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Private Equity Giants Called Vultures Eye Breakthrough in Japan


(Bloomberg) — For years, private equity giants have worked to change a damaging public perception in Japan: that they’re “vultures,” hacking companies apart and gorging on their remains.

Now, Toshiba Corp. is giving the buyout industry an $18 billion opportunity to see whether those efforts have paid off.

The troubled Japanese conglomerate is soliciting acquisition offers — and other proposals — as it seeks to end years of mismanagement. Bain Capital, Blackstone Inc. and CVC Capital Partners are among the funds considering bids, Bloomberg News has reported. A successful deal, which may be private equity’s largest ever in the country, would signal the once-criticized investors have become more accepted in Japan.

But that remains far from certain. Toshiba directors have been disagreeing publicly over the company’s future, and the Japanese government, which deems the firm’s nuclear power business critical to national security, would have to sign off. What’s less in doubt is private equity has made progress in improving its reputation in Japan.

“Things are starting to change,” said Kazuhiro Yamada, head of the Japan buyout advisory team at Carlyle Group Inc., the US investment house that manages $325 billion in assets. “Before, it was hard for private equity firms to even make an appointment,” he said. “Now, companies are increasingly approaching private equity.”

The number of deals involving private equity funds hit an all-time high of 134 in Japan last year, according to the consulting firm Bain & Co. The value of transactions more than doubled from the previous year to about 2.7 trillion yen ($20 billion), close to the record from 2017. Shiseido Co. and Hitachi Ltd., both founded more than a century ago, sold parts of their business to private equity last year.

Even the government says private equity has changed in Japan. In the first half of the 2000s, many private equity firms “sought to increase the value of companies over the short term through debt workouts,” a representative of the Ministry of Economy, Trade and Industry’s Industrial Finance Division said in emailed comments. These days, they try to raise the value of companies over the medium to long term, mainly through overseas expansion, business diversification or acquiring other companies in the same industry, the official said.

That’s a far cry from the early years of the century, when one buyout, in particular, shaped the image of private equity firms in Japan. In 2000, a consortium led by Ripplewood Holdings bought the collapsed Long-Term Credit Bank of Japan (now Shinsei Bank Ltd.) from the government for a price that was considered low. Ripplewood made a big profit when Shinsei listed in 2004. The deal angered the Japanese public, especially as the state cleaned up the bank’s bad debts.

Foreign investment funds became labeled as “hagetaka,” or vultures. A wave of overseas activist funds didn’t help perceptions in the years before the global financial crisis as they pushed Japan Inc. for higher dividends and buybacks. In 2007, the public broadcaster NHK aired a popular TV drama series called “Hagetaka” about a western investment firm taking over ailing Japanese companies and forcing them to swallow painful restructuring.

“Even my parents asked me if I’d become a vulture,” Carlyle’s Yamada recalled. 

When Carlyle bought one Japanese manufacturer, its staff looked at him, wondering “Who is this guy? Is he a foreigner?” he said.

Around that time, Japanese companies would only talk to PE firms after they’d been spurned by peers in their industry, said Tetsuro Onitsuka, head of Japan private equity for Stockholm-based buyout firm EQT AB.

But in the years after the financial crisis, the situation started to change. 

After Prime Minister Shinzo Abe came to power at the end of 2012, he started to push companies to overhaul themselves, helping to sow the seeds for an increase in mergers and acquisitions.

“People began to understand that there are many different kinds of investment funds and not all of them are hagetaka,” Onitsuka said.

A key deal that helped change perceptions was KKR & Co.’s $1.7 billion purchase of Panasonic Corp.’s health-care unit, which was announced in 2013.

“Panasonic is a very iconic company,” said Kunihiro Takahashi, head of corporate finance at Barclays Plc in Japan. “The fact that an American PE was able to buy a business from such a well-known company in Japan was very surprising.”

In 2017 came an even bigger milestone, when a consortium led by Bain Capital agreed to buy Toshiba’s crown-jewel memory-chip business for $18 billion. It was — and remains — private equity’s largest deal in Japan.

The buyout sent a “positive signal” that industries or assets deemed nationally important weren’t “off limits” to foreign investors, said Jim Verbeeten, a partner at Bain & Co. in Tokyo.

To be sure, not everyone is positive about private equity. The investors have been criticized for their tactic of leveraged buyouts, saddling companies with large debts, which can give them less room to maneuver when things go wrong. The LBO was immortalized in the book “Barbarians at the Gate” more than three decades ago about the takeover of tobacco and food conglomerate RJR Nabisco in the US. 

Still, “private equity investors provide the strategic capital which is needed for aging Japanese companies in an aging society,” said Nga Pham, a research fellow at Monash Centre for Financial Studies in Melbourne. As well as injecting funds, private equity firms offer the expertise needed to help transform companies, she said.

Despite its recent successes in Japan, a buyout of Toshiba would be the true litmus test of whether private equity has arrived. The company, which has a market value of about $17.8 billion, has received eight privatization offers and two alliance proposals as part of its process to solicit strategic options. A sharply weakening yen is helping make Japanese companies more attractive for foreign investors. But nothing is decided, Chief Executive Officer Taro Shimada told Bloomberg in an interview this month, saying staying public is still a possibility.

That’s partly because Japan’s government could nix any deal. Toshiba’s nuclear business is involved in decommissioning the wrecked Fukushima Dai-Ichi nuclear power plant, a critical operation for the country. 

The METI division said in its emailed comments that the key for private equity funds isn’t whether they’re Japanese or foreign, but whether they’re contributing to revitalizing the country’s economy. But Koichi Hagiuda, the trade minister, was more cautious about overseas ownership of Toshiba.

“If foreign investors seek a stake above certain levels, we will strictly review whether that could undermine our country’s security,” he told reporters at a press conference earlier this month.

Monash’s Pham said she doubts an international private equity firm will succeed in buying Toshiba without partnering with a domestic PE fund. State-backed investment fund Japan Investment Corp. is considering making a bid, Bloomberg reported in May.

The next step for Toshiba is to appoint a new board. One of the company’s directors publicly disagreed with its inclusion of representatives from activist investors among the nominees. Shareholders will vote on the new director slate at the annual meeting scheduled for June 28. 

Once the board is in place, the company will narrow down the list of investment proposals. In July or later, it give those selected the opportunity to do due diligence and ask them to submit binding bids.

“If a PE succeeds in buying all of Toshiba, it will arguably be one of the most significant transactions in the country,” with other similar large deals likely to follow, Takahashi of Barclays said. “A global PE taking over such an iconic company will be very significant.”

©2022 Bloomberg L.P.

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