TT-438 -- Did MBK pay too much for Yayoi? E-biz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, September 23, 2007 Issue No. 438


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In the last week of August, a private equity firm that few
had heard of, MBK Partners, won an auction to buy the
accounting software firm Yayoi from Livedoor Holdings for
an estimated JPY71bn (US$617m). This was a surprisingly
high figure, given that Yayoi has less than 100 staff, and,
according to the Nikkei, has EBITDA earnings of around
JPY4bn. If correct, this would mean that MBK paid 18 times
earnings, which while a reasonable price if Yayoi was a
public company is an unprecedented multiple for a
non-strategic buy-out in Japan.

Since typical market valuations of private firms fetch only
5-8 times their earnings, the question is: did MBK pay too

The answer is to be found in subsequent media coverage,
which shows that MBK is planning to finance the acquisition
mainly by debt, and that it is looking at the cash flow
generated by the company rather than capital gains achieved
through appreciation of the stock, as a means of return.
Bloomberg mentioned last week that "people say" MBK put
down JPY25bn of its own money and has secured the remaining
JPY45.5bn from various Japanese banks at preferred Japanese
interest rates, and which the banks based on the cash flow
of the business.

If MBK gets it right, then this means for a cost of about
JPY2.275bn (US$19m) in interest (estimated at 5% pa), the
fund will receive about JPY1.75bn (US$15.2m) in annual
profits from Yayoi -- still about a 40% per annum return
before tax and costs, on their investment. On the face of
it, therefore, this deal makes a lot of sense and creates
a type of value that is new to the Japanese market.

[Continued below...]

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[...Article continues]

The risks of course are in whether or not MBK can keep
Yayoi producing this much cash on an ongoing basis.
Firstly, the company needs to keep creating upgrades and
sideways extensions of its product, so that its 400,000+
customer base will keep buying. The accounting market is
pretty well saturated, and just as Microsoft has found with
its Office suite, it gets harder to make people buy
upgrades when the current products work just fine.

Secondly, Yayoi and MBK have to keep their competitors at
bay. Quite apart from traditional accounting software
competitors such as OBiC and MJS, there are a number of
foreign Software-as-a-Service (SaaS) companies with strong
funding behind them looking to penetrate the Japanese
market and who may try to take advantage of any
perceived weaknesses as the Yayoi ownership change

Thirdly, with its foreign equity sources, MBK has to make
sure that the international economy doesn't cause the cost
of its LBO package to soar and kill the spread. By good
design, it looks like only the initial JPY20bn is at risk,
because the rest of the debt appears to be local. So the
real question is whether, at the end of the fund's useful
life, the asset will still be worth as much when they have
to sell it? If not, then how much weaker will the local
market have become?

The natural means of selling will be an IPO. But what if
MBK can't bring the business to the public markets due to
a business turn-down, a product flaw, or management
strife? Particularly with management, MBK is going to have
a tough time keeping everything on track if the management
team realizes how much leverage they have as the company
moves closer to an IPO. Hopefully MBK will be spending a
lot of time and energy maintaining strong personal
relationships and financially rewarding the top Yayoi guys.

If things don't go well, then the potential for loss is
that wide difference between the 5-8 times valuation most
other companies get, and the 18 times that MBK paid. This
is large and scary risk and would take about 20+ years of
holding the asset at its current profit levels to clear.
It will be interesting to see how MBK deals with this.

The Yayoi story itself is also quite an interesting one.
Old Japan hands may recall that originally the Yayoi
accounting software was created by a local firm called
Nihon Micom. The assets of this firm were combined with a
buy-out of another firm called Milky Way to form Intuit
Japan, back in 1996 and 1997. Intuit initially did OK
profit-wise on the merger, but the two very different
cultures in both firms caused lots of strain on the
organization, and by the early 2000's, Intuit was
struggling to contain the fall-out. Only the appearance of
a strong manager in the form of Kozo Hiramatsu kept things

In 2004, coinciding with other challenges Intuit was facing
in its home market, the company sold the business to
Advantage Partners for an estimated JPY9.5bn (US$79m).
While this was considered a high price at the time, it was
presented to the public as a Management Buy-out and the
assumption was that a dedicated management would fix the
internal problems and restore the business to a high profit
level -- in other words, a classic buy-out and turn-around.

This is exactly what happened, and profits rose from around
US$9m (Intuit 2002 financial report) to at least double
that (our estimate) under the new regime. Then, in November
2004, the markets were stunned to learn that Livedoor had
bought the firm for a pricey JPY20bn (US$173m) in cash and
stock. Advantage Partners emerged looking pretty good on
that kind of return in just 20 months, and the Yayoi
management led by Hiramatsu rightly took kudos for their
efforts and personal returns.

So here we have a story of escalating value within a
business that has been bought and sold four times in ten
years. The question now is whether other funds in Japan
will take Advantage Partner's and now MBK's lead by taking
similar risks and ponying up significant amounts of cash.
The M&A culture in this country is pretty conservative, and
despite the opportunities and case book examples, many
local funds worry about Japan's possible economic downturn
and thus getting stuck with both the baby and the bath
water. This is why most M&A in Japan is still getting done
on the basis of distressed assets and owner succession
issues rather than straight financial analysis and creative

On the other hand, many more foreign private equity funds
are watching and learning from the performance of Advantage
Partners, Ripplewood, and others and they are definitely up
to the challenge in terms of financial backing. So we will
be interested to see what new leveraged opportunities come
up next.

...The information janitors/


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+++ NEWS

- GE may take US$1.1bn charge
- World's oldest man is Japanese again
- Nova teachers to get cut
- Second quarter IPOs fall
- Faster recharging times for electric car

-> GE may take US$1.1bn charge

General Electric has said that pulling out of its consumer
loans business may cost the company up to US$1.1bn in asset
valuation losses. The company was referring to its Lake
consumer finance company that it bought 10 years ago and
which it is now trying to sell. GE blames recent legal
rulings that have lowered lending fees from 29% to 20% for
its decision to exit the sector. ***Ed: What we find a bit
disingenuous about GE's claims is their lack of mention
about the profits made before the ruling on lower interest
rates. In a web page published by the buy-out firm KKR in
2006, you can plainly read about GE's ex-CEO: "As President
and CEO of GE Consumer Finance Japan, Mr. Yamakawa led an
enterprise [the consumer finance operation] with over
US$10bn in assets and over 4,000 employees and which is
now the largest contributor of profits for GE in Japan." We
think perhaps GE's blaming of recent judicial events is
more a case of sour grapes. Instead, they should give a
more balanced view of how much the unit has made or lost.**
(Source: TT commentary from, Sep 23, 2007)

-> World's oldest man is Japanese again

Japan temporarily lost its mantle as home to the world's
oldest man, but regained it after the passing of 115-year
old Emiliano Mercado Del Toro of Puerto Rico in January.
The world's oldest man is now 112-years young Tomoji
Tanabe who lives in Miyakonojo, Miyazaki Prefecture.
Apparently there are now around 28,000 Japanese over 100
years old, and this number is expected to rise to an
astonishing 1m people by 2050, almost 2% of the expected
population at that time. (Source: TT commentary from, Sep 23, 2007)

-> Nova teachers to get cut

It's common knowledge that Nova English School is in
serious financial trouble. Now the school has said that it
may have to cut up to 200 of its 900 schools. The company
is saying that it will target schools having to pay the
highest rent costs first, namely those in Tokyo, Osaka,
Aichi, and Hyogo prefectures. In addition to not paying
rent for many locations, Nova was also late in paying
around half of its 5,000 foreign teachers last week. Nova
posted a JPY2.5bn (US$21m) loss in operating profits last
fiscal year. (Source: TT commentary from, Sep
21, 2007)

-> Second quarter IPOs fall

Tougher listing requirements and a disillusionment by
private stock investors in IPOs have meant that the number
of venture companies listing on Japanese stock markets
dropped 31% in the second quarter of this year versus the
same period last year. Perhaps worse, not only is the
volume of listings down, the prices of recently IPO'd
companies are also underwater. A recent Nikkei article
pointed out that major VC JAFCO's JPY220/share investment
in biotech firm GNI is now priced at just JPY60 since the
company's August listing on the Mothers exchange. ***Ed:
This is not good news for the many start-ups now trying to
ramp up for an IPO. It will, however, give foreign
exchanges a few more prospective listors from Japan, as
they try to find at least one public market that wants their
listing.** (Source: TT commentary from,
Sep 22, 2007)

Faster recharging times for electric car

Fuji Heavy, the producers of the Subaru brand of autos, has
said that it has developed a new way of allowing rapid
recharging of Li-ion power cells for its new R1e electric
vehicle. The company says that it has overcome many of the
overheating dangers of fast charging of Li-ion batteries by
incorporating microprocessors in each and every cell,
thereby allowing each cell to recharge at its own speed, and
eliminate some cells recharging too fast and others too
slowly. ***Ed: Can't you just feel the excitement build
over the prospect of untethering our vehicles from oil and
hooking up to electricity instead? Yes, you still need some
primary energy source to make electricity, but at least the
sources of such generation are more diverse and cheaper
than the oil we get now.** (Source: TT commentary from, Sep 19, 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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