TT-700 -- Why Kameda May Regret its US Cracker Deal, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, Mar 03, 2013, Issue No. 700

+++ INDEX

- What's New -- Why Kameda May Regret its US Cracker Deal
- News -- Is Caroline Kennedy next US ambassador?
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Climbing in Ehime, Castles in Kumamoto
- News Credits

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+++ WHAT'S NEW

On Friday, the Nikkei carried a short story about major Niigata-based rice cracker maker, Kameda Seika, buying a US-based organic crackers company, called Mary's Gone Crackers (MGC). Apart from the name of the target firm, at first glance there was nothing particularly notable about the deal. Kameda are spending JPY2.4bn and will buy out 77.8% of MGC. Kameda told the Nikkei it was buying MGC because of a familiar reason -- the market in Japan is mature and flat and the firm is looking for growth strategies abroad. We found it interesting, though, that Kameda decided to go to the USA for M&A shopping rather than SE Asia, and also that they picked an organic cracker maker versus a more conventional one.

But following a hunch that maybe there was more to this deal than just a boring announcement, we found that Kameda may have bought itself a bunch of trouble that from the sidelines is both interesting and entertaining, and it highlights some of the traps for new players in the international M&A market.

Starting with the target, MGC was formed in 2004 by one Mary Waldner of Gridley, California. Ms. Waldner had apparently suffered from celiac disesae (intolerance to gluten) since she was 3 years old, and didn't find out until she was 43. Following her discovery of why she was always sick, she started baking gluten free crackers to eat at home and eat out when with friends. The friends then tried her crackers, loved them, and next thing you know she was cooking for neighborhood stores and thinking about turning it into a business. It's really the American dream, and since she and her husband set up the company in 2004, the company has averaged 40% growth every year, except last year (2012) when they grew 70%.

It appears that not only do a lot of people in the USA suffer from celiac disease, but also that there isn't a nationwide provider of non-gluten, organic crackers and similar snacks. This is the market gap that MGC is trying to fill and looks like it will do handily. No word in public as to the size of MGC's revenues and profits, but given that they are being bought out for JPY2.9bn, and employ 160 people, we can guess that MGC is probably doing US$15MM-US$20MM in sales, and making 10%-15% EBIT.

[Continued below...]

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[...Article continues]

Given that Kameda is in the rice cracker business, also gluten-free (MGC's products are made from brown rice, flax, quinoa, and sesame seeds, among other things), and that MGC is enjoying ballistic growth, it's obvious why Kameda made an offer. Although we don't know Mary's crackers as a product, the growth of the company shows that they have got their marketing message right -- something that Kameda, with it's own US subsidiary for some years and losses for that subsidiary last year of US$1.2MM, is not able to recreate -- means that this should be a very good match.

The deal was announced on Friday, March 1st, meaning that the initial approach probably happened about a year ago, and negotiations would have run around 9 months. There were probably some long, sleepless nights spent by the Kameda M&A team, because they appear to be new at the M&A game, and having so little success with their own US subsidiary, the idea of taking over a US firm with a very different culture and business structure must have caused lots of internal debate. But now they are due a bit of relaxation and a post-deal honeymoon, right?

Not quite. The entertaining part of this story is to come.

Firstly, there is the small matter of the MGC being raided by the US Justice department for employing illegal workers. Not just one or two, but a full 30% of the workforce. A search warrant issued by US Immigration and Customs says that in March last year its investigators found that at least 49 of the firm's 159 employees did not have proper work documentation. Indeed, most of them (the 49) possessed fake social security numbers (where did they get those, then?). As a result, in May last year a company official duly reported back to the authorities that 48 of the 49 had since been fired -- problem solved. However, the newly issued warrant says that in actual fact the very next week, 13 of those fired, who were supervisors, were then re-hired on fake identities and that the company appears to be involved in helping them... Uh-oh. Not good.

So far there have been no arrests, but the authorities did seize the company's computers -- so we're wondering how they are running their business at the moment. Hopefully they were doing their accounting in the cloud, where physical devices don't matter. Either way, Kameda management will have their hands full dealing with this.

Secondly, not 4 weeks after the search warrant was issued, MGC was again in the local news. This time for an exploding oven that set part of the factory on fire. Two workers were injured, one seriously, and about US$10,000 of damage was caused. MGC has almost 30 ovens, so the explosion would not have had serious impact on the production output. However, the fact that such an accident could happen may suggest that MGC's equipment or processes are sub-standard, and if that is the case, then Kameda will have to spend even more money improving infrastructure and systems.

Thirdly, and in our eyes the biggest potential problem, there is the founder herself, Mary. She seems like a quintessential entrepreneur, with the vision and passion to get employees and customers fired up and supporting the business. There was an interview with her in a local paper back in January this year, and she told of her challenges, particularly her frustration in dealing with men in the foods business who don't want to listen to females tell them how things should be done. While her views are entirely reasonable in the US, Kameda is a traditional Japanese countryside company that has been running since 1946. We just wonder how their management will get along with Mary, and whether the founder will last more than a few months in the new organization?

It's not unreasonable to expect that as a company founder recently in the money, Mary would want to go get another life. However, given that Kameda don't have the vision and imagination to make a US company work with their own products, it's hard to see them doing much better with Mary's company without Mary there. Of course maybe they'll get lucky and recruit someone else just as capable in, and that's certainly been done before. In the meantime, though, we imagine there will be a lot of headbutting and hard lessons to be learned by Kameda's team assigned to the project, before they start contacting the recruiters.

Kameda itself is a sterling company. Good sales record, good profits, good R&D, and realizing that they need to go abroad. It will be interesting, though, to see if with Mary and her crackers they haven't bitten off more than they can chew... literally.

*************

Lastly, here we are at issue 700 -- that's 14 and a half years producing the news letter 48 times a year. Sometimes having to get a story out late on a Sunday night makes the newsletter tough discipline, but it's the many emails of encouragement and thanks we get from readers that make the effort all worth while. There's also the fun of interesting research and discovering connections you don't normally get to see by just reading the news -- like today's story about Kameda and the crackers business. Anyway, thank you for reading, and we look forward to producing Terrie's Take for a while to come. Please continue to cut-and-paste the stories that catch your attention, and let others know we exist.

...The information janitors/

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+++ NEWS

- Is Caroline Kennedy next US ambassador?
- Shiseido to largely end animal testing
- OpenX gets Dentsu as investor
- No recovery in auto sales
- TPP haggling begins

=> Is Caroline Kennedy next US ambassador?

Bloomberg is reporting that political scion Caroline Kennedy could be the next US ambassador in Tokyo. Apparently the White House has approached her and she is showing interest, after having turned down a Canada posting offered earlier. Kennedy's family's close connections with John Kerry, the new Secretary of State, also reinforce the speculation that she's bound for Tokyo. Then there is the Japanese government, which is no doubt interested in having another famous name person back in the ambassador role, following in the tradition of Mike Mansfield, Walter Mondale, Tom Foley and others. (Source: TT commentary from washingtonpost.com, Feb 28, 2013)

http://wapo.st/XwiAOw

=> Shiseido to largely end animal testing

Cosmetics giant Shiseido has said that it will largely drop the testing of its products on animals, except where such tests are the only way to prove safety of a product or where certain countries require that type of testing. Shiseido actually stopped animal testing in its own labs as long ago as 2011, but has product components from other suppliers that are still tested the old fashioned way. The Shiseido announcement comes as the EU is getting ready to pass a ban on animal-tested products later this month. (Source: TT commentary from dawn.com, Mar 1, 2013)

http://dawn.com/2013/03/01/japan-cosmetics-giant-shiseido-ditches-animal...

=> OpenX gets Dentsu as investor

Ad serving tech and marketplace company, OpenX of the USA, has announced that Dentsu's Cyber Communications division has invested into it, on undisclosed terms, but which brings OpenX's equity funding to date to around US$75m. Dentsu and OpenX are already partners on a business level, but the investment appears to secure the relationship here in Japan. OpenX is a major player in Real Time Bidding for ads online, and its revenues have jumped by more than 100% for each of the last two years. (Source: TT commentary from mediapost.com, Feb 26, 2013)

http://bit.ly/Z4OL5U

=> No recovery in auto sales

While the media is still in love with PM Abe, his attempt at awakening the nation's "animal spirits" seems to be falling on deaf ears with Japanese consumers. Apparently the auto industry has had a particularly "rugged" February, with sales falling 12.2% year-on-year to just 292,399 cars, making this the sixth month in a row of y-o-y declines. Surprisingly, the sales of small passenger cars slid the most, down by 15.4% to 138,229 units. ***Ed: From such a low base, we can only hope that the 2014 consumption tax rise will stimulate more demand in the second half of the year.** (Source: TT commentary from e.nikkei.com, Mar 1, 2013)

http://e.nikkei.com/e/ac/tnks/Nni20130301D01SS297.htm

=> TPP haggling begins

The Japanese government has identified a parcel of 487 items that it wants to retain tariffs on for TPP, including industrial products. But when it comes right down to it, pundits say that the government aims to hold out on two items only: rice and sugar. Other products on the nation's short list include wheat, dairy products, and beef -- all items requested by farmer's lobby JA. ***Ed: Hard to imagine the other 11 TPP countries accepting restrictions on wheat, beef, and dairy products, given that those are the main exports of the primary players.** (Source: TT commentary from e.nikkei.com, Mar 3, 2013)

http://e.nikkei.com/e/ac/tnks/Nni20130302D02JFF04.htm

NOTE: Broken links
Some 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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+++ CANDIDATE ROUND UP/VACANCIES

=> BiOS, a Division of the LINC Media group, is actively marketing the following positions for customers setting up or expanding in Japan, as well as other employers of bilinguals.

** HIGHLIGHTED POSITION

BiOS is urgently looking for an Application Support Helpdesk Engineer to work on an international helpdesk team supporting a major global internet and software applications company in Tokyo. The candidate will receive training to learn how to support the company’s apps, take phone calls and interact with international users, and escalate difficult problems to English-speaking engineers. You will also be responsible for reporting, tracking activities, and other creative activities in this fast-paced and changing atmosphere.

Due to the technical nature and demanding work environment, this position is suitable for someone with basic helpdesk experience who can adapt to a constantly changing environment. In addition, since this role requires direct coordination with both regional and global IT teams, fluent Japanese and business English will be required.

Remuneration is JPY2.5M - JPY3.5M depending on your experience and skill level.

** POSITIONS VACANT

- Help Center Analyst, global bank in Okinawa, JPY 2.5M - 3.5M
- Staffing Consultant, IT integration services provider, JPY 2.5M - 3M
- Desktop Engineer, IT services provider, JPY 3M - 5M
- Senior Support Engineer, IT integration services provider, JPY 4.5M - 5.5M
- Data Center Operator, global financial services company, JPY 3M - 5M

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Every 2 weeks BiOS sends out a regular communication to its job seeking candidates, called BiOS Job Mail. Every edition carries a list of BiOS's current and most up-to-date vacancies, with each entry featuring a short job description and a direct link to the main entry on the BiOS home page. Regardless of whether you are unemployed and searching, thinking about a career change, or just curious to know if there is something out there that might suit you better, the BiOS Job Mail newsletter is an easy and convenient way for you to stay informed. If you would like to register for the BiOS Job Mail, or to find out more, please email jason.kisling@biosjp.com.

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+++ UPCOMING EVENTS/ANNOUNCEMENTS

----------- Yokohama: A City Open for Business ------------

An executive seminar at Tokyo Midtown on the attractions of Yokohama for commerce. The keynote speaker is Nobuo Asai, an international politics expert, joined by Bosch Operating
Officer Naoki Yagyu, and Yokohama Mayor Fumiko Hayashi. After the talks, relax with a drink and browse a selection of relevant booths. Apply now for this one-off seminar and learn the benefits for businesses of setting up in Japan's second largest city.

http://www.city.yokohama.lg.jp/keizai/yuchi/support/topseminar201303e.html

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------------------ ICA Event - March 21 -------------------

Speaker: Timothy Langley. Esq, President and Representative Director of Langley Esquire KK

Title: "A New World Order?"

Details: Complete event details at http://www.icajapan.jp/

Date: Thursday, March 21, 2013
Time: 6:30 Doors open, Buffet Dinner included and cash bar
Cost: 4,000 yen (members), 6,000 yen (non-members)
Open to all, no sign ups at the door!!!!!!!

RSVP: RSVP by 5pm on Friday, March 15th
Venue is The Foreign Correspondents' Club of Japan
http://www.fccj.or.jp/aboutus/map
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+++ CORRECTIONS/FEEDBACK

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 editors@terrie.com.

=> No corrections or comments this week.

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+++ TRAVEL DESTINATIONS PICKS

=> Climbing Mt. Ishizuchi, Ehime
An easy enough walk, except for the last bit!

When autumn came with its beautifully coloured leaves, I decided to climb Mt. Ishizuchi. I’d heard that Ishizuchi was the highest mountain in western Japan when I first came to Ehime from Shanghai. Although I’m honestly not very athletic, I was confident that I could climb Ishizuchi because I once climbed Mt. Huashan, which is said to be one of the steepest mountains in China. I wasn’t worried about climbing it since we could go half way up the mountain by car. At the beginning, I walked at a fast pace. The mountain path was still wet from the heavy rain on the previous day, but it wasn’t very steep, so I was able to enjoy the coloured leaves.

Just when I started to think that it was going to be easy all the way to the top, we came to some steep stairs. Most of the stairs were made of wood and they were very slippery because of the damp. My pace dropped, and I couldn’t afford to gaze at the beautiful scenery any more. Clambering up the steps to the top took all my concentration. As we got closer to the top, our rests became more frequent. But we realized that the peak couldn’t be far now because nearly all of the trees seemed to be red. The prospect of the view overlooking all this red foliage gave me the heart to keep pushing on.

http://japantourist.jp/view/climbing-mt-ishizuchi

=> Kikuchi Castle, Kumamoto
Kyushu's first line of defense in the 7th century

More than a millennium ago, before quintessential Japanese castles like Himeji and Nagoya were even conceived, a cluster of wooden fortresses defended the island of Kyushu. These early castles may not have been as impressive as their latter counterparts, but they played a critical role in the eyes of Japan’s 7th century Yamato Court -- they were the first line of defense against an invading force from the Asian mainland. With a political presence established by the Imperial Court at Dazaifu in modern-day Fukuoka Prefecture, a ring of castles was constructed to protect this defacto capital of Kyushu.

You’re unlikely to casually stumble across any of these castles today. When the threat from China and Korea waned a few centuries later, most of the buildings fell into disrepair. However, the town of Kikuchi in Kumamoto Prefecture has recently rebuilt part of their ancient castle site, thanks to the artifacts unearthed by archaeologists during a comprehensive dig in 1967.

http://japantourist.jp/view/kikuchi-castle

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