Sony Leads Japan Inc. Eyeing Deals With $2.4 Trillion: Real M&A

After hoarding $2.4 trillion in cash, corporate Japan is pursuing overseas takeovers like never before to boost returns. Sony Corp. (6758) and Fujifilm Holdings Corp. (4901) are among the companies with the biggest incentive to chase deals.

More than $25 billion of cross-border acquisitions have been struck by Japanese companies this year, on pace to exceed the record amount of deals announced in 2006, according to data compiled by Bloomberg. The buying spree comes as Japan’s currency climbed to its highest level since World War II versus the dollar and the world’s third-largest economy fell into its third recession in a decade after being rocked by the nation’s biggest earthquake on record.

Japanese companies are using their buying power on foreign takeovers after slumping demand at home destroyed almost half their equity value in the past five years. Tokyo-based Sony, mired in its worst earnings slump in more than 50 years, and Fujifilm, with five straight years of declining sales at its film and digital camera unit, are among 13 companies with the largest reserves and the lowest returns on equity, the data show. That makes them candidates to profit most from acquisitions, Capstone Global Markets LLC and Harris Associates LP said.

“Corporate Japan collectively has not been an efficient user of free cash on the balance sheet,” said David Herro, Morningstar Inc.’s international stock fund manager of the decade and chief investment officer of international equities at Harris Associates, which oversees about $70 billion in Chicago. “Given the strength of the yen, doing overseas M&A does become a legitimate option.”

Record Cash

Privately owned non-financial companies in Japan amassed 197 trillion yen ($2.4 trillion) in currency and deposits at the end of last year, according to data compiled by the Bank of Japan. In dollar terms, the amount was higher than any fiscal year end since the data began in 1979.

While companies in Japan saved a record amount of cash at near-zero interest rates, shareholders lost money. The Topix index, the benchmark gauge for Japanese common equity, has fallen 49 percent since May 2006. Including dividends, managers of corporate Japan have rewarded owners with a 45 percent loss.

Now, with Japanese companies using more of their money on acquisitions, foreign takeovers are on pace to top $60 billion this year, which would surpass the record $37 billion announced in 2006, data compiled by Bloomberg show.

‘Go Hunting’

Takeda Pharmaceutical Co. of Osaka, Japan, and Tokyo-based Toshiba Corp. spent $16 billion on cross-borders takeovers this month. Takeda’s $13.7 billion deal for Nycomed in Zurich was the largest ever by a Japanese drugmaker, while Toshiba’s $2.3 billion purchase of Zug, Switzerland-based electronic-metering company Landis+Gyr AG was its biggest in five years.

The push overseas gained more impetus as the Cabinet Office said May 19 that the nation’s economy shrank an annualized 3.7 percent in the first quarter, after the magnitude-9 earthquake and tsunami on March 11 disrupted production and prompted consumers to cut back spending.

Japan may expand by 1.4 percent over the full year, less than half the rate of economic growth globally, according to the Washington-based International Monetary Fund.

“Japanese companies have been struggling with a very weak domestic economy,” said Kevin Caron, a market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., which has $110 billion in client assets. “It’s a good time for Japanese companies to go hunting abroad.”

Company List

There are currently 13 non-financial companies in Japan with market values of more than $5 billion that have increased their net cash in the past five years to at least $1 billion and had a lower average return on equity versus the median company in the Topix over that period, data compiled by Bloomberg show.

Sony had the most cash, with $8.3 billion more in reserves than borrowings as of March, the data show. That’s a sevenfold increase in five years. Japan’s largest exporter of consumer electronics had an average return on equity, which measures how much a company earns for each dollar invested, of 0.2 percent in that span, versus an 8.3 percent return in the Topix.

Since Howard Stringer, 69, was named Sony’s first non- Japanese chief executive officer in March 2005, the company has lost about $9 billion in market value, the data show. From its high four years ago, Sony’s equity has decreased by $33 billion.

Sony, which posted three straight years of losses for the first time since listing its shares in 1958, on May 26 forecast net income this fiscal year that fell short of analysts’ estimates by 31 percent, data compiled by Bloomberg show.

Value Destruction

The company’s PlayStation video-game network and Qriocity online service were also breached by cyber hackers last month, exposing more than 100 million customer accounts, which included billing addresses and login passwords.

“It’s hard for me to believe that these guys have destroyed that much value in such a short time,” said Sachin Shah, a merger arbitrage strategist at Capstone Global. “Stringer really has to do something to revitalize the company. For Sony to continue to compete, they’re going to have to start doing deals.”

Imax Corp. (IMAX), the operator of large-screen movie theaters, and Netflix Inc. (NFLX), the Los Gatos, California-based mail-order and online movie-rental service, are two companies that Sony should consider acquiring, according to Shah. Imax advanced 4.5 percent on Dec. 31 in its busiest trading day since the Mississauga, Ontario-based company went public in 1994, after the Daily Mail said Sony may be preparing a bid.

Imax, Netflix

Both Imax, which is valued at $2.4 billion, and Netflix, with a market capitalization of $13.9 billion, will increase per-share earnings by at least 46 percent next year, according to analysts’ estimates compiled by Bloomberg.

Sony has “a lot of cash on their balance sheet to put to work if they wanted to,” Shah said. “They could do multiple deals and it could start becoming exciting for shareholders.”

Mami Imada, a spokeswoman at Sony, said the company isn’t currently working on any acquisitions. Ann Sommerlath, a spokeswoman at Imax, declined to comment on “rumors or speculation,” as did Netflix’s Steve Swasey.

Fujifilm almost doubled its net cash to $1.8 billion after a return on equity of just 1.8 percent over the past five years, data compiled by Bloomberg show. Sales at the Tokyo-based company’s imaging unit have decreased in every year during the same period as more consumers used smartphones to take pictures. Last fiscal year, Fujifilm had 325.8 billion yen in revenue at the unit, a more than 50 percent decline from 2006.

‘Dying Business’

Fujifilm’s cash was “built over the years in its film business, which is of course a dying business,” said Harris Associates’ Herro. “For them, it would make sense” to use more of it on acquisitions, he said.

In February, the company agreed to purchase two units from Whitehouse Station, New Jersey-based Merck & Co. that make biopharmaceuticals as it targets growth in health care to make up for the slump in sales of film and cameras.

The purchase was its fifth in the past year, including its agreement to acquire Japan Tissue Engineering Co. in August.

“We’ve been interested in acquiring firms, especially in the medical and life science fields,” said Takao Aoki, a spokesman at Fujifilm. “M&A is part of our business expansion. Buying firms can help us save time and expand business segments. We budget as much as 100 billion yen a year for acquisitions.”

With record amounts to spend, Japanese companies must avoid repeating the mistakes of the 1980s, when they overpaid to acquire prized assets around the world, according to James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, which oversees $110 billion.

Cautionary Tale

During that time, Japanese buyers snapped up everything from Rockefeller Center in Manhattan to California’s Pebble Beach golf course and Vincent Van Gogh’s Sunflowers painting as the Nikkei 225 (NKY) Stock Average reached a record 38,915.87 at the end of the decade. Many of the investments were sold at a fraction of their cost as the country’s asset bubble burst.

Tokyo-based Mitsubishi Estate Co., which invested $1.4 billion in Rockefeller Center in 1989 and 1990, lost it seven years later after defaulting on the mortgage. Pebble Beach, the site of last year’s U.S. Open, was acquired by golf magnate Minoru Isutani in 1990 for $841 million. It was sold less than two years later at two-thirds the price as Isutani’s company went bankrupt.

“It’s not like you want to throw your money around,” said Dunigan. “The buying spree that they went on the 1980s in the real estate market didn’t work out that well. They were out buying in some cases trophy real estate properties, like Rockefeller Center. You have to make smart purchases and you have to do your homework.”

List of Companies:
Country of Domicile - Japan
Market Capitalization > $5 Billion
Net Cash > $1 Billion
Net Cash > Net Cash 5 Years Ago
5-Year Average Return on Equity < Topix Median Company Value
*Excludes Financial Companies

Denso Corp.
Fujifilm Holdings Corp.
Kuraray Co.
Kyocera Corp.
Mitsubishi Tanabe Pharma Corp.
Ono Pharmaceutical Co.
Rohm Co.
Sega Sammy Holdings Inc.
SMC Corp.
Sony Corp.
Suzuki Motor Corp.
Taisho Pharmaceutical Co.
Yamato Holdings Co.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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