The Japanese Dilemma

The Japanese have a dilemma and Wall Street may have an early Christmas.

Should the Japanese let New York private equity firm Kohlberg Kravis and Roberts buy a controlling stake in Renesas for $1.3 billion?

The 20-something year-old super-sharpies at KKR are beside themselves with excitement. Here’s a company with 46,000 employees and $10 billion in revenues. How many do we sack? How much profit do we want?

For the Japanese the dilemma is: Why should the Yanks take all the profit from a re-structuring? But have we the stomach to do the re-structuring ourselves?

The Japanese solution to failing companies has been government-assisted consolidation with disastrous results. The Japanese government, the Japanese companies and the shareholders in Japanese companies are getting pretty fed up with the Japanese solution.

Renesas management is more than usually leaden – even by Japanese standards. A Japanese solution would leave the same old lurkers in situ. The Yankee solution would not.

But a re-structured Renesas with $10 billion of, by then, highly profitable revenues would be IPO’d by KKR for how much? $5 billion? $10 billion? More?

And what would the Japanese people think of a Yankee outfit making that much profit from a Japanese company.

But if the Japanese re-structured KKR themselves, what would the Japanese people think of a Japanese company which sacked tens of thousands of Japanese employees?

And that’s the Japanese dilemma.



  1. Wouldn’t like to say about the 20-something year-old super-sharpies, Lodekka, but I think everyone knows what needs to be done to make Renesas a profitable business. The only real question is: Do the Japanese do the dirty work and reap the benefits of a healthy profitable company for Japan Inc? Or do the Yankee private equity guys do the dirty work and keep the profits for themselves?

  2. This isn’t sanity [Anonymous] it’s cheeky opportunism

  3. Having seen overpayments for NXP and Freescale it seems some sanity has returned to pricing.

  4. Sounds like they need Ed the Serial CEO, he would have no qualms about what might happen…
    Could they be the same 20 something super sharpies?

  5. The situation of Renesas is indeed regrettable. After 7 years of losses the company is running out of cash while the parent companies are also tight and want the adult child to leave the house.
    The banks are concern about repayment of loans and will probably welcome outside intervention even if they must take a hair cut.
    Renesas has too many employees and even prior to any PE investment 15000 people, please read families, will be moving on. Now the task is to turn around a company in the next 5 years to preserve at least 25000 jobs.
    Following past patterns in 5 years we will see a $7B sales Renesas with profitable bottom line, at 2x valuation that’s a $14B valuation which makes the $1.3B investment an easy decision.
    Like others, we must ponder the reason why a Japanese conglomerate does not see this math and tackles the task. Is it cultural? Must be because there are plenty of competent managers in Japan.

  6. You’re right Dick, it’s a lousy deal for Renesas and a magnificent one for KKR – buying a $10 billion revenue stream for $1.3 billion with a shed-load of people to fire. Hopefully the Japanese will dismiss it out of hand or at least ask for the same valuation ratio as was put on NXP when KKR bought NXP from Philips in 2006. At the time of the acquisition NXP was valued at $10 billion when it had revenues of $4 billion i.e. 2.5x revenues. On that valuation the Japanese should be asking KKR for a $30 billion purchase price!

  7. I think you cracked it Stooriefit. Let McK take the blame and keep the profits in Japan.

  8. The other share holders have to be happy that the cash they are getting in return for loosing control offsets the risk of the drop in the price of their remaining shares like that of Freescale or NXP.
    The other shareholders also have to agree to this debt being loaded on the firm, and for it to be serviced out of expected profits. If KKR aren’t bringing any money to the game other than that they are loading onto Renesas books (I don’t know, and I’m not interested enough to find out!), doesn’t it invite the question “Why do we need KKR to do this? We could load this debt on to the firm, take the cash and pay McKinsey or some other such chancers to come in and do the required restructuring, and we still own the now more valuable firm.”
    After all, the reason for the existence of management consultants is the need to keep some clean hands in incumbent management when it is firing time.

  9. The parallel with JAL is indeed very fitting: AFTER it went bankrupt something changed.
    The flight from Hiroshima to Okinawa is in my experience the most expensive 2h flight on the planet at around 450 USD, with only 2 japanese carriers “competing” for it, yet still it’s not profitable for the carriers.
    Not that I like KRR or anything, but the need for an outside push has been demonstrated by Japanese companies for decades. Perhaps to sacrifice 1 company to show the rest of the country the way isn’t such a bad idea.

  10. $1.3 billion to go onto renasas books as debt needing to be serviced. What an enormous load, even at todays microscopic interest rates

  11. I do hope you’re right, swing and a miss, it would be a tragedy if the Japanese let KKR in and, as you say, they don’t need American money. Interesting parallel with JAL. Fingers crossed.

  12. Renesas’ banks are cash rich and more than capable of funding the turnaround – why would they need KKR’s debt-laden LBO transaction? And it’s not like a native Japanese manager cannot make the tough decisions – under Kazuo Inamori’s leadership JAL laid off more than 16,000 employees as part of its post- bankruptcy restructuring efforts, and now it’s the world’s most profitable carrier and will have the world’s second largest IPO in September.
    Moreover, the fact that Nikkei got the scoop of this proposed transaction at this early a stage of the investment process bodes very ill for KKR’s investment prospects. This is pretty much the textbook way to scuttle M&A transactions in Japan – leak it to Nikkei (they live for this stuff) and watch the unfolding kabuki theater. The same thing happened to the proposed merger between Hitachi and Mitsubishi Heavy Industries last year.

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