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Barbarians at the gate, vultures
overhead
By Jamie Miyazaki
There is perhaps no more telling sign of the
change in corporate Japan than the fact that the past
few months have been particularly busy for leveraged
buyouts (LBOs) and management buyouts (MBOs), which
before the mid-1990s were almost unheard in the Land of
the Rising Sun.
The prolonged downturn has
forced Japanese firms to restructure their operations in
search of greater synergy, spin off non-core
subsidiaries and look for alternative deal structures.
All of these factors have tilted the market in favor of
private equity firms. The past year witnessed 39 MBOs,
compared with fewer than 20 back in 1996.
To the
distress of the Japanese psyche, foreign firms have been
particularly active in the buyout market. While the
economy as a whole may be floundering, depressed equity
markets have made target businesses very affordable and
low interest rates make the debts generated from LBOs
used to purchase firms relatively easy to service. Local
banks have also been under increasing pressure to clean
up their balance sheets. Offloading equity and debt to
buy out funds can be an attractive way of patching up
their battered capital.
In addition, many
foreign funds, with their corporate-restructuring savvy
and solid risk-evaluation methods, represent a far lower
risk profile for Japanese banks to lend funds to than
the morass of indebted local businesses. As a result,
all the major private equity firms are present in Japan
and looking for deals.
Private equity firms have
long claimed to be improvers of business. With the
prevailing conditions and necessity for a cleanup of
corporate-governance practices in Japan, the arrival of
foreign buyout funds in Japan should represent a match
made in heaven. Admittedly, while US private equity
firms have not always been met with open arms, including
in Europe's markets, their reception in Japan has
generally been even less welcoming.
Japan's
hermetically sealed corporate culture does not lend
itself easily to outside intervention. The widespread
perception that many funds are in Japan to prey on weak
companies, buying them at a discount and then rapidly
selling them on for a quick profit, has meant that many
foreign funds have been tar-brushed as hagetaka,
or "vulture funds".
As Toshio Tachibana, senior
consultant at the Japan Research Institute, thundered
recently in an interview with the Yomiuri newspaper,
"physical assets in this country should also be owned
and managed by the Japanese people as an independent
nation. That's the way it should be. A country whose
assets belong to another nation is called a colony."
US fund Ripplewood is perhaps the most
high-profile of these vultures. It made its presence
felt first in March 2000 with its acquisition of the
Long Term Credit Bank (LTCB), which had collapsed under
a mountain of non-performing loans (NPLs). The
acquisition of any Japanese firm in the strategically
important financial sector by a foreign company posed
serious problems for the Japanese. Japanese firms are
heavily dependant on bank loans, and there were fears
that Ripplewood would get tough on many of LTCB's
remaining NPLs, forcing many firms into bankruptcy.
In a society opposed to mass layoffs, this was
not a palatable scenario. The deal was even more
controversial as LTCB had to be bailed out by the
Japanese government using taxpayers' funds. It was not
expected then to be purchased by a foreign firm for just
US$9.8 million, and on very favorable terms for
Ripplewood.
Ripplewood quickly set about
restructuring LTCB, renaming it Shinsei Bank (meaning
"new life") and improving the bank's management and
operations by bringing in foreign management expertise
and far more stringent risk-management techniques.
Under Ripplewood's auspices, Shinsei has quickly
regained its financial health, but the newly
reconstituted bank's refusal to bail out the troubled
Sogo department-store chain, triggering its bankruptcy,
drew heavy criticism from politicians, and accusations
of a foreign conspiracy to bring corporate Japan to its
knees resurfaced.
Nonetheless, LTCB's sale to
Ripplewood opened the way for the barbarians at the
gate. Foreign involvement in the financial sector is now
a given. In the past three years other funds such as W L
Ross & Co, Lone Star and Cerberus have all purchased
majority stakes in a number of second-tier Japanese
banks.
Foreign private equity involvement has
not been limited to the financial sector. UK private
equity firms Schroder Ventures and 3i have been active
in the Japanese MBO market, assisting in the MBOs of
Recruit Building Management, Vantec and Benkan Corp.
Goldman Sachs has a fund specializing in
purchasing and restructuring Japan's spectacularly
bankrupt golf courses. W L Ross & Co is in the
process of setting up a new $200 million fund to buy
distressed real estate. Jeffrey Hendren, Ripplewood's
managing director, has indicated that he is looking to
make two or three buyouts over the next few years in
Japan's telecoms, media and technology (TMT) sector.
Ripplewood has also just completed the largest
LBO in Japanese history with the acquisition of Japan
Telecom's fixed-line business from Britain's Vodafone
for $2.2 billion. Last week also saw the start of a
bidding war for the assets of Daiei, a failing
supermarket group, between Colony Capital and a joint
Lehman Brothers and Ripplewood bid.
However,
increased foreign private equity involvement in Japan's
economy has not necessarily resulted in complete
acceptance of their activities by any means. Foreign
firms have come under increased scrutiny by the Japanese
tax authorities, in July Lone Star was presented with a
14 billion yen (about $124.8 million) tax bill for
failing to declare all its income. Lone Star is alleged
to have used offshore entities to reduce its tax burden,
which is regarded by the tax authorities as tax evasion,
although many foreign firms disagree.
Moreover,
many Japanese executives are inherently conservative,
and skepticism of foreign buyout funds is still
prevalent. It is therefore important for Western funds
to be au fait with Japanese corporate culture in
order to bring their knowledge of Western-style
capitalism to Japanese firms and reap the full benefits
of their investments. Firms such as Cerberus and
Ripplewood certainly look to be succeeding in this.
The irony is that Japanese financial groups have
been happily acting as "vultures" overseas. Nomura has
been very active in Europe and in restructuring the
Czech Republic's beer industry, an undertaking not
dissimilar in significance to Ripplewood restructuring
Japan's rice industry.
Increasingly, though,
Japanese financial firms are themselves becoming more
active in the domestic buyout market. Nomura recently
outbid Ripplewood for the Huis Ten Bosch theme park in
Kyushu and is looking to shift its focus more to Japan.
Nomura is also establishing a joint fund with UFJ bank
and Misawa Resorts to invest in floundering golf
courses. Japan Asia Investment, Tokio Marine and Nikko
Principal Investments have all been active in the MBO
market.
The government's establishment of the
Industrial Revitalization Corp of Japan (IRCJ) in May
and the announcement this month of the first batch of
firms it intends to help restructure may indicate a new
willingness by Japan to tackle failing firms. However,
the rather lackluster list of its initial five
candidates and their relatively small size, with the
exception of Mitsui Mining, may signal that the IRCJ
will function as a hospital for zombie companies. No
firms from Japan's TMT manufacturing sector, which
probably stand the best long-term chance of
revitalization, appear on the IRCJ's initial candidate
list.
In fact, the best efforts at restructuring
and revitalization have come not from the overseas
private-equity quarter but from foreign firms investing
in Japanese companies. Japanese companies have tended to
favor organic growth strategies as means of expansion
and industry buyers have thus often been given a far
warmer reception by Japanese firms. This has been most
evident in the automobile sector, with Renault's
successful turnaround of Nissan being the prime example.
But similar success stories can be found at Mitsubishi
Motors and Mazda.
In the rest of the world,
private equity firms and foreign buyers are important
agents of creative destruction, which is the only way an
economy can successfully restructure as investors come
in and buy up dead or dying companies. As the Japan
Investment Council recently put it, "If new foreign
management succeeds in strengthening competitiveness and
acts as a catalyst to greater reform, this can be an
extremely effective means for Japan to promote domestic
reform."
The foreign vultures circling overhead
thus still appear to have a useful function.
Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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