Terrie's Take 700 -- Why Kameda May Regret its US Cracker Deal, ebiz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Sun Mar 3 22:34:07 JST 2013

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, Mar 03, 2013, Issue No. 700


- What's New -- Why Kameda May Regret its US Cracker Deal
- News -- Is Caroline Kennedy next US ambassador?
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Climbing in Ehime, Castles in Kumamoto
- News Credits

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On Friday, the Nikkei carried a short story about major Niigata-based rice
cracker maker, Kameda Seika, buying a US-based organic crackers company,
called Mary's Gone Crackers (MGC). Apart from the name of the target firm,
at first glance there was nothing particularly notable about the deal.
Kameda are spending JPY2.4bn and will buy out 77.8% of MGC.  Kameda told
the Nikkei it was buying MGC because of a familiar reason -- the market in
Japan is mature and flat and the firm is looking for growth strategies
abroad. We found it interesting, though, that Kameda decided to go to the
USA for M&A shopping rather than SE Asia, and also that they picked an
organic cracker maker versus a more conventional one.

But following a hunch that maybe there was more to this deal than just a
boring announcement, we found that Kameda may have bought itself a bunch of
trouble that from the sidelines is both interesting and entertaining, and
it highlights some of the traps for new players in the international M&A

Starting with the target, MGC was formed in 2004 by one Mary Waldner of
Gridley, California. Ms. Waldner had apparently suffered from celiac
disesae (intolerance to gluten) since she was 3 years old, and didn't find
out until she was 43. Following her discovery of why she was always sick,
she started baking gluten free crackers to eat at home and eat out when
with friends. The friends then tried her crackers, loved them, and next
thing you know she was cooking for neighborhood stores and thinking about
turning it into a business. It's really the American dream, and since she
and her husband set up the company in 2004, the company has averaged 40%
growth every year, except last year (2012) when they grew 70%.

It appears that not only do a lot of people in the USA suffer from celiac
disease, but also that there isn't a nationwide provider of non-gluten,
organic crackers and similar snacks. This is the market gap that MGC is
trying to fill and looks like it will do handily. No word in public as to
the size of MGC's revenues and profits, but given that they are being
bought out for JPY2.9bn, and employ 160 people, we can guess that MGC is
probably doing US$15MM-US$20MM in sales, and making 10%-15% EBIT.

[Continued below...]

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[...Article continues]

Given that Kameda is in the rice cracker business, also gluten-free (MGC's
products are made from brown rice, flax, quinoa, and sesame seeds, among
other things), and that MGC is enjoying ballistic growth, it's obvious why
Kameda made an offer. Although we don't know Mary's crackers as a product,
the growth of the company shows that they have got their marketing message
right -- something that Kameda, with it's own US subsidiary for some years
and losses for that subsidiary last year of US$1.2MM, is not able to
recreate -- means that this should be a very good match.

The deal was announced on Friday, March 1st, meaning that the initial
approach probably happened about a year ago, and negotiations would have
run around 9 months. There were probably some long, sleepless nights spent
by the Kameda M&A team, because they appear to be new at the M&A game, and
having so little success with their own US subsidiary, the idea of taking
over a US firm with a very different culture and business structure must
have caused lots of internal debate. But now they are due a bit of
relaxation and a post-deal honeymoon, right?

Not quite. The entertaining part of this story is to come.

Firstly, there is the small matter of the MGC being raided by the US
Justice department for employing illegal workers. Not just one or two, but
a full 30% of the workforce. A search warrant issued by US Immigration and
Customs says that in March last year its investigators found that at least
49 of the firm's 159 employees did not have proper work documentation.
Indeed, most of them (the 49) possessed fake social security numbers (where
did they get those, then?). As a result, in May last year a company
official duly reported back to  the authorities that 48 of the 49 had since
been fired -- problem solved. However, the newly issued warrant says that
in actual fact the very next week, 13 of those fired, who were supervisors,
were then re-hired on fake identities and that the company appears to be
involved in helping them... Uh-oh. Not good.

So far there have been no arrests, but the authorities did seize the
company's computers -- so we're wondering how they are running their
business at the moment. Hopefully they were doing their accounting in the
cloud, where physical devices don't matter. Either way, Kameda management
will have their hands full dealing with this.

Secondly, not 4 weeks after the search warrant was issued, MGC was again in
the local news. This time for an exploding oven that set part of the
factory on fire. Two workers were injured, one seriously, and about
US$10,000 of damage was caused. MGC has almost 30 ovens, so the explosion
would not have had serious impact on the production output. However, the
fact that such an accident could happen may suggest that MGC's equipment or
processes are sub-standard, and if that is the case, then Kameda will have
to spend even more  money improving infrastructure and systems.

Thirdly, and in our eyes the biggest potential problem, there is the
founder herself, Mary. She seems like a quintessential entrepreneur, with
the vision and passion to get employees and customers fired up and
supporting the business. There was an interview with her in a local paper
back in January this year, and she told of her challenges, particularly her
frustration in dealing with men in the foods business who don't want to
listen to females tell them how things should be done. While her views are
entirely reasonable in the US, Kameda is a traditional Japanese countryside
company that has been running since 1946. We just wonder how their
management will get along with Mary, and whether the founder will last more
than a few months in the new organization?

It's not unreasonable to expect that as a company founder recently in the
money, Mary would want to go get another life. However, given that Kameda
don't have the vision and imagination to make a US company work with their
own products, it's hard to see them doing much better with Mary's company
without Mary there. Of course maybe they'll get lucky and recruit someone
else just as capable in, and that's certainly been done before. In the
meantime, though, we imagine there will be a lot of headbutting and hard
lessons to be  learned by Kameda's team assigned to the project, before
they start contacting the recruiters.

Kameda itself is a sterling company. Good sales record, good profits, good
R&D, and realizing that they need to go abroad. It will be interesting,
though, to see if with Mary and her crackers they haven't bitten off more
than they can chew... literally.


Lastly, here we are at issue 700 -- that's 14 and a half years producing
the news letter 48 times a year. Sometimes having to get a story out late
on a Sunday night makes the newsletter tough discipline, but it's the many
emails of encouragement and thanks we get from readers that make the effort
all worth while. There's also the fun of interesting research and
discovering connections you don't normally get to see by just reading the
news -- like today's story about Kameda and the crackers business. Anyway,
thank you for reading, and we look forward to producing Terrie's Take for a
while to come. Please continue to cut-and-paste the stories that catch your
attention, and let others know we exist.

...The information janitors/


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+++ NEWS

- Is Caroline Kennedy next US ambassador?
- Shiseido to largely end animal testing
- OpenX gets Dentsu as investor
- No recovery in auto sales
- TPP haggling begins

=> Is Caroline Kennedy next US ambassador?

Bloomberg is reporting that political scion Caroline Kennedy could be the
next US ambassador in Tokyo. Apparently the White House has approached her
and she is showing interest, after having turned down a Canada posting
offered earlier. Kennedy's family's close connections with John Kerry, the
new Secretary of State, also reinforce the speculation that she's bound for
Tokyo. Then there is the Japanese government, which is no doubt interested
in having another famous name person back in the ambassador role, following
in the tradition of Mike Mansfield, Walter Mondale, Tom Foley and others.
(Source: TT commentary from washingtonpost.com, Feb 28, 2013)


=> Shiseido to largely end animal testing

Cosmetics giant Shiseido has said that it will largely drop the testing of
its products on animals, except where such tests are the only way to prove
safety of a product or where certain countries require that type of
testing. Shiseido actually stopped animal testing in its own labs as long
ago as 2011, but has product components from other suppliers that are still
tested the old fashioned way. The Shiseido announcement comes as the EU is
getting ready to pass a ban on animal-tested products later this month.
(Source: TT commentary from dawn.com, Mar 1, 2013)


=> OpenX gets Dentsu as investor

Ad serving tech and marketplace company, OpenX of the USA, has announced
that Dentsu's Cyber Communications division has invested into it, on
undisclosed terms, but which brings OpenX's equity funding to date to
around US$75m. Dentsu and OpenX are already partners on a business level,
but the investment appears to secure the relationship here in Japan. OpenX
is a major player in Real Time Bidding for ads online, and its revenues
have jumped by more than 100% for each of the last two years. (Source: TT
commentary from mediapost.com, Feb 26, 2013)


=> No recovery in auto sales

While the media is still in love with PM Abe, his attempt at awakening the
nation's "animal spirits" seems to be falling on deaf ears with Japanese
consumers. Apparently the auto industry has had a particularly "rugged"
February, with sales falling 12.2% year-on-year to just 292,399 cars,
making this the sixth month in a row of y-o-y declines. Surprisingly, the
sales of small passenger cars slid the most, down by 15.4% to 138,229
units. ***Ed: From such a low base, we can only hope that the 2014
consumption tax rise will stimulate more demand in the second half of the
year.** (Source: TT commentary from e.nikkei.com, Mar 1, 2013)


=> TPP haggling begins

The Japanese government has identified a parcel of 487 items that it wants
to retain tariffs on for TPP, including industrial products. But when it
comes right down to it, pundits say that the government aims to hold out on
two items only: rice and sugar. Other products on the nation's short list
include wheat, dairy products, and beef -- all items requested by farmer's
lobby JA. ***Ed: Hard to imagine the other 11 TPP countries accepting
restrictions on wheat, beef, and dairy products, given that those are the
main exports of the primary players.** (Source: TT commentary from
e.nikkei.com, Mar 3, 2013)


NOTE: Broken links
Some 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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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 or comments this week.



=> Climbing Mt. Ishizuchi, Ehime
An easy enough walk, except for the last bit!

When autumn came with its beautifully coloured leaves, I decided to climb
Mt. Ishizuchi. I’d heard that Ishizuchi was the highest mountain in western
Japan when I first came to Ehime from Shanghai. Although I’m honestly not
very athletic, I was confident that I could climb Ishizuchi because I once
climbed Mt. Huashan, which is said to be one of the steepest mountains in
China. I wasn’t worried about climbing it since we could go half way up the
mountain by car. At the beginning, I walked at a fast pace. The mountain
path was still wet from the heavy rain on the previous day, but it wasn’t
very steep, so I was able to enjoy the coloured leaves.

Just when I started to think that it was going to be easy all the way to
the top, we came to some steep stairs. Most of the stairs were made of wood
and they were very slippery because of the damp. My pace dropped, and I
couldn’t afford to gaze at the beautiful scenery any more. Clambering up
the steps to the top took all my concentration. As we got closer to the
top, our rests became more frequent. But we realized that the peak couldn’t
be far now because nearly all of the trees seemed to be red. The prospect
of the view overlooking all this red foliage gave me the heart to keep
pushing on.


=> Kikuchi Castle, Kumamoto
Kyushu's first line of defense in the 7th century

More than a millennium ago, before quintessential Japanese castles like
Himeji and Nagoya were even conceived, a cluster of wooden fortresses
defended the island of Kyushu. These early castles may not have been as
impressive as their latter counterparts, but they played a critical role in
the eyes of Japan’s 7th century Yamato Court -- they were the first line of
defense against an invading force from the Asian mainland. With a political
presence established by the Imperial Court at Dazaifu in modern-day Fukuoka
Prefecture, a ring of castles was constructed to protect this defacto
capital of Kyushu.

You’re unlikely to casually stumble across any of these castles today. When
the threat from China and Korea waned a few centuries later, most of the
buildings fell into disrepair. However, the town of Kikuchi in Kumamoto
Prefecture has recently rebuilt part of their ancient castle site, thanks
to the artifacts unearthed by archaeologists during a comprehensive dig in




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

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