Terrie's Take 549 -- M&A Comes Roaring Back, ebiz news from Japan

Mon Jan 18 00:20:41 JST 2010

* * * * * * * * * 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, January 17, 2009 Issue No. 549

+++ INDEX

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

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+++ WHAT'S NEW

According to M&A Consulting firm Recof Corporation, the
pace of M&A in Japan or involving Japanese companies
abroad fell to its lowest level in 6 years in 2009. Recof
says that there were just 1,954 deals last year, down
almost 20% over 2008, and that the value of those deals was
JPY7trn, down 43% from the year before. Common wisdom says
that the drop was induced by CEOs waiting in 2009 to see
how things would shake out after the Lehman Shock, and
perhaps also because financing became more difficult to
come by.

But the pause seems to be over, and Recof is saying that
while the overall year was down, in fact in December 2009
there was an uptick in the number of deals -- which may
indicate that we may be in for a strong year of M&A
activity. This last week certainly seems to presage that.

First out the gate in 2010 in terms of international M&A
and/or major investments was a Dentsu announcement that it
would buy 40% of leading Chinese Ad firm Suntrend
Advertising. Dentsu will apparently pay out about JPY5bn to
buy a stake from existing shareholders. Suntrend is a big
operator, with about 30,000 employees in 500 cities --
considerably more than Dentsu's 15,000 or so. It does a
broad range of marketing activities and in particular
in-store promotions. This acquisition sounds like a great
fit for Dentsu, since Suntrend is working with about 30
multinational brands, such as Nike and PepsiCo.

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[...Article continues]

Then on Friday, cosmetics firm Shiseido dropped the
bombshell that it would buy out major US cosmetics firm
Bare Escentuals, for US$1.7bn. This is the largest
acquisition in Shiseido's history, and will pole vault the
firm from an also-ran in the US market to the world's
fourth-largest cosmetics firm by sales, right in behind
L'Oreal, P&G, and Unilever.

This is an incredibly gutsy move for Shiseido, and comes
hard on the heels of the firm's announcement late last year
that it would set up a Swiss company to compete head on
with L-Oreal for the swiss market. Shiseido has said
earlier that it wants its foreign sales to surpass 50% by
2017 and with this deal it appears to be on track to do so.

Shiseido is mirroring a trend by other well-run Japanese
retailers expressing global leadership as a fitting
ambition for their firms. Some years ago, supermarket chain
operator Aeon stated it wanted to take on WalMart -- a goal
that took on renewed importance after Walmart bought into
Seiyu. Another company, Fast Retailing (Uniqlo) certainly
has GAP in its sights. Then of course there is Seven & i
(previously Ito Yokado), which already owns more than
35,000 stores in 100 countries and is growing at breakneck
speed in China.

As seems to be de rigueur for recent Japanese takeovers,
Shiseido paid a significant premium of 43% over the closing
price for Bare Escentuals stock. Shiseido said it will
finance the deal through its own war chest and a
bridge-loan from its banks.

It's fairly clear now that Shiseido, Dentsu, Canon, Suntory, and
the various insurance and pharmaceuticals firms who did major
M&As in 2008 and 2009 are all coming to the same conclusion
about their home market: Japan is headed downwards. Rather
rather than try to fight over the scraps, they have decided
to grow internationally. What's interesting, though, is
that the favored strategy of steady organic growth of
yesteryear is being thrown to the winds in favor of major
value-based acquisitions of best-of-breed foreign companies
with good cash flow.

All these companies appear to have arrived at the
conclusion that going big is the only way to execute an M&A
strategy properly. Why? Most likely for the following
reasons: i) the international market is somewhat still in a
state of shock after the events of 2008, and if there is
going to be a recovery, then the window of opportunity is
now. ii) If the economy does enter another down leg, M&A
funds will be harder to come by -- so again, timing is
important. iii) There is poor availability of
internationalized management talent in Japan, and so the
acquisitions need to be healthy, going concerns, with
dependable, stand-alone local management.

Unfortunately, there is a downside to buying a large going
concern, which both Dentsu and Shiseido will need to take
care to avoid -- the inability of the Japanese buyers to
oversight their international holdings properly. This is a
problem that seems to afflict many Japanese firms and one
needs look no further than the already well-established
foreign networks of the nation's IT/electronics firms to see
the problems. So newcomers are likely to feel the lack of
suitable manpower even more keenly. If you are an
enterprising headhunter, this should be good news...

If we need evidence that failure to provide oversight is a
problem, then look at successful local retailer Aeon, which
decided to jettison its major foreign acquisition, Talbots,
just last month. From what we can see, Aeon left the
Talbots senior people to their own devices, and allowed
them to make an ill-timed acquisition of another firm.
This deal wound up losing Talbots about JPY52bn in 2008 and
in turn hurt Aeon's consolidated earnings for that period
as well.

Possibly the one sector which is benefiting significantly
from the emerging M&A boom, but which isn't taking
significant risks, is that of lawyers. According to a
recent press release from mergermarket.com, 10 out of the
15 top law frims for Japanese mid-market (US$10m-US$250m)
M&A sector in Japan in calendar year 2009 were foreign
firms. Between them they pulled in 59 deals out of a listed
total of 169, for an overall deal value of US$647bn. Top of
the heap was Morrison & Foerster (MOFO). We don't have the
numbers for bigger deals, but if it was an international deal,
you can be sure that one of the leading foreign law firms
was involved.

>From scuttlebutt in the street, we believe that the likelihood
of a global M&A uptrend by Japanese firms is now quite
strong. This represents a significant business
opportunity for foreign firms other than just lawyers --
providing those foreign firms are able to pick the winners
that they should invest their time in. We'd be betting on
firms such as Canon, Asahi, Suntory, and of course Fast
Retailing. The good news is that whereas many of these
targets may have been closed to approaches by foreign
businesspeople in previous years, now the size and risks at
stake mean that they have to get serious. They appear to
be more receptive than ever to promises of international
competence, global networks, and of course bilingual,
bicultural help.

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+++ NEWS

- New law to allow foreign company lawsuits
- Tesla sports car auction
- Prudential to stop selling life insurance
- Kyocera founder to head up restructured Japan Airlines
- Citigroup Japan CEO going home

-> New law to allow foreign company lawsuits

A new law being considered by the Legislative Council, a
government consulting think tank, will allow consumers to
pursue lawsuits against foreign companies if the company
was registered in some shape or form in Japan when the
alleged wrongdoing occurred. The new law would also allow
lawsuits for labor and other business disputes as well.
***Ed: Not sure how this law will really improve the
current situation, in that it is incredibly easy for a
foreign firm to do business in Japan without being
registered here at all. Seems to us that this law may
well encourage more offshore selling through proxies.
We'll keep readers informed on this one.** (Source: TT
commentary from nikkei.co.jp, Jan 16, 2010)

http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20100115D15JFA16.htm

-> Tesla sports car auction

In what has to be a hugely popular PR exercise, some
inspired marketing manager at used car dealer Gulliver came
up with the idea of auctioning off a Tesla Motors electric
sports car in February. The auction will take place on
Yahoo Japan and bids will start at JPY1m. The auction will
run for a week. ***Ed: This is just a stunning idea, and
one that is likely to capture consumers' imaginations for
the whole of that week. Wonder how Gulliver managed to
actually secure a car? We thought they were sold out at
least until the end of the year.** (Source: TT commentary
from nikkei.co.jp, Jan 16, 2010)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20100115D15JFA05.htm

-> Prudential to stop selling life insurance

The UK's largest insurance company, Prudential, has said
that it will wind up its PCA Life Co., insurance sales in
Japan from February, due to falling sales in annuities
coupled with increased competition from domestic Japanese
firms. Prudential's move mirrors that of Hartford last
year, when Hartford admitted that its once profitable
annuities business was going to lose it big money in coming
years. PCA Life will continue servicing existing customers
and its asset management business. (Source: TT commentary
from bloomberg.com, Jan 15, 2010)

http://www.bloomberg.com/apps/news?pid=20601101&sid=aVR3Xg4s42I8

-> Kyocera founder to head up restructured Japan Airlines

Whether it's a good idea or not we're not sure, but
nonetheless the government has decided in its wisdom to
appoint the founder of Kyocera and now iconic businessman,
Kazuo Inamori, as the new CEO of Japan Airlines. Inamori is
a colorful character who amongst other things is an
ordained Buddhist priest. Inamori admits that he knows
nothing about airlines, and plans to work just 3-4 days a
week... so clearly he's going to have to be doing a lot of
delegating and gut-led decision-making -- because he'll
have no time to do much else. Should be interesting.
(Source: TT commentary from reuters.com, Jan 13, 2010)

http://www.reuters.com/article/idUSTOE60C09120100113

-> Citigroup Japan CEO going home

Doug Peterson has become a household name in Japan over the
6 years he has run Citigroup Japan. He has overseen both a
broad expansion of the business with the Nikko acquisition,
then the unhappy unloading of the same assets after the
parent got into financial trouble in the US. We'll be sad
to see him leave, and wish him the best of luck. According
to media sources, he will be replaced by 43-year old Darren
Buckley, currently president of Citibank Japan Ltd.
Apparently Peterson will work with the New York head office
team in charge of repaying Citigroup's bailout money to the
US government. (Source: TT commentary from
businessweek.com, Jan 11, 2010)

http://www.businessweek.com/ap/financialnews/D9D5FUNG0.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

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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 comments or feedback this week.

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+++ ABOUT US

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