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Thursday, Nov. 8, 2007
Quick profits, yes, but merger mania has its share of failures
By KAHO SHIMIZU
Mergers and acquisitions are making headlines as companies increasingly seize on consolidations to generate quick profits to reward shareholders and cope with intensifying competition in a saturated domestic market.
A record 2,775 M&A deals involving Japanese companies were announced in 2006, up 1.8 percent from the previous year, according to M&A service company Recof Corp. There were 2,010 M&As during the January-September period this year.
But the hard part is keeping the marriage a happy one.
Companies say coming together allows them to quickly boost corporate value through streamlining operations and slashing costs, but recent examples show that not every deal has a positive outcome.
The breakup of Daimler and Chrysler, the woes of Japan Airlines Corp. — a merger between JAL and Japan Air System Co. — and supermarket chain Seiyu Ltd., which is struggling to turn itself around under the umbrella of U.S. retail giant Wal-Mart Inc., are object lessons in how tieups for quick profit can go wrong.
But as M&A activity heats up in Japan, companies are beginning to ponder what separates the successful from the unsuccessful integrations.
"Many Japanese companies still lack determination to make M&As successful," said Abeam M&A Consulting Ltd. Chief Executive Officer Toshiko Oka, who has been advising Japanese firms on corporate buyouts.
Even where there is extensive M&A experience, such as in Europe and the United States, an estimated 30 percent of deals are deemed unsuccessful, she said, adding that Japanese companies should take into account that business integrations require a lot of hard work.
"Some companies with excess liquidity are seeing buyouts as merely a means to utilize surplus funds so that they'll be able to tell shareholders (they are making effective use of assets)," Oka said.
One success story cited by Oka is the capital alliance carried out in October 2002 between Tokyo-based Chugai Pharmaceutical Co. and Swiss-based F. Hoffmann La Roche Ltd.
Roche's Japan unit was folded into Chugai, which Roche then purchased a more than 50 percent stake in.
Three years later, Chugai reported ¥327.2 billion in sales and achieved an operating profit margin of 24.2 percent in business 2005, far exceeding its initial targets of ¥315 billion in sales and 20 percent operating profit margin.
"We were able to speed up the development of new drugs because we shared our research and development database," said Satoshi Nakazawa of Chugai's corporate planning department.
Nakazawa said one of the reasons behind the success is that Chugai found the right partner.
Chugai wanted to expand overseas, while Roche was having trouble boosting sales at Nippon Roche K.K., the previous Japan unit of the Roche group. So the two companies decided to work together to fulfill their aspirations.
Though their core businesses were similar to some degree, there was little overlap in specific products, which enabled one to complement the other.
For example, both companies' leading products are cancer drugs, but while Roche was focusing on antineoplastic agents, Chugai had an edge in medications to prevent the side effects of cancer drugs.
Above all, mutual respect was the biggest factor behind the smooth integration.
Initially, the deal was seen as Chugai being absorbed by Roche, but Nakazawa said Chugai remained sufficiently autonomous to allow the two sides to share their best practices.
"Interacting with Roche made Chugai employees work faster. But we weren't forced to change; we have become like that without realizing that we were changing," he said.
JFE Holdings Inc., which was created through a merger between Kawasaki Steel Corp. and NKK Corp. in September 2002, is another company praised by analysts.
In fiscal 2005, JFE logged a pretax profit of ¥517.3 billion, more than double the initial target of ¥250 billion and nearly a fivefold increase from the figure reported at the time of the merger.
To streamline operations, JFE shut down two blast furnaces, both operated by Kawasaki.
"The decision was met with no opposition from Kawasaki employees because it was apparent that closing the two facilities was a rational approach," JFE Senior Vice President Eiji Hayashida said.
"There was not time for us to fight among ourselves to save face. Our sense of crisis outweighed such feelings," Hayashida recalled. At the time of the merger, NKK was in the red, while Kawasaki had returned to the black after logging ¥18 billion in net losses the previous year.
Even when a firm is in bad shape, it is not always easy to get all the workers to support a new direction, but Hayashida said promoting in-depth discussions within each section made it possible.
"When it came to deciding something, we asked ourselves, 'What are we doing this for?' " he said. Always coming back to this question made employees understand the intent of the merger, which was to drive up the company's earnings, Hayashida added.
To promote integration, Kawasaki and NKK swapped 22 managers at steel plants and mills, putting them into each other's sections.
By doing this, managers had to interact with plant workers they had never met before, which Hayashida said enabled them to learn from each other on the manufacturing floor.
Naohiro Nishiguchi, a managing director specializing in M&A advisory services at Mercer Japan Ltd., said a willingness to learn from each other is important to generate synergy.
"Anyone can do cost-cutting in alliances, but what is the most difficult is to boost revenues," Nishiguchi said, adding that many companies worldwide are finding it hard to generate synergies through M&As.
The objective of a buyout is to bring about synergies in as short a time as possible, say, no more than three years, he said.
"In order to do so quickly, companies must have a thorough organizational determination to produce tangible effects."