Today there was news that a
government-backed Japanese investment fund may be entering the fray to buy domestic
firm Renesas Electronics corporation after takeover firm KKR has issued a bid.
A piece of everyday protectionism, or is there a bigger story behind this
action? Well, let us start with the fact that the current high yen means that
there are more Japanese firms and funds buying abroad than the other way
around, so Renesas is special.
Renesas makes specialized controllers that
are used in a variety of industrial applications, and is best known for its
high market share in the automotive market. In fact, car makers, who are
normally wary of being too dependent on any one supplier, trusted Renesas so
much that it came as a nasty shock to them when the great earthquake and
Tsunami one year ago devastated some of its manufacturing facilities and caused
delays in the delivery of essential parts. It was able to recover quickly in
part from a massive recovery effort from its suppliers and customers, but it is
still not healthy economically. As a high-quality firm with economic problems,
it is a classic takeover target.
Strictly speaking that should not worry the
government, because good takeover houses can inject necessary capital and improve
their target before reselling them. These firms make a living by improving
their target, not by destroying them. But the likely reason the government is
worries is probably that Renesas’s customers are worried. As an essential
supplier to firms across a wide range of industries, it sits as a hub in a
network that creates a lot of value in aggregate. No doubt some of that value
goes to Renesas, but not all: its customers also benefit a lot. What worries
them now is that a new owner will take a cold hard look at each relation and
cut those that don’t seem to pay off. That could destroy significant value for the
customer firms and even the economy as a whole.
This is why the customers are now rallying
to have someone – either the government or themselves – rescue Renesas. There
is a network creating value that might go away if one isn’t careful, and there
is merit in having a friendly owner. As Renesas is currently managed, the
network around Renesas is worth much more than Renesas itself. That might be
changed under new ownership such as KKR, or even under the same ownership and a
tougher set of managers, but its customers are pretty happy about the current
arrangement. Later I plan to write more about what makes networks valuable. For now, let the games begin: KKR versus the Japanese government.
Schlesinger, J. M. and B. Frischkorn. 2012.
Japanese Government-Affiliated Fund Weighs Renesas Bid. Wall Street Journal,
Sep 23. 2012.
