State Fund Profit on Japan Display Shows Overhaul Path

Innovation Network Corp. of Japan, the government-backed fund that made a tidy profit this month on the Japan Display Inc. (6740) initial public offering, plans to use lessons from the deal in restructuring other troubled industries.

INCJ put 200 billion yen ($1.9 billion) into the Tokyo-based company in 2012 as it combined three struggling businesses and turned a profit of more than 60 percent. In the fund’s first comments since the deal, Co-Chief Operating Officer Yoshinori Komiya said the experiences from the deal can be applied more broadly in Japan.

That may mean it will be easier for Japanese companies in similar industries -- such as televisions, smartphones or cameras -- to combine assets and restructure with state backing. The lessons from Japan Display include the importance of INCJ having control and the ability to install a new chief executive officer such as Shuichi Otsuka, who took over two years ago.

“Japan Inc. has been criticized for decades for the lack of strong and autonomous leadership, and that was something Japan Display needed the most,” said Komiya, 53, who also is deputy-director-general of an economic and industrial policy bureau at the country’s trade ministry. “For Japan Display to be competitive and profitable, Otsuka’s quick decision-making contributed and pushed the IPO two years earlier than expected.”

Photographer: Junko Kimura-Matsumoto/Bloomberg

Shuichi Otsuka, president and chief executive officer of Japan Display Inc., second from left front row, holds a listing notice with Akira Kiyota, president of Tokyo Stock Exchange Inc., as they pose for a photograph during an initial public offering ceremony for the company's listing at the Tokyo Stock Exchange (TSE) in Tokyo on March 19, 2014. Close

Shuichi Otsuka, president and chief executive officer of Japan Display Inc., second... Read More

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Photographer: Junko Kimura-Matsumoto/Bloomberg

Shuichi Otsuka, president and chief executive officer of Japan Display Inc., second from left front row, holds a listing notice with Akira Kiyota, president of Tokyo Stock Exchange Inc., as they pose for a photograph during an initial public offering ceremony for the company's listing at the Tokyo Stock Exchange (TSE) in Tokyo on March 19, 2014.

Culture Clashes

Japan Display was created out of assets from three of the country’s most prominent companies: Sony Corp. (6758), Toshiba Corp. and Hitachi Ltd. In the business of making displays for smartphones and tablet computers, they all lacked the scale to compete individually against larger rivals.

“The three former companies had little money for equipment investment despite their high technology,” Otsuka told reporters March 19. “We had to solve the problem that Japanese electronics companies had faced; winning in technology but losing in business.”

With such combinations in the past, factions from different companies would battle each other and try to protect their own interests, Komiya said. INCJ, which gained a 70 percent stake in Japan Display when it made its initial investment, brought in Otsuka, then a director at Elpida Memory Inc., to minimize such stasis and culture clashes.

Otsuka had seen the difficulties firsthand. Elpida was formed through the 1999 merger of NEC Corp.’s and Hitachi’s memory businesses. It ended up filing for bankruptcy protection in 2012 and was sold to Micron Technology Inc. the following year.

IPO Plunge

Under Otsuka’s leadership, Japan Display was able to move to profitability and return to the market as a publicly traded company. The value of INCJ’s investment swelled to 323 billion yen, a return of 62 percent in less than three years, based on March 28 closing prices. It retains a stake of about 36 percent.

“Japan Display’s IPO was one of our successful deals and without Otsuka’s presence there wouldn’t have been a successful story,” Komiya said in an interview. He said the recommendation to tap Otsuka came when executives from INCJ held unofficial talks with Yukio Sakamoto, the former president of Elpida, two years ago, and he recommended his director.

Japan Display’s IPO has been rough for its investors. Shares plunged 15 percent on its first trading day on March 19, the worst debut of any Asia-Pacific initial public offering worth at least $1 billion since 2008. The stock fell to 721 yen today in Tokyo to 20 percent below the IPO price.

More Deals

INCJ was created in 2009 to invest in technologies that would make Japan’s industries more globally competitive. The fund has 280 billion yen of funds from the government and companies, and has the capacity to invest as much as 2 trillion yen backed by government guarantee.

INCJ also invests in technology startups, similar to a venture capital firm. In February, the fund was said to buy a minority stake in Trigence Semiconductor Inc., a Japanese chip designer part-owned by Intel Corp.’s venture capital arm.

The Japan Display approach can be applied to other companies and industries, Komiya said. One possibility is Renesas Electronics Corp., the Japanese chip supplier to Apple Inc. (AAPL) and Nintendo Co. INCJ first announced plans for a bailout in 2012 before completing the deal last year.

The company has struggled amid falling demand and competition from Samsung Electronics Co. Led by Chief Executive Officer Hisao Sakuta since June, Renesas unveiled on Feb. 19 a plan to cut jobs by offering buyouts. The company was talking with unions to cut about 20 percent of its workforce through voluntary buyouts, a person familiar with the matter said in January.

TVs, Phones

“Reshaping a battered Japanese company with cutting-edge technology into a competitive and profitable firm could eventually give a stimulus to the economy as a whole and create more jobs,” Komiya said.

Japan has several industries with characteristics similar to the display market, with many competitors too small to compete effectively on their own. For example, the country has at least six different manufacturers of TVs and mobile phones. Combining several of those operations may create more powerful companies that can better compete globally.

INCJ does have more capital to invest. The fund has completed about 60 deals, investing a total of 700 billion yen, according to its website.

To contact the reporters on this story: Takashi Amano in Tokyo at tamano6@bloomberg.net; Shigeru Sato in Tokyo at ssato10@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net Peter Elstrom, Robert Fenner

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