Global Business/High Tech
Foreign Invaders
A quiet New York City venture fund is taking over Japanese businesses that are beloved--and broke
BY LISA TAKEUCHI CULLEN
Monday, Feb. 25, 2002
Tim Collins has just wrapped up his monthly three-day stint in Japan. After round-the-clock meetings, he sounds tired but pleased. "Something extraordinary happened," he says, then adds with a chuckle, "but I can't tell you about it for at least another month."
If history is any guide, the news will probably be yet another multimillion-dollar acquisition that will throw the spotlight once again on the 45-year-old Kentuckian and the company he named after his grandma's tobacco farm. Ripplewood Holdings may be little known in the U.S., but the private-equity firm, based in New York City, is virtually a household name in Japan, thanks to a $2.5 billion shopping spree in which it has grabbed national jewels, including a bank, a golf resort and a record label. The current deal may or may not involve KDDI, the Japanese phone giant Ripplewood is reportedly negotiating with for purchase of its wireless units. In any case it's bound to raise another round of hysterical cries about a foreign invasion--a nice irony for those who remember when Japan's corporate invaders were feared. But the real question is this: Can Ripplewood do what Japan Inc. could not and turn these loser companies around?
On the face of it, the odds don't look good. In Japan "restructuring" often means ordering just enough layoffs and cost cuts to qualify for another lifeline from the banks--themselves staggering under $1 trillion in lousy debts. Meanwhile, the corporate graveyard is crowded with foreign investors who tried to make over Japanese failures. Most recently, Merrill Lynch, which bought out securities firm Yamaichi, is beating a retreat.
That's not to say Japan doesn't look like a buy. Foreign investments in the country surged 32% to $28 billion in the fiscal year ending last March, according to just-released government figures. In 2001 foreigners accounted for almost a third of the mergers and acquisitions, says Thomson Financial, up from only 13% the year before. GE Capital, investor Wilbur Ross and the private-equity arms of firms such as J.P. Morgan are committing billions of dollars. "Despite all the uncertainties, there comes a point where you just can't ignore the opportunities here," says John Lewis, a partner at J.P. Morgan in Tokyo.
Yet no firm inspires public outrage like $4 billion Ripplewood, thanks largely to its taste for companies that evoke Japanese national pride. Ripplewood in 1999 became the first foreign firm to buy out a Japanese bank--Long-Term Credit Bank, the fifth largest. Last year it snapped up the largest share in--and effective control of--Nippon Columbia, the 92-year-old record label whose name is synonymous with enka (Japanese folk ballads). Then Ripplewood bought out Seagaia, a sprawling golf and beach resort on the southern island of Kyushu that plays host to Japan's best-known golf tournament. Ripplewood also purchased Niles Parts, an auto-parts maker.
"Japanese companies always prefer to sell to other Japanese companies," says Dean Yoost, CEO of a PricewaterhouseCoopers division in Tokyo that advises on mergers and acquisitions. The foreigner is the buyer of last resort. That means the price is often right: Ripplewood paid $130 million for Seagaia (with a commitment to invest $100 million)--a total that is only 8% of the $3 billion it cost to build the resort, which opened in 1994. But Ripplewood faces a turnaround task that is the corporate equivalent of raising the dead.
To help find a buyer for the failed Long-Term Credit Bank, Japan's government erased much of the bank's bad debts and promised to take back any that turned south through the spring of 2003. Collins hired Masamoto Yashiro, 72, who ran Citigroup's highly successful retail operation in Tokyo, as CEO. LTCB was born again as Shinsei Bank, which was appropriate: shinsei means rebirth.
Immediately, the bank kicked up controversy. It refused to bail out Sogo, a hopelessly debt-ridden but beloved chain of department stores, forcing it into bankruptcy. And the bank initiated bankruptcy proceedings against First Credit Corp., Japan's biggest mortgage-loan specialist. Aside from overhauling its investment-banking business, Shinsei also launched a retail business featuring fee-free, 24-hr. services at its network of 56,000 atms--a concept considered revolutionary here. Shinsei offers savers returns higher than those of traditional banks, at which, Yashiro notes, the annual interest income on a 1 million yen deposit--about $7,700--earns the equivalent of two bus tickets. The lobby of Shinsei's steel-and-glass headquarters in central Tokyo looks more like an Internet cafe than a bank, with customers lounging at flat-screen computers while making transactions and checking stock quotes. Other bank branches share space with Starbucks.
Will enough Japanese consumers take to banks with baristas in place of tellers? The early results are encouraging. For the six months ending Sept. 30, Shinsei reported a profit of $275 million. And the bank is reported to be preparing to sell its stock to the public in an ipo. "We were pessimistic last spring," says Nana Otsuki, an analyst for Standard & Poor's, "but Shinsei has surprised us."
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