:30 Doors open
(Light buffet, beer, wine, soft drinks included)
Cost: 3,500 yen (members), 5,500 yen (non-members)

Open to all-location is Australian Embassy B2
http://www.australia.or.jp/english/seifu/embassy/map.html

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

--------------- Niseko Cricket Tournament -----------------

RidgeRunner Niseko International Cricket Competition
15-17 September 2007

This is your invitation to three days of fun at an
international cricket tournament in Niseko being held to
the benefit of the Tyler Foundation for Childhood Cancer.

Cricketing legend Dennis Lillee will be attending the event
which is being co-hosted by the Higashiyama Prince Hotel
and includes two days of cricket, a golf match and charity
dinner dance and auction. For more information, and the
chance to win a dinner with Dennis,

Please visit www.ridgerunner.jp/cricket
or contact Simon Jackson
(simon at rad-development.com, 011-876-3704)
-----------------------------------------------------------

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Entrepreneur's Handbook Seminar 6th of October, 2007

If you have been considering setting up your own company,
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founder of over 15 start-up companies in Japan, will be
giving an English-language seminar and Q&A on starting up a
company in Japan. This is an ideal opportunity to find out
what is involved, and to ask specific Japan-related
questions not normally answered in business books. All
materials are in English and are Japan-focused.

For more details: http://japaninc.com/terrie_lloyd/
-----------------------------------------------------------

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IT events announcements are priced at JPY50,000 per week.
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-----------------------------------------------------------

+++ 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.

-> No corrections this week.

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

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+++ ABOUT US

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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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