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Interview
on Japanese M&A Environment with Mr. Kiyoshi Goto, Director-General,
Department of Business Development, Development Bank of Japan
By
Keith W. Rabin
 Mr.
Kiyoshi Goto joined the Development Bank of Japan (DBJ) in 1978.
His overseas experience and successful assignments in internationally
related work are extensive, totaling fifteen of his 25-year experience
at DBJ. He received his MBA from the Amos Tuck School at Dartmouth
College in 1984. In 1987 he was dispatched to the International
Energy Agency in Paris, the energy forum of the OECD, and worked
as an energy economics analyst for three years. From 1995 to 1997
he was in DBJ’s International Department, in charge of extending
loans to foreign companies investing in Japan. Then Mr. Goto was
named Chief Representative of DBJ's Washington D.C. office, where
he worked hard to provide a better understanding of DBJ's activities
as well as the Japanese economy and society through thirty plus
presentations and lectures in three years. Last April he was given
a new mission, to lead a team providing M&A advisory service,
a new business for DBJ.
Hello Goto-san, it is a pleasure to speak with you again. Can
you tell our readers something about the Development Bank of Japan,
its role and mission, as well as your own background and activities
there?
The Development Bank of Japan (DBJ) is a governmental financial
institution established in 1951. DBJ's mission is to contribute
to the development of the Japanese economy and society via the provision
of “quality” financial services that usually cannot
be accommodated by private financial institutions. DBJ's contribution
to Japan's wealth, I believe, has been widely acclaimed. Since readers
of this newsletter mostly work outside Japan, I should emphasize
that DBJ has made strenuous efforts to assist foreign firms wanting
to enter the Japanese market. In 1984, DBJ crafted loan programs
specifically designed for foreign companies investing in Japan,
and those programs have been well received. In fact, the 1996 Economic
Report of the President noted our efforts in this area. I have never
heard of any Japanese institution other than DBJ being named in
the Report.
I have devoted more than half of my career at DBJ to international-related
business. After having assisted foreign companies for two years
through the loan programs I mentioned, I went to Washington, D.C.
and worked as a public relations officer for DBJ—and even
for the Government of Japan—giving talks on a wide variety
of issues including DBJ's loan programs and the state of the Japanese
economy. You may recall that in the Business Opportunities in Japan
symposium organized by the Japan External Trade Organization (JETRO)
in November 1997, I gave a presentation titled, “Investing
in Japan: A New Trend”, which pointed out the growing importance
of M&A in Japan. Last April I was assigned to lead the newly
established department in charge of M&A advisory services.
 The
development of M&A deals is a new area for DBJ. Can you tell
us why DBJ is moving in this direction and how the "culture"
of the institution is changing as you move to initiate this type
of activity?
Yes, we are a Johnny-come-lately in this field. But we already realized
how important M&A was for the Japanese economy a decade ago
and carefully studied how DBJ, as a policy-implementing body, could
supplement the market. We started this new service mainly for two
reasons. First, M&A, once regarded in Japan as a malicious business
conduct, is gradually becoming accepted as a useful business tool,
but some distaste for M&A remains. We thought that an advisor
whose mindset differed from that of private advisors was needed
in order for M&A to become rooted in Japan, that is, an advisor
who seeks a triple equilibrium. You may have heard talk of “win-win”
deals, deals in which both the sellers and the buyers get fair shares
of the value from the transactions. That, however, is easier said
than done. The reality is that one side usually wins more than the
other, sometimes unjustly. Being a governmental institution, we
thought we should aim to assure that nobody goes overboard in an
M&A transaction, and we do this by taking into account not only
the benefits to the sellers and to the buyers, but also to the economy
as a whole. I call this the “triple-win” approach. The
second reason we started an M&A advisory service is that even
though M&A has gradually become a business tool in Japan, only
blue-chip companies have had the luxury to use it. Many small-to-medium-sized
firms are ignored in this market because the deal size cannot generally
justify the costs for professional services. We thought that we
should give a helping hand to such companies to support the healthy
development of the M&A market. Thus, we decided to jump into
this new area.
This movement, adding M&A advisory services to DBJ's menu, meets
the diversifying needs of corporate clients and increases the value
of DBJ's financial services. This move also has a positive impact
internally at DBJ in the sense that a solution-oriented approach
is setting in; we should provide not only funds but also knowledge.
Also this service offers DBJ a new avenue to a fee-based business.
Can you give us some specific examples of M&A deals you have
completed or been working on and the type of deals you are targeting
in the future?
Because we are a latecomer in this field, we do not yet have many
completed deals to prove the effectiveness of DBJ's “triple-win”
approach to M&A advisory services. However, a deal we completed
last November may illustrate DBJ's approach. We served as an advisor
for Meidensha Corporation, a heavy electric machinery manufacturer,
on a deal between its affiliate, Meiden Hoist System, and KCI Konecranes,
a world leader in the crane market. Meiden Hoist System had been
struggling in the depressed and over-crowded market, and KCI Konecranes,
though long aspiring to enter Japan, had not found a suitable arrangement.
This strategic alliance not only benefited Meidensha and KCI Konecranes,
both of whom received a fair share of the value, but also achieved
national policy objectives, namely, business restructuring and promotion
of foreign direct investment, thus significantly contributing to
the Japanese economy. KCI Konecranes included DBJ's name in its
press release on this alliance, which, I believe, is quite remarkable
since an advisor is not usually mentioned in this kind of release
and furthermore we served as an advisor for Meidensha -- not for
KCI Konecranes. This deal clearly demonstrates that our aim is truly
for “win-win” transactions. Perhaps one might wonder
if KCI’s praise was earned at Meidensha’s expense—that
is, some might think that Meidensha was underrepresented and the
notion of triple equilibrium is a joke. One thing is evident: Meidensha
could have terminated the contract with us anytime they wanted and
would have done so if they had not been satisfied with our services.
 Let
me tell you how I understand M&A. M&A is an economic transaction
that really does create value that did not formerly exist. The seller
provides a platform for value creation and the buyer offers managerial,
technical and other expertise. Unless the buyer and seller get fair
shares of value created, the deal won’t close and nobody will
gain. Yes, an advisor works for a client, either the buyer or the
seller, and gets fees. However, if you regard M&A as a game
of win or lose, you are quite likely to lose fees you could otherwise
have earned. The fact that more than half of M&A deals end up
as failures, according to various surveys and studies, may back
up my notion. We at DBJ have a mindset to make a project as feasible
as possible in the long run, which we have done through our financings
since the bank’s establishment. As part of our implementing
policy, we have to make sure that the projects we finance will have
positive impacts on the Japanese economy and society. This approach
is also the backbone of our M&A activities. On the other hand,
take an example whereby a client comes to us and says that it is
looking for an M&A opportunity simply to boost its earnings
per share by acquiring a company with a low price-earnings ratio.
We do not provide advisory service for such clients. I hope this
will help explain our M&A advisory policy. We are targeting
deals that will contribute to corporate/business restructuring,
revitalization of local economies, and promotion of foreign direct
investment.
Substantial wealth has been created in the U.S. by investor
groups who assume possession of distressed or underperforming assets
and then move to reduce costs and introduce other "re-engineering"
techniques to restore profitability. One might imagine there are
many opportunities of this kind in Japan given the depressed economic
environment it has experienced over the past decade, yet we have
yet to see this become a defining trend. Can you give us some of
the reasons why and whether this might change in the future? Additionally,
what is the likelihood that virtually bankrupt corporates or financial
institutions will be allowed to fail?
An active market for distressed assets in Japan cannot be created
overnight. But one is developing. Evidence is that the number of
MBOs increased significantly in Japan, from thirteen transactions
in 2000 to forty-two in 2002. Recently, UK-based 3i withdrew from
the market. However, major foreign funds are still in Japan and
Japanese players are becoming active in the distressed-asset market.
Unison Capital, Advantage Partners and MKS Partners have been quite
visible. DBJ also plays an important role in this regard. DBJ put
equity into Nippon Mirai Capital, a new entrant in this field and
we have been investors in several corporate restructuring and turnaround
funds. Our loan function also supports the activities of turnaround
private equity. For example, Unison Capital made equity investment
in ASCII, a publisher of PC-related magazines and books, which had
been in serious trouble for so many years despite twice changing
management. DBJ appreciated Unison’s turnaround scheme and,
together with other commercial banks, provided funds necessary for
its smooth turnaround. ASCII made a surprisingly speedy and dramatic
comeback. In Japan I expect those “hands-on” style investors—in
your words, those introducing “re-engineering” techniques—to
be the key for Japan’s recovery.
About the George Romero question, by that I mean the question about
“zombie” companies, I would like to respond with a quote
from Charles Darwin’s The Origin of Species: “It
is not the strongest of the species that survives, nor the most
intelligent that survives. It is the one that is the most adaptable
to change.” This is the philosophy behind Unison Capital,
which I heard from its founder, Ehara-san. According to Darwin’s
law, the answer is crystal clear.
With
the Nikkei at twenty year lows, many investors have been ignoring
Japan in favor of China and other Asian markets that they believe
offer more dramatic growth and potential. Can you tell us why they
should devote more attention to Japan and about some of the opportunities
they may be missing?
China is regarded as the country of the future by many. China’s
entry into the WTO indicates that an immense market is finally opening.
But I think there is still a rocky road ahead. Risks in China’s
financial sector alone could ruin the economic potential. Since
the stakes for prosperity coming from China are so huge, every multilateral
and bilateral effort should be made to ensure her healthy growth.
Still you should keep in mind that your love for China might sometimes
blind you to her faults. Talking about Japan, it is, no doubt, saddled
with numerous problems. However, according to World Economic Forum's
Global Competitiveness Report 2002, Japan's position improved considerably,
from 21st in 2001 to 13th in 2002. Technology represents the key
driver for this improvement. The report points out that the country’s
innovative power has remained very strong, which compensates for
drops in the macroeconomic index and public institutions index.
This implies that once the macroeconomic situation improves and
the governance problems can be addressed properly, which admittedly
are not easy tasks, “the sun should also rise.” Investors
should follow Japan carefully, that’s for sure; I see no reason
to ignore Japan.
Many analysts view the primary economic problem in Japan
as being the need to deal with non-performing loans, and they maintain
that little can be done until this problem is addressed in a definitive
manner. Furthermore there is also a common perception that there
is little or no demand for commercial loans among borrowers. Do
you share the view that no progress can be achieved in Japan without
resolving the NPL issue? Furthermore do you believe that there is
little or no demand for new commercial loans?
Oh, boy! This has been extensively discussed among high-profile
economists and I may not be the right person to answer this. My
opinion is that the NPL problem should be properly addressed. However,
I think we should distinguish between two types of NPLs: NPLs stemming
from the burst of the bubble and NPLs stemming from the deepening
deflation. The former had long been left disregarded partly because
banks thought they could be disposed anytime as unrealized gains
on securities but most of them have been written off. The latter
is a new pile of bad loans springing up like mushrooms due to worsening
deflation. Since the problem we now face is the latter, what is
most needed, I think, is comprehensive counter-deflationary measures.
I will leave what the measures should be to policy-makers and economists,
though. A lot should be done to address the NPL problem properly.
Regarding the demand for commercial loans, if you look at some macro
statistics on liquidity or free cash flow of non-financial firms,
you see that in aggregate firms have excess cash. Demand for commercial
bank loans has been weak because of the slack economy. Banks themselves
have changed their lending policies, leaning toward charging premiums
applicable to the risks involved, which I think is the right direction.
These two factors have caused the decrease in commercial bank loans.
When
talking about direct investment in Japan, much of the emphasis has
been on greenfield rather than M&A projects. Part of the problem
has been the dichotomy between, one, domestic constituencies and
management who want to maximize valuations and/or are resistant
to change and, two, foreign investors who seek to introduce efficiencies
and achieve maximum gain. This adversarial relationship is standard
practice in the U.S., but is often perceived to cause excessive
tension in a consensus-driven Japan. Is it simply a matter of time
before Japan takes more fully to U.S.-style M&A as a corporate
finance tool?
I do not fully share your view. First, even the Japanese government
(the Japan Investment Council headed by the prime minister) a long
time ago realized the importance of promoting foreign direct investment
via M&A and in 1996 made an official statement “On the
Preparation of an M&A Environment in Japan.” It was so
epoch-making that the media bashed it, claiming the government was
selling off Japanese firms. Secondly, although Japanese have been
highly allergic to M&As because of negative aspects such as
greenmailers and hostile takeovers in the U.S. in the 1980's, their
attitude has been changing. Carlos Ghosn of the French company Renault
successfully revived Nissan Motor and French coach Philippe Troussier
energized the Japanese soccer team. Is Mr. Ghosn still a public
enemy in Japan? Definitely, not. We all know that we need foreign
management know-how to rejuvenate the Japanese economy. When I was
studying at Amos Tuck in 1982–1984, the U.S. was eager to
learn from Japan, and you guys did it right. You benchmarked Japan
and adjusted the Japanese model to meet the U.S. context. It’s
our turn, isn’t it? M&A has become recognized in Japan
as a common corporate finance tool; there is no doubt about it.
Looking from North America, it may seem a snail's pace. But our
team has been working hard to assist Japanese firms to benefit from
M&A, especially cross-border M&A, and hope to change that
perception.
In the U.S., many business owners and entrepreneurs look
to sell all or part of their companies for the right price, even
when they are doing well, for either strategic reasons or to realize
some of the underlying equity, and these transactions when properly
executed are perceived as positive achievements. In Japan, however,
they are often viewed as failure. For that reason, it has been rare
to see healthy Japanese firms turn to M&A as a means to realize
value or to enhance their competitiveness. Do you think this is
a fair statement, and, if so, what can be done to change this perception
in Japan?
Well,
since corporate/business restructuring has been the single most
important issue in Corporate Japan recently and M&A has been
used as a restructuring tool, you might have such an impression.
But Japanese blue-chip companies have become focused on corporate
value creation and have used M&A to increase the value-based
metric, best known as “economic profit” or “economic
value added.” In short, we are too busy restructuring. But
you should note that restructuring also increases corporate value
and that, usually, the more ambitious the restructuring the more
the growth. You may have in mind something like Jack Welch's 1987
swap of GE's consumer electronics business for the medical systems
interests of Thomson of France. If that's the case, I admit it may
take a decade for Japanese to see such a deal. But didn’t
the GE-Thomson deal frighten even the U.S. people to death?
Even though one can make a good argument as to why Japan
offers an attractive investment opportunity, many companies and
investors we deal with find it extremely difficult to identify attractive
companies that possess a sufficient understanding and appreciation
of the investment process -- despite a professed desire to attract
foreign investment. Furthermore, business practices and sensibilities
can be very different. As an ivy-league MBA graduate, can you give
any advice to foreign investors on how they might identify specific
investment opportunities in Japan and not only go about facilitating
transactions but also to maintain good relations with their Japanese
counterparts after they are consummated?
To expedite successful M&A in Japan, I would advise them to
choose an advisor who has expertise in cross-border transactions
as well as a good understanding of Japanese corporate culture. Marriage
between two different parts of the world can never be easy and there
are a lot of difficulties to overcome. An advisor who is well-versed
in cultural differences could successfully build a bridge between
the two. Our team has strong competence in cross-border deals since
DBJ has for almost twenty years accumulated vast know-how in cross-border
transactions through its financial assistance to foreign firms entering
the Japanese market. The Meidensha–KCI Konecranes deal I introduced
earlier demonstrates our capabilities.
Part
of the problem in initiating M&A deals is the complexity of,
and large amount of time that must be devoted to, individual transactions.
Many people point to the scarcity of qualified service professionals
in Japan, even in large-scale transactions. This can be even more
problematic within the smaller scale transactions you are focusing
on as they lack the scale needed to amortize the costs needed to
allow successful closure. Can you comment on this problem and how
if might be addressed?
Japan’s M&A market is very young, relative to that in
the U.S., and an overemphasis on lending activities by Japanese
banks accounts for the lack of qualified M&A advisors here.
However, competence in this business is quite different from the
one in the derivatives house. You do not have to know the Black
and Scholes model to be a good advisor. The weapons you should have
are basic tools in valuation and some of the buzzwords in this world.
What makes you an excellent advisor are an analytical capability
to formulate corporate strategy and communication skills, which
can be cultivated through work experience. Therefore, Japanese advisors
could sooner or later be parallel to their U.S. counterparts. Regarding
the cost recovery issue in smaller deals, a clear-cut answer cannot
be expected. The amount of work required for an M&A transaction,
unfortunately, hardly changes with deal size. Therefore, an institution
like us should contribute for the time being, subsidizing smaller
deals. Since DBJ alone cannot support smaller M&A deals, a more
comprehensive approach should be devised: by giving technical assistance
to the M&A sections of local banks, for example.
 When
foreign investors talk about investing in Japan, they are largely
talking about Tokyo and perhaps Osaka. Can you talk a little about
other geographic areas of Japan and the potential that they offer?
Yes, the only city in Japan that many foreign investors can name
may be Tokyo—outside of, perhaps, Osaka, because of its international
airport and Universal Studios Japan—so, it’s no wonder
that most foreign direct investment and M&A has focused there.
However, this should not be construed to mean there is a lack of
opportunities in other parts of Japan. It is just difficult for
foreign investors to find the hidden jewels in areas other than
Tokyo. I can name some of the areas which may appeal to foreign
investors: Sapporo City in Hokkaido, where high technology companies
cluster together; the northern Kyushu area, as a gateway to East
Asian countries; and the Nagano area, where Japan’s manufacturing
prowess can be found. As for how to mine these mother lodes, DBJ
can assist in many ways. As I mentioned, DBJ has assisted foreign
companies investing in Japan for more than twenty years using our
network all around Japan: our branch offices, local governments
and other related institutions, such as JETRO and the Japan Industrial
Location Center. In terms of M&A, we have a network with forty
local banks and regularly exchange information. We think it would
be prudent for your readers to keep us in mind.
Thank you Goto-san for sharing your thoughts with our readers.
Do you have any closing thoughts or comments you would like to leave
with us?
Let me close by borrowing from the final scene of the 1985 movie
Rambo: First Blood II:
“Kiyoshi, non-performing loans, deflation, everything that
happened here may have been wrong. But, damn it, Kiyoshi, you can't
hate your country for it.”
“Hate? I'll die for it.”
Yes, our team will serve the country via M&A to death.
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