TT-395 -- plummeting post-IPO prices, ebiz news from Japan

General Edition Sunday, October 15, 2006 Issue No. 395

- What's new
- News
- Candidate roundup
- Upcoming events
- News credits

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How important is a strong CEO for a strong IPO?

Over the last couple of months, the Nikkei 225 stock index has been steadily recovering, passing the 16,000 mark at the end of September. Market sentiment is good and foreigners are busy buying stocks, being net buyers last week. As readers will know, we're interested in freshly listed companies, particularly small cap firms that are more likely to be run by entrepreneurs.'s Takashi Nishibori notes that the level of IPOs in Japan is still running at a healthy clip, with
15 IPOs in September and 17 planned for October. This will bring the total number of IPOs for the first 10 months of the year to 144, roughly the same as last year. Of the 127 IPOs done through to the end of September, the average opening price was almost 90% higher than the offering price. We think this is surprisingly high, considering that the market has been on this IPO binge for more than 5 years now.

However, it looks as if mid-2006 is marking a turning point for investors, who are just now starting to give the thumbs down on companies that don't match expectations.

Just what those expectations are we are not sure. You'd think it would be on earnings. However, when we look at the continuing high-flying stock of Mixi, which even though the price is down from a high of JPY3.25m (US$27,500) a share to JPY1.85m (US$15,700) a share on Friday, it still has a market capitalization that represents an earnings per share
(PER) of 260 times! Clearly, glitter and potential are still big factors in the thinking of shareholders attracted to freshly public companies.

[Continued below.]

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One company which doesn't have the Mixi glitter and which because of its hard-core, hard-grind business model also doesn't offer a quick near-term upside is Banctec Japan, an outsourcing company that went public on October 5th. Using optical character recognition technology and systems, Banctec outsources the boring bits of banks and insurance companies' back office operations. After a mere 5 days of being public, the company is already feeling the "backlash"
of shareholder disinterest, with its share price plummeting from JPY126,000 (US$1,070) per share to just JPY74,000 (US$627), the price on Friday. That's a 40% drop in just 25 hours of trading.

Market experts are saying that shareholders are moving away from the secondary markets, such as Mothers and JASDAQ, to focus on blue chip companies, which are raking in profits thanks to the continued economic boom and the weak yen. We don't disagree with this, and certainly there are many other freshly listed companies falling below their IPO prices. However, a drop of 40% is precipitous and must surely tell the Banctec shareholders that this is more than just a market correction. Something deeper is wrong in the company.

Banctec originally came to prominence in the Japanese media in 2002, when a bunch of local private equity funds led by JAFCO decided to do a "Management buy-out" of the Japan and South Korean business from Banctec USA. We parenthesize the MBO status of the deal, since the CEO of the company only wound up with 1.9% of the shares, and is locked in along with other senior managers for 6 months before being able to sell any. So he wouldn't be feeling much richer at present.

In fact, we think that this lack of senior management involvement in the IPO may be part of Banctec's problem.
>From the IPO statement, we can see that the entire
management team were holding less than 7% of the company's stock at IPO time, and thus the post-IPO performance may simply reflect their salaryman status in the business.

Instead, in our minds, a CEO who settles for a stake of less than 10% of the company in an MBO is probably thinking of his position as merely a job. There isn't enough incentive in it for him to be thinking as a potentially rich owner. At best, and on paper only, he is worth JPY148m, not much of a return if you've just take a firm public.
...But at the same time, probably not bad for a salaryman.

Unfortunately, in a business with as little sex appeal as Banctec's, the commitment of the CEO can make all the difference to both performance and public image. He needs to be motivated to show a strong, publicly visible face. And he needs to be coming up with a stream of fresh strategies to get customers and employees excited about the future. However, from what we can see, the company has produced very few press releases about any strategic activity. It's almost as if they've been hiding in a hole.

To us, the structure of Banctec's shareholdings and lack of senior management equity participation spells out that JAFCO and other Japanese private equity funds do not yet understand what is needed to step in and turn around a business. Economizing on the CEO stock allocation is not helping investor interests. If the CEO is not worth more than 1.9% of the company, then they need to get one who is. In essence, if they want Shinsei-style IPO results, then they have to put in extraordinary people, like Yashiro and his team.

If we were JAFCO right now, we'd be looking at some of our more recent deals (it may be too late to do anything with Banctec), and start looking to hire in a Masamoto Yashiro clone to set the business on fire again.

The incentive for JAFCO to do this is certainly there. From last week's experience, it's worth at least JPY4bn
(US$33.8m) in the week after the IPO, to get it right...

...The information janitors/

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+++ NEWS

- Friendly bacteria to replace livestock antibiotics
- 50% increase in international conferences
- The bomb when you're not having a bomb
- Hello... hello, you have any kidneys for sale?
- Land Ministry to allow more RE speculation

-> Friendly bacteria to replace livestock antibiotics

Calpis, the fermented milk drink company, have announced that it will soon start selling its Calsporin bacteria-based feed additive for livestock. The new product is designed to compete with antibiotics in animal health.
Calsporin is made from Bacillus subtilis and works in the animals' intestines to reduce salmonella and other harmful bacteria. First off the rank will be a poultry feed additive. ***Ed: If it works, we think it'll be a hit!
No one likes absorbing antibiotics second hand from animals.

** (Source: TT commentary from, Oct 13, 2006)

->50% increase in international conferences

After the basic failure of the Ministry of Transport to substantially increase the number of foreign visitors to Japan some 3 years ago with its Yokoso campaign, it is now the turn of the Ministry of Land to have a shot. On Friday the ministry will launch a public-private group which will attempt to increase the number of international conferences held in Japan by 50%. The new initiative is designed to increase the number of foreign visitors to Japan to 10m by 2010. ***Ed: One of ex-PM Koizumi's old election goals.

** (Source: TT commentary from, Oct 13, 2006)

->The bomb when you're not having a bomb
So did North Korea explode an atomic bomb, or two, this last week or not? Although a sesmic reading of an earthquake-strength blast recorded on October 9th indicated something exploded, atmospheric tests by the Japanese for radiation leakage have proved negative. On the other hand, samples from a US drone the day after the alleged test indicated some presence of radiation.
***Ed: So was a test conducted or not?
** (Source: TT commentary from, Oct 14, 2006),23599,20582291-1702,00.html

->Hello...hello, you have any kidneys for sale?

Apparently a recent case of a family of a terminally ill patient duping a transplant surgeon into accepting an organ from a donor who was paid cash, something which is illegal in Japan, has spurred a number of citizens to see if they could cash in as well. The Mainichi reports that hospitals and kidney disease awareness groups around the nation have been receiving phone calls from would-be donors trying to find out if they can get cash for their kidneys. Buying and selling human organs is prohibited in Japan. ***Ed: We find the whole organ transplant scene ludicrous. If it is so immoral to buy an organ, why is it that Japanese are allowed to hop on a plane to China or the USA and get it done there? We suspect that rather than an ethics issue this is a case of protecting entrenched interests -- just it's hard to see which interests those may be. Any comments

** (Source: TT commentary from, Oct 5, 2006)

->Land Ministry to allow more RE speculation

We don't know how we missed this one last month, but in any case if you have land in Tokyo you'll be happy to hear that it may yet go up in value. The Ministry of Land has said that it will allow real estate investment advisors, not just REITs, to handle the real estate investment portfolios of pension funds and corporations. Until now, discretionary accounts for organizational real estate investors were prohibited. But no longer. The deregulation is expected to draw in a substantial level of funds from companies, universities, and pension funds, as an alternative to low bank interest rates.

***Ed: Expect inner Tokyo real estate to get even hotter over the next 12 months, as the pension funds money starts pouring in.

** (Source: TT commentary from, Sep 2, 2006)

NOTE: Broken links
Many online news sources are now removing 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

-> TT393 on Pensions. We said that if the government really
wanted wealthy retirees to forego the pension, they needed to give proper incentives, such as a tax break on death duties.

*** Reader: Although I am not a tax expert, I think it just takes common sense to see what the effect of the tax break would be. People who thought they would save more on tax than they receive in pension, would take this up en mass, to the effect of being a tax break for the rich, costing the government taxes. Looking in the short term like you are hides the loss of future revenues with a small reduction in current expenditures. Although this is standard practice for politicians it is what caused the problem in the first place. I was disappointed to see this in political commentary. I hope find solutions to problems in commentaries not new ways to fiddle the books and hide problems from the public.

*** We Respond: We believe that the right formula would be to offer death duty tax breaks that do not exceed the pension due to be received. I.e., the government would simply be trading one for the other. For wealthy pensioners, this allows them to in effect "save" in small increments for the cost of inheritance taxes, by foregoing their pensions on a monthly basis. For the government this has the benefit of providing immediate access to cash, rather than them having to wait for people to die before tangling with the heirs and their lawyers. Having the money now does indeed raise the temptation to put off the problem a couple more years, but at the same time if the government is truly interested in fixing the problem, then it also gives them a chance to put these advance payments into investments yielding high rates of interest -- and that surely is beneficial.

Thanks for the feedback.

...The information janitors/


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