COVER STORY • 8 World’s Giants Make a Landfall in Japan – The Changing Japanese M&A Market –

By Takahashi Naoto

APAN’S stock market enjoyed a and food maker RJR Nabisco Inc. for Critical of Vulture Funds, Placing J boom in the fall of 2005 for the first $25 billion. Founded in 1976, KKR Stress on Reconciliation time in many years. Keeping pace with racked up profits in the United States rising stock prices, Japan’s corporate and moved into Europe in the latter half Both KKR and AlixPartners are not merger and acquisition (M&A) market of the 1990s. Its next target was Japan eager about bad-debt disposal business- was on a course of expansion. A sym- where the investment climate saw an es. They also prefer reconciliation with bolic episode is the landfall of a major improvement thanks to the relaxation of existing managers and employees to hos- foreign investment fund and a corporate government controls and the active tile takeovers. rehabilitation consultant in Japan. stock market. Bad-debt disposal deals in Japan got Behind the advent of these “giants in the Justin Reizes, chief operations man- into full swing after a series of collapses world” was a change in the Japanese ager in Asia, explained KKR’s advance to of major financial houses like Yamaichi M&A market, which traditionally had Japan, saying the country’s M&A mar- Securities and the Long-Term Credit focused on the reconstruction of bad- ket is still smaller than its US and Bank of Japan (LTCB) in the latter half of debt corporations. Japanese corpora- European counterparts, and there is the 1990s. The US investment fund tions have now come to pursue strategic growth potential. Following in KKR’s Ripplewood Holdings was the first to realignment to raise their own corporate footsteps, AlixPartners, LLC, a major launch turnaround businesses in Japan, values. US turnaround consulting firm, bidding to revive the collapsed LTCB, announced it had started full-fledged which has since been reborn as Shinsei High Hopes Pinned on Growing business operations in Japan last fall. Bank. A number of foreign securities Japanese M&A Market Founded in 1981, AlixPartners is firms and investment funds followed in known to have reconstructed troubled its footsteps. Kohlberg Kravis Roberts & Co. (KKR) giants such as US major retailer Kmart While major Japanese banks were of the United States has announced that and telecom carrier WorldCom Inc. As busy with bad-debts helping reconstruct it will establish an office in Tokyo in was the case with KKR, AlixPartners debt-ridden client companies, such for- April 2006. KKR, one of the world’s moved into Japan after its experiences eign equity firms as Goldman Sachs, largest buyout funds, made headlines in in the United States and Europe. Morgan Stanley, Lehman Brothers, 1989 for taking over major US tobacco Representatives of the company were Lone Star Group and Colony Capital

Photo: Kyodo News invited to Japan by politi- were flocking to rehabilitate major com- cal and business leaders in panies in the so-called structurally 2003, and visited the depressed industries. country’s major banks and Amid a prolonged economic slump, investment funds. Its these foreign investment banks and long-awaited advance into funds came under fire from Japanese Japan came after a full political and business circles for being analysis of the needs pecu- “vulture funds” that reap fabulous prof- liar to the country. its through aggressive takeovers with Jack Smith, former CEO their rich financial resources. As a of General Motors Corp. result, the effectively state-run invest- and now chairman of ment fund, the Industrial Revitalization AlixPartners’ advisory Corporation of Japan (IRCJ), began full- board, said “special skills” fledged operations. It later launched are necessary to conduct many bailout projects despite a wave of “special medical treat- proposals from foreign funds. Major ment,” referring to its pur- supermarket chain operator Daiei Inc., pose in Japan. Smith indi- whose rescue package was called the cated that the Japanese final big project, also fell into the IRCJ’s M&A market has grown hands. into a mature stage where In parallel with the IRCJ’s activities, skilled turnaround experts Japanese investment funds were estab- Timothy Collins, President and CEO of Ripplewood Holdings are required. lished successively. Major banks, which (right) and Yashiro Masamoto, President and CEO of LTCB (All titles as of September, 1999)

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Photo: THE YOMIURI SHIMBUN had almost disposed of their nonper- ing a recurrence of the forming loans, and corporations whose bitter battle between streamlining efforts got through the crit- livedoor and Fuji TV. ical stages, began funneling excess cash Behind Mikitani into these investment funds. though, was another Ripplewood posted a huge profit by foreign investment relisting Shinsei Bank, but such a success bank, Goldman Sachs. now became history. Foreign broker- Rakuten seized a stake ages and investment funds have found of more than 15% in bad-debt disposal businesses in Japan are TBS. In contrast with no longer attractive. After making quick Rakuten’s high-handed money, these foreign equity firms have takeover attempt, acquired the unfavorable nickname of Goldman Sachs sent vulture funds. out the message at home and abroad that Foreign Money Supports TOBs for it will never help in any Broadcasters hostile TOB. It showed Murakami Yoshiaki surrounded by reporters the maximum cau- KKR and AlixPartners have refrained tiousness so as not to make its financial hostile takeovers are still disliked. from making hostile takeover bids advisory contract with Rakuten adverse- There remains a traditional method of (TOBs) after being criticized as vulture ly affect its activities in the Japanese corporate rehabilitation in which con- funds. In addition, they have also wit- market. tinues corporate managers and a bank nessed Japanese investment funds stage that plays the double roles of a consul- hostile TOBs for broadcasting compa- Revived Japanese Banks Compete tant and a fund supplier work hand in nies. with Foreign Capital hand. In February 2005, Internet service The current keyphrase in the Japanese provider livedoor launched a hostile TOB The cautious attitude of Goldman stock market is “corporate value.” The against Nippon Broadcasting System, Sachs is motivated by the resurrection of so-called Murakami Fund, led by which later became a subsidiary of Fuji major Japanese banks. Japan’s major Murakami Yoshiaki, a former-bureau- Television Network. Horie Takafumi, banks were reorganized into three mega- crat-turned-investor, is purchasing CEO and President of livedoor, attracted bank groups – Mitsubishi UFJ Financial shares in companies whose stock prices national attention. Group, Mizuho Financial Group and are a relative bargain. As a shareholder, His action sent shock waves through Sumitomo Mitsui Financial Group. he asks for an improvement in the com- Japan’s political and business communi- The reorganization was achieved panies’ corporate value. As a result, ties as the vulture funds did. Behind through a series of bad-debt disposals prices of shares in companies that he Horie was Lehman Brothers, which is and injection of public funds to purchased skyrocketed upon buy orders believed to have provided him with a strengthen their financial health. After a from investors. huge amount of funds and key advice series of streamlining efforts, the three AlixPartners President Michael over the M&A strategy. Lehman major banking groups have sought to Grindfors said his firm’s activities in Brothers chose to remain in the backseat pay back the public funds and have Japan will focus on preventive corporate from lessons learned through bad-debt quickly shifted their attention to invest- revitalization so that powerful and disposal. Eventually, livedoor sold its ment bank operations that are expected healthy corporations will post better equity stake in Nippon Broadcasting to produce high yields. They are swiftly earnings and raise their corporate value System to Fuji TV and posted, together advancing into the M&A market which while the economic cycle is in a favor- with Lehman Brothers, huge profits. had so far been monopolized by foreign able phase. Japan’s M&A market has Internet shopping mall operator capital. come out of the rehabilitation phase and Rakuten Inc., led by Mikitani Hiroshi, The Japanese economy had been stepped into the next stage where for- acquired a large stake in major TV and characterized by the so-called main- eign capital and domestic banks are radio broadcaster Tokyo Broadcasting bank system under which main dealing vying for healthy corporations which are System (TBS), and proposed integrating banks monitor every move of their seeking an improvement in their corpo- their operations under a joint holding client corporations and take care of rate value. company in October 2005. Mikitani them. Although Japanese corporations stressed that his proposal for manage- have recently softened their allergy to Takahashi Naoto is a reporter for the ment integration is a friendly one, deny- foreign capital somewhat, ostentatious Economic News Section of Kyodo News.

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