TT-633 -- Are We in an M&A Bubble? ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, October 09, 2011, Issue No. 633


- What's New -- Are We in an M&A Bubble?
- News -- Tsunami destruction tour
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback
- News Credits

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Over the last 9 months the amount of foreign M&As being
done by Japanese companies has been remarkable, and as we
mentioned some weeks ago in TT-627, the amount of deals
involved is already 70% above where it was this time last
year, at US45bn for the first 7 months. Since most of us
are far removed from the concept of foreign M&As, unless we
happen to be working for an acquisitive Japanese firm that
requires bilingual skills in order to get promotion, these
M&As make for interesting breakfast table reading but are
otherwise ho-hum stuff. After all, the yen is at a record
high, so why is it such a surprise? Effectively all of
these purchases are coming at a 25% discount compared to
where the Yen-Dollar rate will be 12-24 months from now, so
it's no wonder companies are on the prowl. Right?

But what if there was more to it than that? What if the
current M&A trend wasn't a simple outcome of economics but
rather was being boosted by government economic policies as
a means to resolve Japan's own problems? Then you'd be
looking at the Japanese equivalent of the Chinese solution.
The Chinese are using their strong currency to buy up
global resources -- they have plenty of internal demand so
this is a good use of cash reserves. The Japanese on the
other hand only need as much resources as they can actually
store until they manufacture it into something, so the most
storable form of future wealth based on currency strength
is either gold, which doesn't produce future revenue flows,
or ownership of foreign firms with strong market positions
and strong future cash flow.

This last week, two interesting news items in the financial
press started us thinking that there is something going on
behind the scenes that will have big repercussions for
Japan and eventually for the man in the street. Both items
make us think that the current wave of M&A interest could
quickly become a tsunami, and create yet another bubble
that at some stage would have to pop. Further, this bubble
comes with some strong risks because of the relatively
small size of some of the companies effecting the
takeovers. Small size means less resources to bring to bear
if things go wrong.

[Continued below...]

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[...Article continues]

The first announcement came last week when the Japan Bank
for International Cooperation (JBIC) said it had signed
agreements with three major private banks to provide them
with JPY3.3trn credit lines to be used for foreign
takeovers by the banks' Japanese customers. This is part of
a larger US$100bn program announced back in August to get
Japanese firms out of yen and in to dollars.

This amount, along with the half trillion dollars in war
chest funds that Japanese listed firms already have socked
away, makes for a potent brew when it comes to leverage for
ambitious Japanese firms looking to expand abroad.
Companies of all sizes are getting the message that they
can start looking at foreign M&As, and the leveraging
involved is quite awe-inspiring -- some Japanese firms are
paying 5x-20x on earnings of their targets and borrowing 90%
of the acquisition price. Normally these multiples are the
domain of venture capital.

The second news item was a confirmation of the leveraging
available to those firms willing to take the risks. A
little known medical testing company called Miraca
Holdings, announced this last week that it was taking over
the life sciences arm of a Texas-based firm called Caris.
Miraca is a small to mid-sized listed company that does
about JPY166bn in revenues, and last year made JPY11bn in
net profit. Actually these are pretty good margins for a
Japanese firm. Anyway, Miraca is going to take over the
Caris business for the not insignificant sum of US$725m
(JPY56bn approx.), the funding of which will be just JPY8bn
in cash already held by Miraca, and a bit less than JPY50bn
to be taken on in new bank loans. The amortization of this
acquisition will be 20 years -- a long, long stretch even
by Japanese standards.

This is truly impressive leveraging. Looking through the
Miraca presentations (they have excellent English-language
materials, which is probably a reflection of the fact that
they are 56% owned by foreign investors), we can see that
after amortization and bank loan interest costs, there will
be almost no free cash flow from the acquisition, based on
today's revenue/profit numbers from Caris. Now, true, the
Caris business has a Compound Annual Growth Rate (CAGR) of
around 30%, so theoretically the Miraca folks should be
well above water in 2-3 years time. But this makes some big
assumptions, such as the fact that healthcare testing in
the USA will continue its current torrid pace of growth,
and that there won't be either: a) a recession, b) a change
of government that de-emphasizes medical spending, or c)
in the USA, the land of litigation, a class action law suit
over testing issues that no one has thought about yet.

Now, the Miraca senior management are not country bumpkins
and are not newbies to the foreign market. They have an
impressive track record of previous acquisitions, have a
highly successful foreign business called Fujirebio, and
their board of directors includes a who's who of former
banking and pharma executives who also sit on the boards of
other famous Japanese (and acquisitive) companies. So if we
were a Japanese bank weighing up who to give money to, we'd
probably pick someone like Miraca. But nonetheless, the
previous largest M&A that Miraca had performed was a deal
about 15% the size of the current one, and as yet there are
no foreigners on the board of directors at all. So we
wonder, just as we wonder for some of these other M&As
going on, whether the board and executive management will
be able to meet all the demands that taking over a large
foreign business entails.

Taking a cue from other medical M&As that have happened
recently, there appear to be two ways forward that most
Japanese firms are taking with a large foreign acquisition.
One is to largely leave the acquired business alone and
trust that the local management team there will do the
right thing. An insider has told us that this is what
Takeda have done with their 2008 US$8.8bn purchase of
Millenium and we understand that to a certain extent this
will be Miraca's approach. The other way is to keep things
Japanese by bringing in an internationalized Japanese
Director with a Stanford or Harvard MBA, to run the
acquired target either in the foreground or background,
and this is what Zeria has done with their US$130m Tillotts
acquisition in Switzerland made back in 2009. So far, most
of the pharma acquisitions made in the last few years are
doing well, but you couldn't say that they have been
properly stress tested yet.

If the Japanese government, and specifically the Ministry
of Economy, Trade, and Industry (METI) really thinks that
foreign cash flows into Japanese holding companies is the
way of the future, and given the pessimism amongst the
Japanese themselves about the decline in their own economy
this is understandable, then they need to do more than just
make money available. Thinking into the future, there needs
to be a whole support system for these companies who
currently might know very little about running a foreign
company (Miraca at least does have this experience), and
who when faced with a crisis or adverse circumstances may
not be able to react quickly or appropriately enough to
address those problems. This support system has to include
resources for language, management systems, law, labor
relations, and a host of other issues.

Also, like all bubbles, there are going to be a number of
M&A deals out of this US$43bn which have a high possibility
of going bad in the future. Despite their excellent
management track records to date, we would class both the
Miraca deal and also Rakuten's massive expansion as
high-risk. Actually, the JPY43.3trn is probably going to be
a pivot for much larger sums to be spent, and therefore if
things do go poorly, this could put a huge strain on the
Japanese banking system. Since these acquisitions are now
in foreign jurisdictions, each bankruptcy will be very
public and will cause a major loss of investor confidence
in the banking entities behind such deals. We wonder if
this is being thought through and if so, what the risk
amelioration strategy is going to be? Government

...The information janitors/


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+++ NEWS

- After-hours futures trading by amateurs popular
- Sony to buy out Ericsson from cell phone j/v
- Yahoo! getting ready to sell Yahoo! Japan stake
- Good growth in LED market
- Tsunami destruction tour

-> After-hours futures trading by amateurs popular

Common wisdom has it that Japan's markets follow those in
the US, and amateur traders are now realizing that instead
of waiting until the next morning to move their stock, they
can trade in the after-hours markets with stock futures.
Apparently the Osaka Securities Exchange (OSE) has futures
trading available from 16:30 pm to 03:am and over the last
2 months trading has risen from 20% of daytime trading to
37% in August and 38% in September. (Source: TT commentary
from, Oct 8, 2011)

-> Sony to buy out Ericsson from cell phone j/v

Sony is negotiating with its joint venture partner in the
cell phone business to buy our Ericsson's share of the
firm. The Sony-Ericsson operation has sales of about
EUR6.3bn but a net profit of just EUR90m. ***Ed: We wonder
if this is a good move by Sony? Analysts say that Sony is
fed up with Ericsson's slow decision-making and their
basic lack of interest in cell phone devices given that it
is more an infrastructure company. The problem for Sony is
that this business doesn't really make money and with all
the Ericsson patents that have to come with the deal, it
will cost Sony dearly.** (Source: TT commentary from, Oct 7, 2011)

-> Yahoo! getting ready to sell Yahoo! Japan stake

Media speculation is that Yahoo! in the USA is seeking
advice from the US IRS about how to sell its 35% stake in
Yahoo! Japan. Making the sale would earn Yahoo! about
US$19bn, and would make it much easier for the shareholders
to get a decent price now that Yahoo! is shopping itself
for a buy-out by someone else. Amongst the companies
wanting to buy Yahoo! are Alibaba, Silver Lake Partners,
News Corp., a Russian company called Digital Sky
Technologies, and possibly Microsoft. Yahoo! has a market
value of nearly US$20bn. ***Ed: In other words Yahoo! Japan
is triple the value of Yahoo! in the USA -- testament to
the skills of the local management.** (Source: TT
commentary from, Oct 7, 2011)

-> Good growth in LED market

The post-earthquake power shortages were great news for one
industry in Japan: the LED manufacturers. Sales of LED
light bulbs hit 60% of the total sold in Q3, and as prices
steadily drop, annual growth is predicted to be 70%, taking
LED market share to around 75%. Brand name LED bulb prices
are already down 25% and with the market entry of Samsung
and LG Electronics, this price point is expected to drop
much further. (Source: TT commentary from,
Oct 7, 2011)

-> Tsunami destruction tour

We wonder why it took so long. Finally a US adventure
tourism company is offering US tourists a trip related to
the tsunami-devastated areas in Tohoku, but with a twist --
the tourists will only see the debris swept out to sea.
Apparently the tour, which starts next year, has has an
ecotourism theme and aims to document the environmental
impact of the Japan Tsunami Debris Field, which is making
its way across the Pacific towards the US west coast. The
tour will have two legs, one from the Marshall Islands and
the other from Japan to Hawaii. ***Ed: Actually, the Japan
Tsunami Debris Field is an interesting topic. See more at:** (Source: TT commentary from, Oct 7, 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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