TT-629 -- Small Companies Get in on M&A Trend, e-biz news from Japan

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

General Edition Sunday, September 11, 2011, Issue No. 629


- What's New -- Small Companies Get in on M&A Trend
- News -- Israeli drug mule gets acquittal
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback -- NOT a fan of McDonalds
- News Credits

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The world is watching the steady march of Japanese
companies abroad, and the surge of big-number M&A's. As we
mentioned in TT-627 several weeks ago, Japanese
international M&A activity is up 67% over last year, with
401 deals worth around US$45bn being done between January
and July. The Nikkei reckons that about 80% of all listed
firms' earnings now comes from abroad, not from their
moribund domestic businesses.

While all attention is on the big numbers, there is plenty
of action going on at the lower levels as well. One such
example is a smallish (as far as Japanese multinationals
go) Osaka firm called Endo Lighting. Run by a Mr. Endo,
naturally. This company had sales last year of JPY18.3bn
and is currently the largest LED lighting manufacturer in
Japan in the commercial lighting space. It has about 30%
market share. Endo Lighting is a perfect case study of the
hollowing out of the Japanese electrical manufacturing
sector over the last two decades, having set up a small
factory in Thailand back in 1989, then based on that
experience much bigger ones in China in 2003 and again in

The firm appears to have been through some rough times in
the last three years, and in February 2009 its shares were
worth just JPY105. That was the fiscal year that Endo
Lighting lost JPY1.3bn, so it's no wonder its shares
tanked. You would have been happy to buy in at that point,
though, because now the company has since clawed its way
back to profitability, and the shares are up 1,000%. It
does help that the demand for energy-saving LED lighting
has soared since the earthquake and is likely to stay that
way. Indeed, since June, LED bulbs have been outselling
incandescent ones in Japan.

[Continued below...]

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[...Article continues]

There is very little information available on Endo Lighting
as a company, even though it's listed, but what drew our
attention was the fact that after having a close call with
death, the firm is once again riding high, and announced
this last week that it was going to buy out a small
lighting distributor in the USA for JPY850m. Endo Lighting
says that it plans to turn the acquired company, called
Icon International, into a platform for distribution of its
products into the US market.

The company says, possibly somewhat optimistically, that it
expects to lift Icon's sales from around JPY940m last year
to JPY10bn over the next three years. They're not
disclosing how they are going to do this, but what is
amazing to us is the speed of Endo's turn-around, and also
the fact that they can pull together JPY850m in cash to do
an M&A at a time when the US market has to be hurting.
Either Endo Lighting has a secret treasure stash, or the
banks are sufficiently eager to lend money to anyone with a
positive P&L and a plan for the future that involves
international earnings. We suspect the second option is the
likely one.

The fact is that money for M&A by Japanese firms is easy to
come by, costing a firm like Endo Lighting all of 1% or so
per annum for a 10-year loan. This is low enough that with
Icon making an operating profit of around 15% (US$1.5m) in
FY2010, this deal will give Endo Lighting around JPY140m of
new profit annually, representing a helpful 20% increase
over Endo's mainly Japan-based earnings last year. Not bad
for one modest M&A.

This kind of leveraging, buying new profit streams for a
fraction of the financing cost, and having your own major
production facilities in China, is the template of choice
for Japanese manufacturers these days, and everyone from
pharmaceuticals to LED lighting makers is doing it. The
banks presumably understand the value being unlocked with
each M&A loan and have decided to make substantial funds
available even for the small-to-mid-sized guys such as Endo
Lighting. If the markets continue to hold in their current
pattern and do not take a deep dive again, then we can
expect to see a lot more smaller M&As such as this one, and
a massive increase in profits overall for Japanese firms.
Whether they repatriate these profits to Japan or use them
to continue pursuing a growth strategy abroad is of course
a big question the Japanese government is trying to find
answers for.

Anyway, the surge in M&As across the board is also having
an electrifying effect on business consultants overseas,
and interest in Japanese firms as acquirers is at an
all-time high. If we were in the M&A consulting business,
we would most certainly be talking to any company owner in
the USA or Europe with positive cash flow, a reliable
business history, and a strong product distribution
business. Right now there have to be thousands of
small-to-medium sized Japanese manufacturing firms who are
watching compatriots like Endo Lighting and are drawing the
conclusion that they have to follow suit or die out.

The going rate for such consultants is also very
attractive, so deal flow is pretty much guaranteed. In some
cases they are on retainers from the Japanese buy side,
searching for acquisitions and typically are drawing
JPY300,000 or so per month retainer, plus a percentage of
any deals that go through. To operate on this side of the
fence, the consultants are typically Japanese and are on
close personal terms with their sponsors.

On the US sell side, the field is far more open and the
rate for putting a deal together appears to be around 5%
for deals under US$10m, and a number dropping to around 1%
on deals over US$50m. Bilingual capability seems to be
less important than does the consultant's personal track
record and their business network for finding deals. The
challenge for US based consultants is of course finding a
route in to a suitable buyer back here in Japan. Often
going through the front door is greeted with skepticism or
suspicion by the Japanese side, not to mention the cost
and time needed to visit 50 companies to find 1-2
interested parties.

We're cheering on the M&A wave because we believe this is
Japan's best chance to internationalize its SMEs, which
employ 80% of the nation's working population. Japan has a
history of performing in times of extreme pressure, and in
a fight for survival the pressure has never been greater for
small businesses. The cross-border opportunities associated
with this ground shift in company strategy and behavior
will also start to become clear, leading, we think, to a
substantially increased demand for foreign employees and
services in Japan.


Lastly, a comment about Metropolis' new online wine shop,
produced by the owners of Village Cellars under a new brand
called WineBuzz. If you like new world wines, then you
should check out the shop, at:

We love Chardonnay, and bought a mixed half dozen, which
arrived just a day and a half later at the office. Wine
Buzz has a great selection of Chardonnays and the one that
we're going to definitely buy again was the Tasmanian 9th
Island -- a little oak, light but balanced acidity from
the low temperature location, extremely drinkable, and
just JPY2,500 a bottle. Yum.

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+++ NEWS

- JPY500bn to keep companies in Japan
- Sale of state assets to pay quake recovery bills
- Israeli drug mule gets acquittal
- Ritz-Carlton expands in Japan
- Consumers redeem gold for cash

-> JPY500bn to keep companies in Japan

The government is concerned that the high yen, up an
additional 5% against the US dollar since June, is
accelerating the hollowing out of industrial production
from Japan, as companies set up overseas manufacturing
facilities to overcome the yen appreciation. The
government says that it will set aside JPY500bn in the
third budget of the year, to address the problem. ***Ed:
The high yen is what it is, and subsidies alone will not
keep companies producing here. What is needed instead is
substantial tax cuts, as Keidanren has been asking for
some time now, and subsidies on consumer items based on
technologies the government wants to promote, such as
autos and solar panels.** (Source: TT commentary from, Sep 9, 2011)

-> Sale of state assets to pay quake recovery bills

Given the unpopularity of tax increases, the government is
trying to find other ways to meet the JPY13trn price tag
put on reconstruction efforts for Tohoku after the March 11
earthquake. Assets apparently being considered for sale
include holdings in Japan Post, Japan Tobacco, and a
variety of other companies. The total value of all shares
is around JPY22trn, while the Japan Post and Japan Tobacco
holdings are worth about JPY9.6trn and JPY1.7trn
respectively. (Source: TT commentary from,
Sep 8, 2011)

-> Israeli drug mule gets acquittal

In a historic first for the Japanese courts, an Israeli
drug mule was acquitted of trafficking charges thanks to
expert testimony from a US witness. The witness testified
that a young man of the satmar hassidic faith would be
highly unlikely to traffic drugs and that this type of
person is a frequent target elsewhere in the world by drug
traffickers because of their naivety. So frequent, in fact,
that the phenomenon is the object of academic studies.
Unfortunately for the man's two companions, who did not
use the same defense approach, they were convicted and are
now languishing in a Japanese jail. ***Ed: We assume that
there will be appeals from the other two, so that they can
use the same defense used by their luckier companion.**
(Source: TT commentary from, Sep 9,

-> Ritz-Carlton expands in Japan

It may be tough times for hoteliers at the moment, but the
forward thinkers amongst them are nonetheless looking to a
turn-around in the tourism market in years to come. One
such firm is the Ritz-Carlton, which apparently has signed
two new hotel management agreements with property owners.
Interestingly, but perhaps not surprisingly, the
Ritz-Carlton is picking Kyoto and Okinawa as its two new
locations, expanding on the current Tokyo and Osaka
hotels. ***Ed: Their target is primarily wealthy Japanese,
although we're sure that mainland and HK Chinese travelers
will fit in there as well...** (Source: TT commentary from, Sep 9, 2011)

-> Consumers redeem gold for cash

While the rest of the world is focusing on buying gold as a
value hedge in case a currency war (think Swiss Franc,
Euro, and US Dollar) happens, in Japan the Nikkei reports
that the opposite trend is happening -- consumers are
cashing in their gold. The article names a number of major
gold buying firms who have bought a ton or more of gold
jewelry so far this year, which will be melted down for
resale. The National Institute for Materials Science
reckons that Japanese consumers are sitting on around 1,500
tons of gold, while Gold Fields Mineral Services in the UK
says that Japan consumed 18.5 tons for jewelry in the last
ten years. Clearly, then, most of this gold was accumulated
back in the 60's-80's, and represents yet another form of
untapped savings for the Japanese. (Source: TT commentary
from, Sep 9, 2011)

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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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

*** In TT628 we looked at how McDonalds is likely to boost
their profitability given that they feel their worker
productivity is too low in Japan. We got some strong and
interesting feedback, including the following email.

=> Reader says:

I've been reading your blog for quite some time with a
high regard for your acumen but your piece on MacDonalds
[sic] is so far out of whack it definitely takes the cake.

Why don't you start off by comparing their profitability
with the competitors here in Japan? Comparing it with
Australia is like apples and oranges. The minimum wage in
Australia is $14.25/hr, Canada is $11 depending on the
province and $10.40 in New Zealand, 6 pounds in the UK. But
in Japan it ranges from 642 to 821 yen. So wages are not
the big drag on profits. Rather, maybe it is other
overheads that are impacting the bottom line.

Indeed, maybe the management is taking too high a cut,
maybe their incredibly expensive computer applications or
other "business improvement" systems have had too high
an investment with little to show for it. Maybe it's their
cut-throat pricing?? Have you compared their pricings here
to what they sell their food for in Australia? Macdonalds
is the only fast food chain that I know of in Japan that
"rents" their uniforms out to the kids who are working

And about the high staff turnover?? Why on earth do you
automatically criticize the kids. Have you actually seen
any data that pinpoints the range of reasons. Maybe some of
them are Macdonalds doings and the kids are quite justified
in leaving. And what is Macdonald's like to work for?? Do
you know??

So other than the kids who work there, you're haranguing
again about the "unnecessary" and superfluous levels of
service in Japan? So what? You advise to change the market
for the benefit of one company? Do you think for one second
these levels of service weren't developed by the companies
themselves here? They've trained the consumers to expect
these levels and now they have to meet them. That's
free-enterprise at it's roots, isn't it?

If macdonalds decides to leave the land of the fatted cow
(and they won't with all the money they're making) so what?
They wouldn't be the first of failed foreign companies here
and they sure won't be the last. Maybe some of their more
successful Japanese competitors will start marking up
Macdonalds' markets outside Japan.

So, finally you want to exploit imported labour to cut the
already non-survival wages? How much? What sub-standard
wage do you propose so poor Mac can pull himself up by his
sainted boot straps and make a glorious 15% margin in
Japan? Do you think you want to work those hours for that
stipend? Would you like your wife, teenager or non-teen-age
kid to work for the big Mac? Why not?

*** We respond:

Thanks for your feedback. We think you have the wrong end
of the stick here.

Firstly, the comments about profitability and Australia
were from a piece that the Nikkei did with the McDonalds
CEO here in Japan, and most of the key points were points
that they themselves brought up. The Take was to fill in
some of the gaps and to use that as a means of
highlighting what all services companies are asking
themselves -- about how to compete in this declining market
and how to increase margins.

We don't eat at McDonalds and we certainly don't have a
high opinion of their menu and dominance. But they do know
how to make money and in this regard will act as a
scout/guinea pig for many others trying to emulate them.

The point about wages was not that the kids are overpaid.
We never said they are. The point is that as a services
business, wages make up 80% of the costs of the business
and so wages are the only real area that can be attacked
from a business viewpoint. We'd have thought it was
obvious that we were making this point when coming up with
the list of things that could be done about wages.

Anyway, our objective was not to laud or judge McDonalds,
but to basically show that it's interesting the challenges
faced by services companies like them, and the way that
they are likely to go in the future to seek more profit. Do
they deserve to make more profits? That's not something
we're concerned with, they'll do it no matter what you or
we think.


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