TT-672 -- Will Dentsu hit a home run with Aegis? E-biz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, July 29, 2012, Issue No. 672


- What's New -- Will Dentsu hit a home run with Aegis?
- News -- Consumer prices, retail sales miss targets
- Upcoming Events
- Corrections/Feedback - Current account surplus correction
- Travel Picks -- Okayama swords and Shimane art
- News Credits

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Two news items in the press over the last couple of weeks
tell us a story of unrequited love in the business world.
Those seeking "love" being Japanese multinationals, and
those spurning it being the management of their takeover
targets. Let's start with the latest "love affair" being the
acquisition of the Aegis group of marketing companies by
Dentsu, announced on July 12th.

Dentsu is paying a huge 48% premium over the last closing
price for the object of its desire -- marketing group
Aegis, making the deal worth about US$5bn. To put this in
some perspective, Aegis shares were already pretty richly
priced and this deal is equivalent to 20 year's worth of
this year's expected earnings...! That's a pretty low ROI
for the next 20 years for Dentsu. On the upside, you have
to be a major entity to win clients these days, and in
combining the two companies, Dentsu has now vaulted to the
position of fifth largest ad agency network in the world.
Along with its earlier acquisitions, the company now has
decent coverage in most developed countries around the
globe. Still, ahead of Dentsu are WPP, Publicis Groupe,
Omnicom and IPG.

The deal had ad industry commentators buzzing, with some
saying that it is a "perfect fit" but with others
commenting that even after the deal, 80% of the combined
group's income will be in mature economies, 60% of the
income will still be in Japan, and only 20% will be in
digital. We thought the best comment was from Martin
Sorrell of WPP who told Bloomberg, "The conclusion from
analysts this morning was that the strategy was right but
price is very high and the execution risk is substantial."

[Continued below...]

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[...Article continues]

Yes, risky indeed. So here we have another major Japanese
player that realizes that the domestic market has topped
out and business can only decline from here. Therefore, it
needs to move abroad, and to be credible with major foreign
clients, it needs to be big. Thus, it was only a matter of
time before Dentsu would announce a deal. What surprised
people, though, is the sheer size of this one and the
premium company it went after. Past experience showed
the company being more interested in "nibble-sized"
opportunities. Maybe they were just practice runs?

Now that Dentsu has committed itself to the next 5-10 years
to making this deal work, we see a number of challenges
ahead: i) Personality fit between Dentsu and Aegis senior
management, ii) untested ability of Dentsu management to
run a major foreign acquisition, iii) the fact that most of
both companies clients are in mature markets, and Europe in
particular is troublesome, and iv) how will they ramp up
their digital income so as to remain relevant to

Personality fit.
Here's what AdWeek ran from interviews with former
employees about Aegis CEO Jerry Buhlmann when he was
appointed CEO of Aegis Media EMEA back in 2003. "Jerry is a
very business-focused and numbers-orientated man, devoid of
character or personality. He certainly doesn't have a sense
of humor." And another person said, "He's driven by
personal ambition. I think what counts with him is to what
extent he can use people to get what he wants." Hmmm,
doesn't this sound like someone remarkably similar to
Michael Woodford, who ran Olympus UK? In other words
they're both good operators but quite unsuitable for the
"squirrely consensus-driven Japanese senior management.
We suspect that Buhlmann is ready to retire move on and
will either leave of his own free will after a respectable
period of time, or will quickly have a run-in with
consensus-driven Dentsu management. Either way, given
that Buhlmann has been referred to as a one-man band
in the past, his departure would certainly spell a significant
risk factor to the success of this deal.

Dentsu international management skills.
To our knowledge, Dentsu has not executed a
successful major foreign acquisition before from Japan
(they have done some smaller deals through the US
office under Tim Andree), which apparently was why they
had so few acquisitions until recently. Once burned, twice

Probably there are two ways forward for Dentsu: either
leave Aegis alone and let the senior team they've just
bought get on with the job, or inject some talented
leaders from the parent or a related subsidiary, to move
Aegis closer to the parent firm's formula.

We think it can be said that the type of business that
Dentsu practices in Japan, that of deep, long-lasting ties
which depend on personal relationships more than
marketing skills, is not what Aegis needs, although it
can work in developing countries. So they have to either
put in someone like Andree from their US operation, but
we imagine he is already busy with his own M&A and
expansion efforts, or they need to leave Aegis alone.
Question is, left alone, what will Aegis' senior management
look like if Buhlmann departs? Possibly it will have to
have Andree's stamp on it anyway, because Dentsu
doesn't appear to have anyone else with the right

Mature markets.
The second company in our unrequited love story is Nomura
Securities, which paid a huge price recently by allowing
its senior management to resign to take responsibility for
an insider-trading scandal. But the speculation is that
while the insider trading was bad, in fact there is a
deeper story. The speculation is that CEO Ken Watanabe, who
was the motive force behind the Lehman Europe takeover deal
in 2008, is being made to pay for the Lehman miscalculation
(i.e., hemorrhaging cash on 8,000+ Lehman employees while the
European markets evaporate) by political forces within
Nomura. Especially in Japanese companies, it is an
exceptional leader who can withstand subordinates
continually sniping at him/her or outright sabotaging their
plans through inaction. With its appointment of a new
domestically-focused CEO, who is signaling a restructuring
of the international operations is in the works, we think
that Nomura is beating a retreat. Therefore, one wonders at
the wisdom of Dentsu buying Europe-based Aegis BEFORE there
has been a serious European meltdown -- which many in the
markets believe is only a matter of time. If it does
happen, then this has to be a serious risk to Dentsu.

In a company as large and diverse as Dentsu, there is no
way of really knowing what their skills and prospects are
like in digital advertising, which is predicted to overtake
print advertising globally by 2017, but even if they have
decent assets, the competition for advertising dollars is
defined by a new paradigm that ad companies need to get
used to -- the big digital portals sucking in ad dollars
themselves. By portals, we mean the Googles, Yahoos, and
Facebooks of the world. What these companies have that most
ad companies cannot compete with is technology, and in the
new digital era it is functionality as well as information
that is driving success. Therefore, unless Dentsu was to
turn around and buy out FourSquare, for example, it is hard
for us to see them being able to take significant market
share in the digital space.

So in total, we think that Dentsu has its work cut out to
try to manage the Aegis acquisition into further growth. We
agree that they have to be bigger to be a player, and so
the rationale is probably correct, but the devil will be in
the details and risks that come with them. In this respect,
we think that Dentsu has a strong chance of repeating the
Nomura experience, with quiet regret being the primary

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+++ NEWS

- Consumer prices, retail sales miss targets
- M3 buys MIC Medical
- Utilities have biggest electricity demand this summer
- Nomura to go domestic again?
- Fujitsu sees Q1 profits fall

=> Consumer prices, retail sales miss targets

Despite the Bank of Japan's recent enthusiastic declaration
that Japan's economy is improving, government
stats seem to show that it is faltering again. Consumer prices
unexpectedly fell by 0.2% over June 2011, and at the same
time retail sales barely rose 0.2%, the smallest rise in 9
months. Home electronics was particularly hard hit, with a
32% fall. ***Ed: The government must now be hoping for a
consumer splurge in 2013, prior to the consumption tax
increase -- a poor method of encouraging more spending and
one that will have its own consequences a year later.**
(Source: TT commentary from, Jul 28, 2012)

=> M3 buys MIC Medical

Interesting to see Sony's (Sonet's) M3 subsidiary work out
a services business for its thriving medical portal. M3 is
buying out JASDAQ-listed MIC Medical, which is a clinical
trials services company. No word on the price paid,
although the Nikkei seems to indicate the 13,558 shares
went at the closing price of JPY179,500, which means M3 is
paying around JPY2.4bn. This is a pretty high premium for
a company that only managed to eke out JPY143m of profit on
a consolidated basis last year. ***Ed: Maybe M3 is betting
it can pull off a Macromedia style business, of moving some
of the heavy lifting involved in clinical trials online and
creating a web survey paradigm? Pure speculation by us...**
(Source: TT commentary from, Jul 27, 2012)

=> Utilities have biggest electricity demand this summer

Power demand surged last Friday, as summer really settled
in across the country and the mercury soared to 34 degrees
(meaning it was 35-38 degrees at street level). The media
covered the power surge closely, as it reminded the
population that electricity supplies are fragile.
Apparently TEPCO was at 91% capacity when it supplied
50.88GW between 14:00 and 15:00 on Friday afternoon. The
company's capacity is 55.8GW. Chubu Electric ran at 93%
capacity and Kansai Electric ran at 88%. ***Ed: Looks like
the public are doing their part to keep demand down, and
hopefully we squeak through this summer with no black
outs.** (Source: TT commentary from, Jul 28,

=> Nomura to go domestic again?

Very good piece from about the probability that
Nomura will pull back from its global strategy and focus on
Japan again. The article points out that the departure of
Kenichi Watanabe and some lieutenants, to take
responsibility for the insider trading scandal that has
rocked the company recently, will significantly realign
foreign/domestic cliques within the company. It surely
doesn't help that replacement CEO Koji Nagai has stated,
"Given that the business environment is changing so
dramatically, we will remake the global franchise into an
appropriate size." ***Ed: Sounds like some serious
head-cutting is ahead for Nomura.** (Source: TT commentary
from, Jul 26, 2012)

=> Fujitsu sees Q1 profits fall

The high yen and problems in Europe are starting to bite
into the profits of even the most stalwart of Japanese
firms. Fujitsu has just announced that its Q1 loss was
JPY23.7bn, worse by 16% than the loss recorded for the
same period last year. The company blamed a fall-off in
demand for LSI chips, optical transmission systems,
servers, and other infrastructure products. Sales for some
consumer products, especially car navigation systems and
audio for vehicles rose. ***Ed: Telcos around the world are
battening down the hatches for what they think is going to
be a tough financial period over the next 12-18 months. We
think this is primarily based on fears about Europe and the
fall-out to the rest of the business world.** (Source: TT
commentary from afp on, Jul 28, 2012)

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

*** A reader points out to us the finer details of the
current account surplus.

=> Reader says:

I was a bit startled by your TT671 summary on the current
account this week, so went to the Bloomberg link you gave
to see what was really going on. When you stated that “all
trade, not just exports” was Y215.1bn for the month, and
suggested that this had fallen by over 50% compared with
the previous year, I nearly had a heart attack! If the
total of both exports and imports (whether including the
other items in the current account or not) had fallen by
over 50% year-on-year, the Japanese economy really would be
in trouble!

But a glance at the original suggested that the figure
cited was the current account surplus, not “all trade”. Of
course this is important economic information, but I don’t
think the current account or trade surpluses should be
described as economic “performance”, as such. As a mature
economy with an increasing proportion of its population
retired, Japan is really at the stage where it should be
running a trade (and perhaps also current account) deficit,
and a rebalancing in that direction shouldn’t be regarded
as disastrous. If a collapse in these surpluses were caused
by surging imports (unlikely, I grant), it would suggest
that domestic consumption was booming, and would be a very
good thing. [Ed: Or it could just be lots of expensive oil
imports for the utilities... which may not be healthy.]

I’d note that the current account surplus is not a measure
of “output”. It’s the difference between the value of
exports (and income on overseas investments) and imports
(and dividends/interest paid on foreign investments in
Japan). If the current account surplus were to fall to
zero, this wouldn’t mean that the Japanese economy had
disappeared altogether, merely that exports etc. were
balancing imports etc., which is generally considered to be
a reasonably healthy state of affairs. (At the global
level, exports have to balance imports by definition,
although they don’t in the reported figures because of
errors and omissions. Unsustainably large current
account imbalances have often been cited as a cause of
economic instability over the last few decades.) Exports,
in this context, include exports of services as well as
goods, so the direct link between the current account
surplus and the manufacturing sector is pretty tenuous.

The machinery orders also cited by the article are more
directly linked to manufacturing. Not only is machinery
produced by the manufacturing sector, but companies have to
buy it to expand manufacturing capacity. The fact that they
aren’t ordering much suggests they are not confident about
the outlook for manufacturing – and as you say, that’s
still a significant part of the economy and employment.

I’m not really following the Japanese economy closely
enough to say whether things are likely to improve from
here or not. But I wouldn’t be at all surprised if the
pessimists were right – a lot of the strength in the
Japanese economy over the last year has been a one-off
recovery after the earthquake. And although the
reconstruction of Tohoku will generate sustained demand in
that region for some years, the experience of the Kobe
earthquake suggests that much of that investment will
replace investment or spending that would have happened
elsewhere, rather than being a net addition to total



=> The Sword and Okayama
The Bizen Connection

When you think of the Japanese sword the word katana
probably comes to mind. What I came to understand after
several visits to the Bizen Osafune Sword Museum is that
the katana is just the name of one type of sword among
many. According to the museum, the katana was born from the
change to infantry style warfare away from the cavalry. So
you could say that the katana was the game changing assault
rifle of its day. What is the definition of a Japanese
sword? The answer to this question relates directly to
Japanese history.

Why Osafune? Well, Osafune was a very important sword
making town during the Muromachi period, which ran from the
mid-14th century to the late-16th century. During that era
the eastern part of Okayama Prefecture was called Bizen
Province, which is where the museum’s full name Bizen
Osafune comes from. It’s a little confusing because the
neighboring city to the east is also called “Bizen”.
Osafune had not only its own school or style of sword
making but was also one of the largest producers of swords
in Japan. During that period of Japan’s history, the land
was divided into states controlled by feuding warlords who
tried to keep power from falling into the hands of a
central emperor.

Sounds like a Star Wars movie doesn’t it? In fact it wasn’t
far from one as the ability to produce swords brought power
and prestige to the region and its rulers. Japan had yet to
become a single country and was governed much the way
Europe was in its Middle Ages. A Lord or Emperor was first
and foremost a landowner with a number of landless workers
and farmers under their control. Samurai were enlisted to
defend the land not unlike the way kings in Europe employed
knights in times of strife. Money was hard to come by so
payments were made in land and commodities.

=> Adachi Museum of Art a must-see in Shimane

If there was only one “must see” in Shimane prefecture, my
vote would go to the Adachi Museum of Art. Set in the
simple countryside of Yasugi, Adachi is tucked away between
Shimane’s dramatic ranges in a long, flat valley. Fifteen
minutes from the nearest train station, Adachi has brought
guests from all over the world to this sleepy town. While
the museum is well known for artifacts, ceramics and a
collection of very ornate paper walls, it was the simple
art of nature that first drew me in.

The founder, Adachi Zenko, created the museum and now
famous integrated gardens, as a gesture of gratitude to his
hometown. After becoming a well respected businessman,
investor and land owner, he wanted others to see life in
Shimane as he did. We should be thankful for this, because
the surrounding beauty acts perfectly as a backdrop to the
main stage. The gardens are meticulously sculpted, no
stone, branch or leaf out of place. It’s the ultimate
marriage of earth’s natural beauty and man’s tender care.
It’s a scene writers will forever struggle to paint with
words, what can only be truly felt, through sight. Adachi
is a place for reflection, for thought and meditation.



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