TT-436 -- Changing attitudes in M&A, ebiz news from Japan

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A weekly roundup of news & views from Terrie Lloyd.

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


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- News
- Candidate roundup/Vacancies
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- Corrections/Feedback
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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...]

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[...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

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

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

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, Sep
6, 2007)

-> 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, Sep 6, 2007)

-> 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, Sep 6, 2007)

-> 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, Sep 6,

-> 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, Sep 6, 2007)

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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