Corporate Restructuring Shrink to Grow

Description
Since 1997, there has been a series of legislative and tax changes in Japan with the aim of facilitating corporate restructuring.

Corporate Restructuring
Shrink to Grow
CONTENTS
Executive Summary 1
1. Understanding Corporate Restructuring in Japan 2
1.1 Regulatory Reforms 2
1.2 Trends in M&A Transactions in Japan 4
1.3 The Corporate Restructuring Survey 7
1.4 Summary 10
2. Creating Value through Divestitures 11
2.1 The Pattern of a Typical Corporate Restructuring Process 11
2.2 Alternative Divestiture Structures 13
2.3 Spin-Ins 14
2.4 Corporate Splits 16
2.5 Sell-Offs 19
2.6 Equity Carve-Outs 20
2.7 Spin-Offs 21
2.8 Tracking Stocks 23
2.9 Joint Ventures 24
2.10 Summary 26
3. Achieving Value-Building Growth 27
3.1 Common Obstacles to Restructuring 27
3.2 Future of Corporate Restructuring 28
3.3 Key Factors for Successful Restructuring 29
3.4 Managing Balanced Business Portfolios 30
3.5 Pruning the Portfolios through Proactive Divestitures 31
3.6 Summary 34
Glossary 35
List of CASE STUDIES
Case Study 1: Nissan's Dramatic Turnaround 12
Case Study 2: Matsushita's Spin-Ins to Implement Groupwide Restructuring 14
Case Study 3: Thermo Electron's "De-Conglomerating" through Spin-Ins 15
Case Study 4: NEC's Restructuring through Corporate Splits 17
Case Study 5: Sumitomo Rubber's Splitting of its Non-Tires Businesses 17
Case Study 6: Osaka Gas's Corporate Splits followed by Sell-Offs 18
Case Study 7: Japan Telecom's Use of a Holding Company as a Restructuring Vehicle 18
Case Study 8: Chugai's Reactive Spin-Off to Avoid Anti-Trust Issues 22
Case Study 9: Sony's Issuing of the First Tracking Stock 24
Case Study 10: Tomen's Formation of a Joint Venture to Foster Growth 25
Case Study 11: Takeda's Sell-Offs of Non-Core Businesses through Joint Ventures 25
Case Study 12: Hitachi's Diffculty in Finding Buyers 32
Case Study 13: GM's Preparing for a Successful Spin-Off of Delphi 33
ABeam Research & Linklaters Corporate Restructuring
1
Executive Summary
Since 1997, there has been a series of legislative and tax changes
in Japan with the aim of facilitating corporate restructuring. In
particular, the introduction of procedures such as share exchanges,
share transfers and corporate splits has provided companies with
greater flexibility in pursuing corporate restructuring. Although
corporate restructuring is not facilitated by legislative and tax
changes alone, the increased level of M&A activities over the
same period is evidence that the recent reforms have, to some
extent, achieved their aims. See Chapter 1.
A typical corporate restructuring process comprises three phases.
Faced with debt and cash flow problems, companies should
execute financial restructuring immediately to stabilize their
financial situation. Once the situation is stabilized, companies
need to start business rebuilding to strengthen their core
businesses. Finally, companies can shift their focus to long-term
value-building growth. Across the three phases of the restructuring
process, divestitures play an increasingly crucial role in Japan.
Divestitures may take several different forms: corporate splits,
sell-offs, equity carve-outs, spin-offs, tracking stocks and joint
ventures.
Corporate splits, minority carve-outs and joint ventures are often
used as interim solutions toward an eventual exit. In Japan the
most common exit alternatives are sell-offs and full or majority
carve-outs. We believe spin-offs would also be popular in Japan
(as they are in the U.S. and Europe) if the tax disadvantages were
removed. Some of the most successful corporate restructurings
have been where parent companies have prepared exit strategies
at the start of the corporate restructuring process and have used
interim solutions as a means to develop stronger subsidiaries
before a full exit at a later date. See Chapter 2.
We conducted a survey to determine the current and future
trends in restructuring activities. Our fndings revealed that many
companies rated planning growth strategies prior to restructuring
as very important, but assessed their own performance as less
satisfactory. To achieve value-building growth, companies must
develop and maintain balanced business portfolios. The key
challenge is to nurture growth options while proactively divesting
underperforming or non-core businesses. Success in proactive
divestitures is likely when companies deliberately use interim
solutions before an eventual exit and lay the groundwork for
creating a stand-alone entity. See Chapter 3.
We include in this report a number of case studies. One of the
lessons that these demonstrate is:
The more extensive the restructuring, the greater
the growth prospects; the stronger the growth, the
greater the need for restructuring. Shrink to grow
and vice versa.
ABeam Research & Linklaters Corporate Restructuring
2
1. Understanding Corporate Restructuring in Japan
This first chapter presents an overview of the recent regulatory
reforms in Japan related to corporate restructuring and recent
trends in M&A transactions in Japan.
This chapter also sets out certain results of our survey on corporate
restructuring which we conducted in March 2003. The results
1.1 Regulatory Reforms
1.1.1 Overview
Over the past several years, many of the obstacles to corporate
restructuring contained in the Commercial Code of Japan (the
"Code") have been amended or removed, beginning in 1997 with
the introduction of simplifed mergers. This was followed by the
introduction of equity redeployment procedures such as share
exchanges (Kabushiki Koukan), share transfers (Kabushiki Iten)
and corporate splits (Kaisha Bunkatsu). Consequently, examples
of corporate restructuring, including divestitures, have become
more commonplace in Japan.
The Japanese tax rules have also been amended to provide
incentives to companies to take advantage of the new restructuring
measures. The corporate reorganization tax reforms have been
effective since April 1, 2001 and allow for tax-free restructuring
under certain circumstances.
The following presents a brief list of recent changes to the Code
and other legislation and the taxation rules that are relevant to
corporate restructuring in Japan.
• In October 1997, the Code was amended to simplify and ratio-
nalize merger procedures.
• In December 1997, the Anti-Monopoly Law was amended to
allow pure holding companies to be established in Japan.
• In October 1999, the Code was amended to introduce the share
exchange and share transfer procedures.
• In April 2000, the Composition Law was abolished and the
Civil Rehabilitation Law was introduced to facilitate corpo-
rate workouts.
• In April 2001, the Code was amended to introduce the corpo-
rate split procedure.
• In April 2001, the corporate reorganization rules were intro-
duced under the 2001 tax reform.
• In October 2001, the treasury stock system was introduced.
This system allows companies to buy back their shares and
hold them for unspecified purposes, including later use in
M&A transactions through share exchanges.
• In August 2002, the consolidated taxation system was enacted.
• In April 2003, the Industrial Revitalization Law was revised
to facilitate corporate restructuring. Under this law, companies
whose restructuring plans receive approval from the relevant
authorities are eligible for tax incentives and governmental
financial assistance. They may also take advantage of a less
restrictive corporate law regime.
As part of the revision of the Industrial Revitalization Law, there
are measures designed to encourage inward investment by non-
Japanese companies. For example, in a statutory merger, the
revisions to the law allow shares in a third company to be issued to
the shareholders of the extinguishing company (whereas normally
they could only receive shares in the surviving company). What
is more, the third company issuing shares can be a non-Japanese
company, which makes this new law a potentially significant
additional tool to facilitate inward investment and corporate
restructuring in Japan.
of this survey illustrate the recent trends in M&A transactions
in Japan and give an insight into how Japanese companies are
conducting (or intending to conduct) corporate restructurings in
the future, in particular how Japanese companies are starting to
make use of alternative methods to conduct such restructurings (see
Chapter 3).
New shares
Shareholder Shareholder
Y Co. shares
X Co. Y Co. X Co. Y Co. X Co.
Y Co.
100% Share
exchange
agreements
Figure 1.1 Share Exchanges
Source:ABeam Research
Figure 1.2 Share Transfers
Source:ABeam Research
New shares
Shareholder
X Co.
shares
100%
? ? ?
X Co.
X Co. X Co.
New Co.
New Co.
Figure 1.3 Types of Corporate Splits
Source:ABeam Research
New
shares
Transferring a business to
an existing company
X Co.
A
?
Y Co.
C
X Co.
A
Y Co.
B
X Co.
A
?
Y Co.
C
X Co.
A
?
Y Co.
B
B
C
B C
New shares
?
?
?
? ?
X Co.
A
?
New
shares
New
shares
Shareholder
Transferring a business to
a new company
A
l
l
o
t
t
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g

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B
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B
X Co.
A
?
Shareholder
B
X Co.
A
?
New Co.
B
New
shares
A B
2
A
B
1
B
1
B
2
C
C
A B
2
A B
1
B
1
B
2
C C
New Co. X Co. Y Co. X Co.
?
Y Co.
?
? ?
New shares
New Co.
X Co.
?
?
Y Co.
X Co.
?
Y Co.
?
X Co.
?
New Co.
Transferring a business to
a newly created joint venture company
Figure 1.3
ABeam Research & Linklaters Corporate Restructuring
3
1.1.2 Share Exchanges
The share exchange procedure, which was introduced in October
1999, allows companies to make other companies both within the
group and outside the group wholly-owned subsidiaries (Figure
1.1). X Co. acquires all of Y Co.'s outstanding shares in exchange
for new shares issued by X Co. at a predetermined exchange
ratio. As a result of the completion of the share exchange, Y Co.
becomes a wholly-owned subsidiary of X Co. and shareholders of
Y Co. become shareholders of X Co.
1.1.3 Share Transfers
The share transfer procedure, which was introduced along with
the share exchange procedure in October 1999, allows companies
to create a new holding company (Figure 1.2). X Co. incorporates
a new company. New Co. acquires the entire shares of X Co. in
exchange for new shares issued by New Co. Subsequently, X Co.
becomes a wholly-owned subsidiary of New Co. and shareholders
of X Co. become shareholders of New Co.
1.1.4 Corporate Splits
The corporate split procedure was introduced in April 2001.
Under the Code, corporate splits are classified into two types:
(i) where a business is transferred into a new company; and (ii)
where a business is transferred to an existing company, in each
case, in exchange for shares in the transferee company. It is also
possible to transfer a business to a newly established joint venture
company in exchange for shares in the JV company.
For tax purposes, corporate splits are further classifed according
to whether the new shares as consideration are distributed to the
transferor company or directly to the shareholders of the transferor
company. Accordingly, there are the following types of corporate
splits (Figure 1.3).
Figure 1.4 Number of Japanese Company Related
M&A Transactions
Source:Nomura Securities
In-Out
In-In
0
400
800
1,200
1,600
2,000
Out-In
Increased number
of In-In M&As
1,881
1,344
968
636
525
394
354 382
454
1,442
Note: In-In M&As mean M&As between Japanese companies.
In-Out M&As mean M&As of non-Japanese companies by Japanese companies.
Out-In M&As mean M&As of Japanese companies by non-Japanese companies.
Number of Transactions
93 94 95 96 97 98 99 00 01 02
Year
Figure 1.5 Total Value of Japanese Company Related M&As
Source:Nomura Securities
In-Out
In-In
Out-In
Note : The total value of transactions is based only on cases for which data is available.
  Data availability differs widely depending on transaction types.
While the value of In-In
deals remain flat, the value
of both In-Out and Out-In
deals collapsed
0
500
1,000
1,500
2,000
2,500
3,000
3,500
bn
93 94 95 96 97 98 99 00 01 02
Year
Figure 1.6 Number of In-In M&A Transactions by Type
Source:Nomura Securities
Year
389
281
489
74
37
608
62
395
0
100
200
300
400
500
600
700
800
Asset
acquisitions
Equity
participations
Mergers
Equity
acquisitions
Increased diversity in
M&A transaction type
93 94 95 96 97 98 99 00 01 02
Number of Transactions
Mergers
Equity
participations
Equity
acquisitions
Asset
acquisitions
62%
16%
8%
14%
21%
26%
32%
21%
ABeam Research & Linklaters Corporate Restructuring
4
1.2 Trends in M&A Transactions in Japan
1.2.1 General Trends
In the following pages, we describe the trends in M&A
transactions up to the end of 2002. The total number of Japanese
company related M&A transactions announced in 2002 increased
to 2,244. The number of M&A transactions between Japanese
companies ("In-In deals") constituted 84% of all deals in 2002. It
is interesting to note the signifcant increase in the number of In-In
deals in the fve-year period from 1997–2002 (Figure 1.4).
In this paper, we have only included data for the number of M&A
transactions completed; complete data showing the value of these
transactions is not available. Data was available for 931 out of
2,244 M&A transactions announced in 2002 (i.e., 41% of all
M&A transactions). The value of these 931 cases was 3.42 trillion
yen. While the value of In-In deals remained roughly fat for the
period from 2000 to 2002, the value of M&A transactions of non-
Japanese companies by Japanese companies ("In-Out deals")
and M&A transactions of Japanese companies by non-Japanese
companies ("Out-In deals") fell dramatically during the same
period (Figure 1.5). This data suggests the following trends:
• there are fewer high profle (i.e., big value) transactions now
than two or three years ago; and
• Japanese rather than foreign companies are driving an increase
in M&A transactions but such Japanese companies are pre-
dominantly active in Japan rather than abroad.
M&A transactions can be categorized into four types:
(1) mergers;
(2) equity acquisitions (controlling over 50% of the voting
shares in a company);
(3) asset acquisitions (whether an entire business or a collection
of assets); and
(4) equity participations (controlling up to 50% of the voting
shares in a company).
Mergers constituted the majority of In-In deals in the 1990s. While
the number of equity acquisitions, asset acquisitions and equity
participations increased during the 2000 to 2002 period, the number
of mergers remained fat during the same period and consequently
accounted for only 21% of In-In deals in 2002 (Figure 1.6).
Signifcantly, asset acquisitions rose by 70% in 2002 over 2001.
This sharp rise in asset acquisitions reflected the increasing
number of business divestitures and sell-offs of assets as part of
corporate restructuring.
Figure 1.7 Number of Inter- and Intra-group M&A Transactions
Source:Nomura Securities
594
617
808
825
500
316
248
213
175
199
279
750
1,073
320
277
468
181
179
183 175
0
200
400
600
800
1,000
1,200
Inter-group M&As
Intra-group M&As
Increased number
of inter-group M&As
93 94 95 96 97 98 99 00 01 02
Year
Number of Transactions
Figure 1.8 Number of Inter-group M&A Transactions by Type
Source:Nomura Securities
Mergers
35
367
377
294
Inter-group mergers have
leveled out but other
inter-group M&A
transactions have
increased significantly
0
50
100
150
200
250
300
350
400
Number of Transactions
Equity
participation
Equity
acquisitions
Asset
acquisitions
93 94 95 96 97 98 99 00 01 02
Year
Figure 1.9 Number of Intra-group M&A Transactions by Type
Source:Nomura Securities
0
50
100
150
200
250
300
350
400
93 94 95 96 97 98 99 00 01 02
Equity
acquisitions
Mergers
18
241
354
195
Asset
acquisitions
Equity
participations
Intra-group acquisitions of
assets and equity have
increased significantly
Number of Transactions
Year
ABeam Research & Linklaters Corporate Restructuring
5
M&A transactions are often categorized as either inter-group
or intra-group. An inter-group M&A transaction is when
companies from two different groups are involved. An intra-group
M&A transaction is when all of the companies involved in the
transaction belong to the same group.
Inter-group and intra-group M&A transactions increased in
parallel from 1995 to 1999. Thereafter, the number of inter-
group M&A transactions surpassed that of intra-group M&A
transactions, reflecting the increased level of restructuring in
Japan generally (Figure 1.7).
The mix of inter-group M&A transactions underwent signifcant
changes during the 2000–2002 period. Equity participations
tripled in number to 377 in 2002. Asset acquisitions showed a
2.5-fold increase (Figure 1.8).
Although mergers are still the most popular form of transaction
in intra-group M&A transactions, asset acquisitions and equity
acquisitions have grown in popularity in recent years (Figure 1.9).
The growth in asset acquisitions has been fueled by the increase
in the number of business transfers as part of reorganizations and
consolidations within groups.
The number of equity acquisitions has risen as the review of
capital policy became prominent in business trends. Major
companies are increasingly turning majority-owned subsidiaries
into wholly-owned subsidiaries. Such transactions are sometimes
referred to as spin-ins. According to the Tokyo Stock Exchange,
48 publicly listed companies were spun in by their parent
companies and consequently were delisted in 2002, up from 30 in
the previous year.
Figure 1.11 Number of Corporate Splits by Objective
2002
2001
Growing use of
the corporate split
procedure
Split of business
unit into a wholly-
owned subsidiary
Reorganization
into a holding
company
Intra-group
M&A
M&A Total
29
68
46
8
151
33
92
84
15
224
0
50
100
150
200
250
Number of Transactions
Source:Recof
Figure 1.10 Number of Share Exchanges/Share
Transfers and Corporate Splits
Growing use of
the share exchange
procedure within
the group
Note: Share exchanges include both intra- and inter-group share exchanges.
20
45
51
81
4
6
15
9
23
0
20
40
60
80
100
99 00 01 02
Share
exchanges
Intra-group
share
exchanges
34 32
61
12
Share
transfers
26
Corporate
splits
Number of Transactions
Year
Source:Nomura Securities
ABeam Research & Linklaters Corporate Restructuring
6
1.2.2 Use of New Procedures for Equity Redeployment
The introduction of equity redeployment procedures such as share
exchanges and share transfers (in October 1999) and corporate
splits (in April 2001) gave companies greater flexibility with
regard to corporate restructuring.
The number of M&A transactions using share exchanges
increased 59% from 51 in 2001 to 81 in 2002. Among these,
75% were effected to make majority-owned subsidiaries into
wholly-owned subsidiaries. The number of share transfers to
create holding companies decreased to 9 in 2002 from 15 in
2001 and the number of corporate splits increased to 26 in 2002
from 23 in 2001 (Figure 1.10).
These fgures for corporate splits, however, do not include deals
between parents and subsidiaries. If such deals are included, the
number of corporate splits increased to 224 in 2002, an increase of
nearly 50% on 2001 (Figure 1.11).
Figure 1.12 Profle of the Survey Respondents
Source:ABeam Research
27.7%
59.6%
4.3%
8.5%
Less than 3,000
70.2%
6.4%
6.4%
6.4%
10.6%
Utility & Others
Number of Employees Type of Industry
Wholesaling
& Retailing
Financial
Services
Transportation &
Services
Construction &
Manufacturing
3,000~
  5,000
10,000 and
over
5,000~10,000
Figure 1.13 Organizational Structure
Source:ABeam Research
55.3%
31.9%
4.3%
8.5%
Other system
Divisional
unit system
In-house
company
system
Holding
company
system
Figure 1.14 Performance Metrics
Source:ABeam Research
76.6%
44.7%
21.3%
10.6%
0% 20% 40% 60% 80% 100%
Sales and
profits
Cash flows and
return on assets
Value metrics
(e.g, EVA)
Balanced
Score Card
ABeam Research & Linklaters Corporate Restructuring
7
1.3 The Corporate Restructuring Survey
We conducted a survey on corporate restructuring in March 2003
to determine:
• current and expected levels of restructuring activities in Japan;
• motives for engaging in restructuring activities;
• restructuring methods that are used today and will be used in
the future; and
• key factors for successful corporate restructuring.
Questionnaires were sent to executives of 250 listed companies
with more than 1,000 employees on a consolidated basis. A total
of 47 companies responded to the survey. 60% of our respondent
companies have 10,000 or more employees and 70% are
manufacturers (Figure 1.12).
1.3.1 Organizational Structures
55% of our respondents adopt a divisional unit system. 32%
have gone one step further, creating quasi-companies within
themselves (Figure 1.13). This divisional company or in-house
company system is designed to increase management effciency
through swift decision-making and clearly defned responsibility
and authority. 9% of our respondents have established holding
companies.
1.3.2 Increased Focus on Shareholder Value
The results of our survey indicate that Japanese companies are
beginning to focus more on shareholder value. Though 77% of
our respondents use sales and profts as key metrics, 21% use such
performance metrics as economic value added (EVA) to measure
shareholder value creation (Figure 1.14).
Figure 1.15 Present Situation in Corporate Restructuring
Source:ABeam Research
59.6%
12.8%
14.9%
10.6%
2.1%
No M&As
Focusing on
inter-group M&As
Focusing on
intra-group M&As
Wrapping up
M&As
Conducting intra-group
and
inter-group M&As
simultaneously
Figure 1.17 Degree of Attainment of Objectives
Source:ABeam Research
21.3%
34.0%
27.7%
0.0% 2.1%
4.3%
10.6%
Fully achieved
Nearly achieved
Partially achieved
Unable to assess
No answer
Moderately achieved
Unachieved
Figure 1.16 Motives for Corporate Restructuring
Source:ABeam Research
55.3%
42.6%
40.4%
31.9%
27.7%
23.4%
21.3%
21.3%
4.3%
Increasing
shareholder
value
Achieving
growth
Improving
financial position
Pursuing group
synergy
Eliminating
duplication of
businesses
Divestiture of less
profitable
businesses
Divestiture of
non-core
businesses
Strengthening
core businesses
Unlocking
intrinsic value
50% 40% 30% 20% 10% 0% 60%
ABeam Research & Linklaters Corporate Restructuring
8
1.3.3 Current Corporate Restructuring Activities and Motives
60% of our respondents are currently pursuing corporate
restructuring through intra-group and inter-group M&A
transactions simultaneously. More than 72% are conducting
inter-group M&A transactions (Figure 1.15). These statistics
are consistent with the increased level of inter-group M&A
transactions over the past three years (Figure 1.7).
The results of our survey revealed that strengthening core
businesses, increasing shareholder value and achieving growth are
the three main motives for corporate restructuring (Figure 1.16).
We asked respondents to assess the degree to which they had
achieved their objectives on a scale of one to five. 28% of
our respondents say it is too early to assess the results of their
restructuring efforts. No respondents say that their objectives have
been fully achieved. 55% say that their objectives were nearly or
moderately achieved (Figure 1.17).
Figure 1.18 Restructuring Methods Used Over the Past Three Years
Source:ABeam Research
91.5%
80.9%
55.3%
55.3%
44.7%
42.6%
40.4%
36.2%
34.0%
23.4%
21.3%
14.9%
12.8%
10.6%
6.4%
6.4%
2.1%
0% 20% 40% 60% 80% 100%
Reorganization of business units/subsidiaries through
corporate split procedure
Creation of a holding company through share
exchange/share transfer procedures
Acquisition of companies outside the group through
share exchange procedure
Split of business units into subsidiaries through
corporate split procedure
Closure of unprofitable businesses
Sale of businesses/subsidiaries through MBO
Sale of businesses/subsidiaries to buyout funds
Merger with companies outside the group
Carve-outs of subsidiaries as publicly traded
businesses
Spin-ins of subsidiaries through share exchange
Dissolution of a JV with companies outside the group
Purchase of businesses from companies outside
the group
Cash acquisition of companies outside the group
Sale of businesses to companies outside the group
Sale of subsidiaries to companies outside the group
Increase in the size of controlling stakes in
subsidiaries
Creation of a JV with companies outside the group
ABeam Research & Linklaters Corporate Restructuring
9
1.3.4 Restructuring Methods
There is a wide range of options available for companies to
implement restructuring. The results of our survey indicate that
91% of our respondents have closed unprofitable businesses
over the past three years (Figure 1.18). Creation of joint ventures
(81%) is the second most popular method. Other widely
used methods for restructuring include: increasing the size of
controlling stakes in subsidiaries (55%), selling off subsidiaries
to companies outside the group (55%), selling off businesses
to companies outside the group (45%), acquiring companies
outside the group for cash (43%) and acquiring businesses from
companies outside the group (40%).
Many companies executed restructurings using the new
methods available to companies, including share exchanges and
corporate splits. 34% of our respondents have made majority-
owned subsidiaries into wholly-owned subsidiaries through
share exchanges. 23% have reorganized their business units and
subsidiaries by way of corporate splits. 21% have established
new subsidiaries, again using the corporate split procedure.
ABeam Research & Linklaters Corporate Restructuring
10
1.4 Summary
Since 1997, there has been a series of legislative and tax changes
in Japan with the aim of facilitating corporate restructuring. In
particular, the introduction of procedures such as share exchanges,
share transfers and corporate splits has provided companies
with greater flexibility in pursuing corporate restructuring. The
number (and, to the extent data is available, value) of M&A
transactions has increased over the same period. In particular, the
number of M&A transactions using new procedures has increased
signifcantly. This seems to indicate that, at least on a superfcial
level, the recent changes in legislation and taxation have achieved
or begun to achieve their aims.
The results of our survey provide anecdotal evidence for the
increased level of corporate restructuring and, more importantly,
suggest that a high proportion of large companies continue
to engage in restructuring activities with the objectives of
strengthening core businesses and increasing shareholder value,
among others. Almost every large company has been engaged
in some form of corporate restructuring. Most of them have
closed unprofitable businesses and created joint ventures and
approximately half of them have made divestitures and/or
acquisitions.
Figure 2.1 Shrink to Grow
Source:ABeam Research
Value-
Building
Growth
Financial
Restructuring
ROE < Ke
g > 0
ROE > Ke
g > 0
ROE > Ke
g < 0
ROE < Ke
g < 0
Business
Rebuilding
0
- +
-
+
A
s
s
e
t

G
r
o
w
t
h

(
g
)
Return (ROE – Ke)
0
ROE: return on equity
Ke: cost of capital
ABeam Research & Linklaters Corporate Restructuring
11
2. Creating Value through Divestitures
engaged in divestitures of underperforming business units or
subsidiaries. In this chapter, we will describe the pattern of a
typical corporate restructuring process and examine in depth
various alternative divestiture structures. This chapter will also
explore many case studies, which demonstrate specifc examples
of how companies put various divestiture structures into practice.
Recent changes in the Code and taxation rules allow Japanese
companies to use a wide range of restructuring options. Many
companies have executed restructurings using the new options
available to companies. Large companies are coming under more
pressure to create shareholder value. We believe that this trend
will continue and that large companies will become increasingly
2.1 The Pattern of a Typical Corporate Restructuring Process
The pattern (as illustrated in Figure 2.1 below) of a typical
corporate restructuring process calls for a company to stabilize
its fnancial situation, return to proft and then focus on growth.
If companies incur excessive debts and suffer from deteriorating
cash fows, short-term measures will need to be taken immediately
to generate cash for debt payments and stabilize the financial
situation. To release cash (and thus reduce debts), companies can
sell off fxed assets or underperforming businesses and rationalize
working capital (e.g., accelerate debtor collections, extend creditor
payments or reduce inventories). The priority in this phase, called
fnancial restructuring, is to stabilize fnancial situations.
Once the financial restructuring phase is over, companies will
need to strengthen their core businesses so that they can generate
enough cash to fnance subsequent growth initiatives. No growth
initiatives can commence without having strong core businesses.
To improve profitability in core businesses, companies can
redesign and streamline business processes. Such efforts can be
extended to the entire supply chain. We refer to this phase as
business rebuilding.
When companies have improved the efficiency of their core
businesses sufficiently, they are poised to shift emphasis from
short-term proftability to long-term proftable growth. To sustain
growth, companies need to launch new products and develop
new markets. This phase is called value-building growth.
Growth initiatives usually take several years to yield results.
Consequently, companies will need to consider front-loading of
growth initiatives. In many cases, business rebuilding and value-
building growth take place simultaneously rather than one after
the other (see the Nissan case study 1 below).
Figure 2.2 Nissan: Automotive Cash Flow
Source:Nissan
Cash
generated
Cash
used
Cash
generated
Cash
used
FY00 FY01
Cash
generated
Cash
used
FY02
296.6
195.7
629.2
293.1
169.7
45.4
106.3
287.4
98.7
108.9
40.4
38.2
31.0
0
100
200
300
400
500
600
700
800
900
1,000
Others
Others
Billion yen
302.0
*
PPE: Property, plant and equipment
797.3
376.4
39.8
80.2
94.8
15.6
491.0
395.1
Proceeds
from sales
of PPE*
Proceeds
from sales
of securities
Operating
cash flow
Proceeds from
sales of
operations
Capital
investment
134.6
215.2
308.7
Figure 2.3 Nissan: Purchasing Cost Reduction
Source:Nissan
80
100
90
FY00 FY01 FY02
NRP Target
-8%
-14.5%
-20%
-20%
-11%
Actual
Plan
Nissan beat its own
purchasing cost
reduction targets
Figure 2.4 Nissan: Net Automotive Debt
Source:Nissan
2,100
1,349
953
432
-8.6
0
500
1,000
1,500
2,000
2,500
3/99 3/00 3/01 3/02 3/03
-751
-396
-521
-440
Billion yen
Nissan eliminated its
automotive debt
ABeam Research & Linklaters Corporate Restructuring
12
Case Study 1: Nissan's Dramatic Turnaround
Nissan Motor faced serious problems in the early 1990s. Nissan, led
by Yoshifumi Tsuji, announced in 1993 a restructuring plan including
the closure of its major assembly plant. Although the plan aimed
to return to proftability by 1997, Nissan continued to suffer a loss.
Yoshikazu Hanawa, who succeeded Tsuji in 1996, announced a new
restructuring plan in 1998. However, Nissan was still saddled with
more than 2 trillion yen in debt and needed a capital injection to
accelerate its debt reduction.
The Renault-Nissan Alliance was formed in 1999 and Carlos Ghosn
was named Nissan's COO in that year. Ghosn's aggressive Nissan
Revival Plan (NRP) was announced in October 1999. Although he
had earned the nickname "le cost killer" in France, Ghosn understood
that Nissan would not achieve lasting profitable growth by cost
reductions alone. The NRP focused on building the foundations
for long-term growth whilst simultaneously undergoing systematic
fnancial reform.
The frst phase of the NRP was fnancial restructuring. For two years
up to the end of March 2002, Nissan sold off fxed assets and non-
core businesses and raised cash worth 524 billion yen to pay down
interest-bearing debt (Figure 2.2). The second phase was business
rebuilding. Nissan implemented the "3-3-3" initiative to reduce
purchasing costs by 20%. The "3-3-3" initiative means: 3 partners
(suppliers, purchasing and engineering) working together in 3 regions
over 3 years. Nissan achieved a 20% reduction in purchasing costs
by March 2002, one year ahead of schedule (Figure 2.3). Lower
purchasing costs increased operating cash fow to 629 billion yen for
the fscal year 2001 and thus further reduced interest-bearing debt to
432 billion yen at the end of the fscal year 2001 (Figure 2.4).
The third phase of value-building growth was started with the launch
of the three-year Nissan 180 plan in April 2002. Nissan 180 plan
means one million additional unit sales by the end of fiscal 2004
compared with fscal 2001, 8% operating proft margin and zero net
automotive debt at the end of fscal 2004. Nissan also continued the
"3-3-3" initiative to further reduce costs by 15% over three years.
The frst year of Nissan 180 marked net sales of 6.85 trillion yen, up
10.6% from the fscal year 2001, and net income of 495 billion yen,
up 33.1% (Figure 2.5).
Figure 2.5 Nissan: Net Sales and Net Income
Source:Nissan
NRP 180
Billion yen Billion yen
3/99 3/00 3/01 3/02 3/03 3/94 3/95 3/96 3/97 3/93
Net sales
Net income
3/98
-56
-87
-166
-88
78
-14
-28
-684
331
372
495
6,198
5,834
6,039
6,580
5,801
6,659
6,565
5,977
6,090
6,196
6,829
-800
-600
-400
-200
0
200
400
600
800
1,000
4,000
4,500
5,000
5,500
6,000
6,500
7,000
With NISSAN 180, Nissan
took a step toward value-
building growth
Figure 2.6 Options to Implement
Corporate Restructurings
Source:ABeam Research
Mergers
Acquisitions
Divestitures
M&As
2.5 Sell-Offs
2.7 Spin-Offs
2.4 Corporate Splits
2.8 Tracking Stocks
Inter-Group Acquisitions
2.6 Equity Carve-Outs
2.3 Spin-Ins
2.9 Joint Ventures
ABeam Research & Linklaters Corporate Restructuring
13
While the foundation is being laid in business rebuilding, Nissan
180 also focuses on growth. This demonstrates that the business
rebuilding phase and value-building growth phase may take place
simultaneously rather than one after the other.
Nissan's growth initiatives include launching new models and
developing new markets. Nissan introduced 12 new models in the
fscal year 2002, to be followed by 16 new models during fscal years
2003 and 2004. In addition, Nissan and China's DongFeng Motor
established a new joint venture, which commenced operations in July
2003. This paved the way for Nissan's first entry into the Chinese
market. The new company aims to sell 550,000 units by 2006.
2.2 Alternative Divestiture Structures
Whereas section 2.1 focused on the general principles of corporate
restructurings, in this section we describe alternative divestiture
structures, other than the closure of unprofitable businesses.
Divestitures play a major role in corporate restructuring in the U.S.
and Europe. There are three basic ways to divest a subsidiary: sell-
off, equity carve-out and spin-off (Figure 2.6). Other methods
of divesting a subsidiary include corporate splits and tracking
stocks. Corporate splits are commonly used to effect intra-group
corporate restructurings and to prepare a business for divestiture.
A tracking stock is a specialized option for a parent company
to realize hidden value in a business unit or subsidiary while
retaining control of the unit or subsidiary concerned.
We also describe spin-ins and joint ventures. A spin-in is the
acquisition of minority shares in majority-owned subsidiaries.
Consequently, majority-owned subsidiaries become wholly-owned
subsidiaries. In many cases spin-ins are executed with the aim of
implementing groupwide restructuring and are followed by further
divestitures (see the Matsushita case study 2 and the Thermo
Electron case study 3 below). A joint venture can be used as a
means of acquiring or exiting a business in two stages. In the frst
stage, a parent company and its partner company create a joint
venture company. In the second stage, the parent company sells its
remaining shares of the joint venture to the partner after a certain
period of time (see the Takeda case study 11 below).
Figure 2.7 Matsushita: Spin-Ins to Implement Groupwide Restructuring
Source:ABeam Research
Matsushita
Kotobuki
Electronics
Matsushita Electric Industrial Co. (MEI)
FA
Div.
Car
navi -
gation
System
solu -
tions
Auto.
multi -
media
Mobile
Comm.
Panasonic
Comm. &
Imaging
Panasonic
Mobile
Comm.
Panasonic
Automotive
Systems
Panasonic
Systems
Solutions
Matsushita
Ecology
Systems
Panasonic
Factory
Solutions
Merger
Matsushita Electric Industrial Co. (MEI)
MEI made five majority-owned subsidiaries into
wholly-owned subsidiaries by way of share exchanges

67.8% 51.5% 56.3% 57.6% 57.6%
Listed on the Tokyo Stock Exchange
100% 100% 100% 100% 100%
Then, MEI implemented groupwide restructuring
Oct. 1, 2002
- -
Matsushita
Kotobuki
Electronics
Jan. 1, 2003
Matsushita
Kotobuki
Electronics
Matsushita
Graphic
Comm.
Kyushu
Matsushita
Electric
Matsushita
Communication
Industrial
Matsushita
Seiko
Matsushita Electric Industrial Co. (MEI)
Matsushita
Kotobuki
Electronics
Matsushita
Graphic
Comm.
Kyushu
Matsushita
Electric
Kyushu
Matsushita
Electric
Matsushita
Communication
Industrial
Matsushita
Communication
Industrial
Matsushita
Seiko
Matsushita
Seiko
Corporate
systems
related
divisions
FA
Company
Corporate
Info. &
Comm.
Sales Div.
Automotive
electronics
related
divisions
Matsushita
Graphic
Comm.
In-house company In-house company
Env.
systems
related
divisions
ABeam Research & Linklaters Corporate Restructuring
14
between Kyushu Matsushita Electric and Matsushita Graphic
Communications Systems. MEI also split its environmental
systems sales unit into Matsushita Seiko and the company was
renamed Matsushita Ecology Systems. Finally, by combining the
FA Company, an in-house company of MEI, and the FA division
of Kyushu Matsushita Electric, Panasonic Factory Solutions was
newly established. These transactions are examples of the use of
the corporate split procedure described in section 1.1.4 (corporate
splits are described in more detail in section 2.4).
In line with the restructuring initiatives, MEI also made two
other group companies, Matsushita Electronic Components and
Matsushita Battery Industrial, into wholly-owned subsidiaries
through share exchanges in April 2003.
As part of its restructuring program, in October 2002, Matsushita
Electric Industrial (MEI) made fve majority-owned subsidiaries
into wholly-owned subsidiaries by way of the share exchange
procedure described in section 1.1.2. The five group companies
were Matsushita Communications Industrial, Kyushu Matsushita
Electric, Matsushita Seiko, Matsushita Kotobuki Electronics
Industries and Matsushita Graphic Communications Systems.
Four of these companies had been publicly listed companies and
consequently were delisted (Figure 2.7).
Thereafter, MEI implemented its groupwide restructuring in
January 2003. MEI split its sales unit of mobile communication
equipments into Matsushita Communications Industrial and the
company was renamed Panasonic Mobile Communications.
Panasonic Communications was established through a merger
2.3 Spin-Ins
Increasingly, companies are making majority-owned subsidiaries
into wholly-owned subsidiaries. Such transactions are referred
to as spin-ins. Often spin-ins are implemented through the share
exchange procedure. Spin-ins allow a parent company to implement
Case Study 2: Matsushita's Spin-Ins to Implement Groupwide Restructuring
groupwide restructuring by streamlining overlapping businesses and
redeploying assets and capabilities within the group. Consequently,
spin-ins will often lead to divestitures (see the Matsushita case
study 2 and the Thermo Electron case study 3 below).
Figure 2.8 Thermo Electron: Increased Complexity of the Company Structures
Source:Thermo Electron 10K, ABeam Research
Thermo
Electron
Thermo
Ecotek
Thermo
Fibertek
Thermo
Power
Metrika
Systems
Thermedics
Detections
The Randers
Killam Group
Thermo
Lase
Thermo
Fibergen
ONIX
Systems
Thermo
Cardiosystems
Thermo
TerraTech
Trex
Medical
Thermo
BioAnalysis
Thermo
Sentron
Thermo
Vision
Thermo
Optek
Thermo
Voltek
Thermo
Quest
Thermo
Spectra
85% 74% 86% 64% 94% 91% 79%
73%
Thermo
Electron
Kadant
*
Viasys
Healthcare
Shareholders
Shareholders
Sell-off Sell-off
Note: % reflects combined ownership by direct parent company and Thermo Electron as of year end 1998.
*
former Thermo Fibertek
76%
81%
84%
95%
90%
92%
80%
88%
60%
86%
69%
96%
71%
80%
77%
Spin-Ins
Sell-off
Thermo
Instrument
Thermedics
Thermo
TerraTech
Thermo
Trex
ABeam Research & Linklaters Corporate Restructuring
15
Case Study 3: Thermo Electron's "De-Conglomerating" through Spin-Ins
Kadant (former Thermo Fibertek) and Thermo Fibergen. Spectra-
Physics was spun into the company in 2002. These acquisitions
enabled Thermo to undertake groupwide restructuring.
After the acquisition of minority interests, Thermo implemented
a groupwide restructuring. Thermo split into three independent
publicly listed entities. The company spun off as a dividend to its
shareholders Kadant and Viasys Healthcare in 2001 (spin-offs are
described in more detail in section 2.7). In addition, Thermo sold
several non-core businesses. As part of the sell-offs, the company
sold its interest in Thermo Cardiosystems in 2001. As a result of
the completion of spin-offs and sell-offs, Thermo's continuing
operations consist solely of its instruments businesses.
This case study highlights some of the disadvantages of minority
carve-outs and the fact that minority carve-outs are perhaps
better thought of as an interim solution (minority carve-outs are
described in more detail in section 2.6).
In the early 1980s, the founder of U.S.-based Thermo Electron,
George Hatsopoulos, began to carve out subsidiaries as publicly
listed businesses. Using carve-outs, he hoped to increase the
overall valuation of the group and inspire entrepreneurship.
Thermo completed 24 minority carve-outs between 1983 and
1998. The initial success of Thermo's carve-outs became an
appealing model for other companies. Subsequently, however,
the company structures became too complex and unmanageable
(Figure 2.8).
A new management team led by Richard Syron started the process
of "de-conglomerating." The goal was to consolidate Thermo
into one publicly traded entity focused on its core business of
measurement and detection instruments. In January 2000, Thermo
announced a major reorganization plan. During 2000, Thermo
acquired the minority interest in all of its formerly publicly held
subsidiaries other than Spectra-Physics, Thermo Cardiosystems,
ABeam Research & Linklaters Corporate Restructuring
16
2.4 Corporate Splits
The corporate split procedure makes it easier for companies to
split business units into new companies (or existing companies).
Prior to the introduction of the corporate split procedure, it
was possible for a company to split a business unit into a new
subsidiary through either an investment-in-kind or a post-
establishment transfer of business. However, the traditional
methods to complete such transactions were expensive and time-
consuming procedures. For example, an asset valuation by a court-
appointed inspector was required. We call this type of corporate
split Bunsha-type splits.
In addition, the corporate split procedure makes it possible for the
frst time for a transferee company to distribute its shares directly
to the shareholders of a transferor company. This type of corporate
split is broadly equivalent to the concept of a spin-off in the U.S.
or the concept of a demerger in the European market (spin-offs
are described in more detail in section 2.7).
The Matsushita case study 2 above and the NEC case study 4
below show examples of restructurings that made use of different
types of corporate splits.
Bunsha-type splits (whether in the traditional method or by a
corporate split which does not involve the distribution of shares
directly to the shareholders of a transferor company) enable a
parent company to:
• focus on core businesses (see the Sumitomo Rubber case
study 5 below);
• improve the control span of the parent’s management team by
reducing parental involvement; and
• accommodate differing personnel and compensation systems.
At the same time, such Bunsha-type splits enable a parent
company to unlock the value of a business unit by:
• clarifying the business unit’s responsibility and authority;
• providing a certain degree of autonomy to foster an indepen-
dent culture;
• expediting the business unit’s decision-making to improve
business performance; and
• enhancing visibility for customers, suppliers and potential alli-
ance partners or buyers.
More signifcantly, Bunsha-type splits facilitate the participation
of strategic partners who can provide necessary capabilities (e.g.,
by way of joint ventures, see section 2.9 and the Tomen case
study 10 below). Alternatively, Bunsha-type splits are commonly
used to prepare a business for divestiture. The Osaka Gas case
study 6 below illustrates how corporate splits may be used to
divest selected assets into a subsidiary in preparation for a sell-
off. Bunsha-type splits may be also used to establish a holding
company (i.e., a parent company splits its business units into new
companies and the parent becomes a holding company). In many
cases, a parent company establishes a holding company to manage
its business portfolio more effciently (see the Japan Telecom case
study 7 below). These examples show that Bunsha-type splits are
often interim solutions leading to more strategic transactions.
Figure 2.9 NEC: Restructuring through Various Corporate Splits
Source:ABeam Research
? Split its Compound Semiconductor Device Division and transferred it to NEC Compound
Semiconductor Devices, a new subsidiary, in October 2001.
? Split its microwave tube business and transferred it to NEC Microwave Tube, a new subsidiary, in  
October 2002.
? Split its color PDP business and transferred it to NEC Plasma Display Corporation, a new
subsidiary, in October 2002.
? Splits its semiconductor business (except for DRAMs) and transferred it to NEC Electronics
Corporation, a new subsidiary, in November 2002.
? Split its liquid crystal display (LCD) business and transferred it to NEC LCD Technologies, a new
subsidiary, in April 2003.
? Split capacitors, batteries and relays business from NEC Electron Devices, an in-house company  
of NEC, and transferred it to Tokin Corporation in April 2002. Tokin allotted new shares to NEC in
exchange for the business. As a result, NEC increased its stake in Tokin from 40.6% to 66.6% and
Tokin was renamed NEC Tokin Corporation.
? Established NEC Toppan Circuit Solutions, a new joint venture company with 55% contributed by
Toppan Printing and 45% by NEC, and transferred its printing wiring business in October 2002.
Transferring a business
to a new company
Transferring a business
to a new JV company
Transferring a business
to an existing company
Examples of Corporate Splits Type
Figure 2.10 Sumitomo Rubber: Corporate Splits to
Focus on Core Business
Source:ABeam Research
Merger
Ohtsu Tire
SRI
Sumitomo
Rubber
Sporting
good
business
Tire
business
51%
SRI
Hybrid
July 1, 2003
Industrial
products
business
Sumitomo
Rubber
(SRI)
Sports
ABeam Research & Linklaters Corporate Restructuring
17
Case Study 4: NEC's Restructuring through Corporate Splits
NEC recorded a 151 billion yen net loss in the fscal year 1998
and since that time has been implementing a restructuring. NEC
set the short-term goal of returning to proftability and the long-
term goal of transforming NEC into a solutions provider. As part
of the restructuring efforts, Packard Bell NEC was liquidated in
November 1999, Elpida Memory, a DRAM joint venture with
Hitachi, was established in December 1999 and NEC Home
Electronics was dismantled in January 2000.
In April 2000, NEC formed three in-house companies (NEC
Solutions, NEC Networks and NEC Electron Devices) to focus on
solutions businesses. NEC has also completed many splits of non-
core businesses through the corporate split procedure described
in section 2.4. Some of these splits are described below; these
splits include examples of transfers of business to new companies,
newly created JV companies and existing companies both inside
and outside the NEC group.
Case Study 5: Sumitomo Rubber's Splitting of its Non-Tires Businesses
Sumitomo Rubber Industries is Japan's third largest tire maker and
a major manufacturer of sporting goods and industrial products.
While the tire business posted operating income of 28.1 billion
yen and the sporting goods business 6.4 billion yen in the fscal
year 2002, the industrial products business caused an operating
loss of 2.8 billion yen in the same year. Sumitomo Rubber
announced a restructuring plan in December 2002.
As part of its restructuring initiatives, Sumitomo Rubber merged
with its 51% controlled subsidiary, Ohtsu Tire & Rubber, in July
2003. At the same time, using the corporate split procedure,
Sumitomo Rubber split its sporting goods and industrial products
businesses into new subsidiaries, SRI Sports and SRI Hybrid,
respectively (Figure 2.10). This reorganization will enable the
parent company to focus on its tire business and promote further
restructuring in its non-tire businesses.
Figure 2.11 Osaka Gas: Corporate Splits for Later Sell-Offs
Source:ABeam Research
100% 65.3%
6.4%
28.3%
100% 65.3%
6.4%
28.3%
65.3% 65.3%
Osaka Gas
Osaka Gas
Osaka Gas
Osaka Gas
Harman Co.
OG Capital
OG Housing
OG Capital
Mfg Sales
100% 65.3%
6.4%
28.3%
60% 10%
OG Capital
OG Housing
40%
90%
Harman
Harman Pro
Noritz
100% 65.3%
6.4%
28.3%
10% 10%
OG Capital
OG Housing
90%
90%
Harman
Harman Pro
Noritz
Sep. 1, 2001
Oct. 1, 2001
Apr. 1, 2003
..... .....
.....
.....
OG Housing
Harman Planning
Harman Planning
Harman Harman Pro Harman Planning
Figure 2.12 Japan Telecom: Restructuring Under the Holding Company Structure
Source:Japan Telecom Holdings
Japan Telecom Holdings Co.
JENS
J-Phone
Absorption into JT
Japan
System
Solution
Japan
Telecom
JT
Information
Services
JT
Singapore
JT
UK
JT
America
JT
Networks
JT
Data
Telecom
Services
JT Network
Information
Services
JT Create
Sale of telemarketing
business to JT Max
& Transfer to JT
Sale to Toho
Electrical
Construction
Sale to
Moshi Moshi
Hotline Co.
Sale to
Ripplewood
Sale of assets to
Toppan Forms &
liquidation
Sale of
assets to JT
& liquidation
JT
Engineering
Asahi
Telecom
JT MAX
Telecom
Express
ABeam Research & Linklaters Corporate Restructuring
18
Case Study 6: Osaka Gas's Corporate Splits followed by Sell-Offs
In September 2001, Osaka Gas split its kitchen appliance
business subsidiary, Harman, into three companies through the
corporate split procedure (Figure 2.11). The three companies
are: Harman Pro (manufacturing), Harman (sales) and Harman
Planning (real estate).
In October 2001, Osaka Gas sold 90% of its shares in Harman
Pro and 40% of its shares in Harman to Noritz, a leader in gas
water heaters. One and a half years later, Osaka Gas sold its 50%
stake in Harman to Noritz. Noritz now controls a 90% stake in
both companies.
Case Study 7: Japan Telecom's Use of a Holding Company as a Restructuring Vehicle
In December 2001, Japan Telecom initiated its "Project V"
restructuring plan to improve profts of its fxed-line business. In
August 2002, Japan Telecom established a new holding company
structure under which it operates fixed-line, mobile and other
businesses as separate subsidiaries (Figure 2.12). In March 2003,
Japan Telecom Holdings announced that, with the sale of Japan
Telecom Max, it has completed its program to dispose of all of its
non-core assets. In August 2003, Japan Telecom Holdings further
announced that it had reached agreement to sell its wholly-owned
fxed-line subsidiary, Japan Telecom, to Ripplewood Holdings.
Figure 2.13 Nissan's Sell-Offs of Subsidiaries to Buyout Firms
Source:ABeam Research
Target
Company
Buyout Firms Form Date
Vantec 3i Group 66.7% MBO Jan.'01
Niles Parts Ripplewood Holdings 40.0% Buyout Apr.'01
Nissan
Transport
AIG Japan Partners;
Tokyo Marine Capital
100.0% MBO May'01
Nissan Altia Fuji Management 86.9% MBO Oct.'01
IID Inc. 100.0% MBO Nov.'01
KIRIU Unison Capital 36.7% MBO Dec.'01
Rhythm J.P. Morgan Partners 51.0% MBO Aug.'02
Nissan's
Stake
NIF Ventures; Fuji Capital
Markets (now Mizuho Capital);
New Business Investment
Figure 2.14 Buyout Firms in Japan
Source: ABeam Research
Transformation Turnaround
Traditional Venture Capitals Traditional Buyout Firms
Extended Venture Capitals (e.g., JAFCO)
Turnaround Funds
Transformation
Turnaround Start-Up
Start-Up
Corporate Life Cycle
Extended Buyout Firms
e.g., Advantage Partners, Unison Capital, MKS
Partners, Ripplewood Holdings, Carlyle Japan Partners
Principal Investment Firms
e.g., Nomura Principal Finance, Daiwa Securities SMBC Principal Investments, Mizuho Capital,
Tokio Marine Capital, Goldman Sachs, BNP Paribas, J.P. Morgan Partners
ABeam Research & Linklaters Corporate Restructuring
19
2.5 Sell-Offs
A sell-off is the sale of a business or subsidiary of the parent company
to another frm outside the group, generally resulting in a payment
of cash to the parent. In theory, sell-offs are the least complex of
restructuring structures.
Acquirers can usually be divided into two groups: strategic buyers
and financial buyers. Strategic buyers are those who are interested
in acquiring a business for strategic purposes (e.g., increasing
market share, creating economies of scale or exploiting synergies).
Strategic buyers are typically companies engaged in the same
business as, and therefore competing with, the business or company
under consideration. In contrast, financial buyers are those who
are interested in acquiring a business to secure a fnancial return in
the short- to medium-term before selling the business or otherwise
exiting the investment. Financial buyers are likely to be buyout frms.
Buyout firms raise funds in order to be able to take equity stakes
in companies though funding and assisting with management
buyouts (MBOs) and leveraged buyouts (LBOs). Buyout firms
generally focus on established companies with potential to grow
after transformation. Non-core divisions and subsidiaries of large
public companies are their typical targets. For example, as part of
its restructuring efforts, Nissan Motor sold its shares in at least 24
subsidiaries from 2000 to 2002. 17 were sold to strategic buyers
and the remaining 7 were sold to buyout frms (Figure 2.13). It was
expected that, like Nissan, large companies would sell off non-core
divisions and subsidiaries as they pursued restructuring initiatives.
Fueled by expectations, the number of new buyout firms rose
signifcantly. However, some buyout frms have been unable to fnd
places to invest, as evidenced by the withdrawal of some such frms
(e.g., 3i) from Japan.
Due to the pressure for banks to dispose of non-performing loans, it is
expected that turnaround deals will increase dramatically over years
to come. Consequently, the number of corporate turnaround funds
has increased sharply and is expected to increase even further. For
buyout frms, corporate turnarounds provide an important source of
investment opportunities. Accordingly, most buyout frms have been
expanding their activities into corporate turnarounds.
There are several types of buyout frms in Japan (Figure 2.14):
• venture capital-affliated buyout frms (e.g., JAFCO’s Structured
Investment Group);
• domestic independent buyout firms (e.g., Advantage Partners,
Unison Capital, MKS Partners);
• foreign independent buyout firms (e.g., Ripplewood Holdings,
Carlyle Japan Partners);
• domestic principal investment firms (e.g., Nomura Principal
Finance, Daiwa Securities SMBC Principal Investments, Mizuho
Capital, Tokio Marine Capital); and
• foreign principal investment firms (e.g., Goldman Sachs, BNP
Paribas, J.P. Morgan Partners).
ABeam Research & Linklaters Corporate Restructuring
20
2.6 Equity Carve-Outs
An equity carve-out is the sale of an equity interest in a subsidiary
to public investors in an IPO or to professional investors in a
private placement.
Equity carve-outs come in two forms: minority carve-outs and
majority carve-outs. A minority carve-out occurs when a parent
company sells a minority interest in a wholly-owned or majority-
owned subsidiary to investors while retaining the majority interest.
A majority carve-out involves the sale of a majority interest in a
wholly-owned or majority-owned subsidiary to investors. It should be
noted that the preparation for either an IPO or a private placement to
professional investors takes longer than that for a sell-off. In addition,
a parent company will have to ensure that a carved-out subsidiary
should be a viable independent company. This is often the most
diffcult part of the preparation for an equity carve-out.
Minority carve-outs have the following benefts, among others:
• after a minority carve-out, the parent company continues to remain
in control of the subsidiary;
• a minority carve-out allows the parent company to take advantage
of a high valuation of part of its operations and provides opportu-
nities to raise capital on advantageous terms;
• if the minority carve-out unlocks value and a higher-rated or
higher value stock is created (in aggregate), the stock of the
parent company (or subsidiary) has more value as an acquisi-
tion currency;
• a minority carve-out gives the subsidiary time to become a stron-
ger company before a sale or majority or full carve-out;
• a minority carve-out may create business opportunities for the
subsidiary by demonstrating that the subsidiary will be an inde-
pendent business; and
• a minority carve-out IPO allows the subsidiary to offer market-
linked or other equity incentives to management.
Minority carve-outs also have disadvantages. These include:
• the parent company maintains control of the subsidiary, which
may cause a potential confict of interests with the minority share-
holders of the subsidiary;
• if the initial public float (i.e., the value of shares available for
public investors in the IPO) is too small, it may fail to attract insti-
tutional investors;
• small public foats may increase the volatility of the stock;
• in difficult markets, a minority carve-out may impede a selling
strategy by setting a price for the shares of the subsidiary which is
below their "real" value; and
• a minority carve-out may reduce the flexibility with which the
parent and subsidiary can cooperate to capture synergies.
The parent should anticipate that a minority carve-out is often an
interim solution. In most cases, a minority carve-out is later followed
by another transaction, such as a sell-off, follow-on public offering or
spin-off. In practice, a minority carve-out is likely to lead to complete
separation over time because the carved-out subsidiary tends to drift
away from and interact less with the parent due to its independence.
In addition, the carved-out subsidiary, if it becomes a publicly listed
company, will issue its own financial statements and establish a
public market value, resulting in the increased possibility of a merger
(or takeover) offer. A minority carve-out IPO may be combined with
a later spin-off (such two-stage spin-offs, which are particularly
popular in the U.S., are described in more detail in section 2.7).
If unsuccessful, the minority carve-out may be followed by a
spin-in, i.e., the parent company acquires the shares held by minority
shareholders and turns the majority-owned subsidiary into a wholly-
owned subsidiary (see the Thermo Electron case study 3 above).
When a substantial or complete separation is desired, a majority carve-
out may be implemented (again usually by way of an IPO or private
placement). A majority carve-out is benefcial in the following ways:
• a majority carve-out may generate substantial cash for the parent
and/or the subsidiary;
• a majority carve-out may allow the parent to terminate its respon-
sibility toward the subsidiary;
• a majority carve-out means that there will be fewer potential con-
ficts of interests between the parent and the subsidiary after the
carve-out than is the case with a minority carve-out;
• notwithstanding that it will only be a minority shareholder, the
parent may maintain a signifcant infuence on the subsidiary after
the carve-out; and
• a majority carve-out allows continued financial participation by
the parent.
Disadvantages of a majority carve-out include:
• neither the parent nor its shareholders will participate fully in the
upside of the subsidiary; and
• the parent will lose control over the subsidiary after the carve-out.
Figure 2.15 Potential Advantages of Spin-Offs
Source:ABeam Research
Spin-offs provide a valid IPO
alternative in difficult market
Spin-offs enable the parent's
shareholders to retain
the value of a subsidiary
Spin-offs separate
a subsidiary from the
parent's balance sheet
Spin-offs have no
advantages over
alternatives
Spin-offs create a
focused parent and
a fully independent
subsidiary
0.0%
16.3%
11.6%
11.6%
60.5%
ABeam Research & Linklaters Corporate Restructuring
21
2.7 Spin-Offs
A spin-off (or demerger) often consists of the distribution of a
subsidiary's stock to the parent company's existing shareholders
by way of a dividend. A spin-off has become an increasingly
popular way of undertaking corporate restructuring in the U.S.
and Europe (see the Thermo Electron case study 3 and the GM
case study 13). The main reason for the popularity of spin-offs in
the U.S. and Europe is that the distribution can often be made tax-
free for both the parent corporation and the receiving shareholder.
This can represent signifcant savings to the parent company.
In Japan, the corporate split procedure allows a transferee
company to distribute new shares as consideration directly to
the shareholders of the transferor company. However, spin-offs
have been rarely executed to date. This may be because spin-offs
are only tax-free for Japanese companies if they are executed as
part of reorganization within the group or reorganization for the
purpose of a joint venture. Otherwise, spin-offs are taxable and
hence have been executed only in special cases (see the Chugai
case study 8 below).
Spin-offs are a means to unlock the value of a subsidiary and
transfer that value directly to the parent company's shareholders.
It is especially useful for a subsidiary that does not completely
ft with the parent company's core activities or would otherwise
benefit from being a stand-alone public company. Spin-offs
are also a means to obtain full value for the parent company's
shareholders when a spun-off subsidiary is viable but will not
command a reasonable price in a cash divestiture because of
market conditions.
Where the shares of the parent company are publicly listed, in
order to ensure that the parent company's shareholders can realize
the value of the distribution, the shares of the subsidiary generally
need to be (or become) publicly listed to give the shareholders
the same liquidity in the shares in the subsidiary as they have in
the shares of the parent, i.e., the parent will need to seek a public
listing for the new shares.
As is the case with equity carve-outs, the spun-off subsidiary must
be a viable stand-alone entity to create shareholder value. This
means that it must have a strong capital structure and a viable
business model. This poses a major challenge for all spin-offs. In
addition, spin-offs have disadvantages, including the following:
• unlike an equity carve-out or a sale for cash, neither the parent
company nor the subsidiary receives any cash in the transac-
tion itself;
• the parent company loses the income and cash fow of the sub-
sidiary without receiving any cash in return;
• unlike a carve-out IPO, the shares are distributed to the parent's
shareholders as a dividend and therefore the parent company
may not work hard to create investor interest in the stock as
much as in a carve-out IPO; and
• if the spun-off subsidiary fails to meet their investment criteria
(e.g., minimum size of market capitalization or portfolio hold-
ings), institutional investors of the parent company may sell
the shares distributed to them in the spin-off.
Although spin-offs are currently rare in Japan, the results of our
survey revealed that many companies found potential merits
in spin-offs (see Figure 2.15). 84% of our respondents believe
that spin-offs are a unique measure offering several advantages
over alternatives. 60% of our respondents believe that, unlike
Bunsha-type splits, spin-offs enable a parent to focus more
completely on core businesses and allow a subsidiary to become
fully independent from the parent company and develop its own
business strategy. Where spin-offs can be structured so that they
incur no tax, we expect them to become a more widely accepted
method of implementing corporate restructurings in Japan.
Figure 2.16 Chugai Pharmaceutical: Gen-Probe Spin-Off
Source:ABeam Research
100%
Chugai
Gen-Probe
Chugai
Gen-Probe was spun-off from
Chugai on September 16, 2002.
Gen-Probe began
trading on the NASDAQ
on Sept. 16, 2002
Gen-Probe
Chugai
shareholders
Chugai
shareholders
Gen-Probe
shares
ABeam Research & Linklaters Corporate Restructuring
22
A carve-out IPO may be combined with a later spin-off. Such two-
stage transactions have become a common means of implementing
a spin-off in the U.S. (see the GM case study 13 below).
The advantages of such two-stage transactions include the
following:
• the IPO establishes a public market for the subsidiary’s stock
in advance of the spin-off;
• the scrutiny which comes with being a publicly listed company
should make the subsidiary a stronger company; and
• the IPO generates cash for either the parent company or sub-
sidiary or both.
The disadvantages of these two-stage transactions are similar to
those of minority carve-outs, including:
• the IPO is dependent on equity market conditions;
• preparing for and implementing the IPO is time consuming;
• companies with small public foats are less attractive to institu-
tional investors; and
• a depressed stock price may prevent the parent from undertak-
ing the subsequent spin-off.
A split-off is a variant of a spin-off. In a split-off, a parent
company distributes shares it owns in a subsidiary to its
shareholders in exchange for their shares of the parent. A split-off
is a way to create value for the parent's shareholders by reducing
the parent's outstanding shares. Reducing the parent's shares
outstanding increases the earnings and cash flow per share and,
thereby, the value of the remaining shares.
A split-up is a form of split-off where a parent company is
broken up into two or more independent companies. In the
split-up, a parent company is often liquidated and the parent
company's shareholders become shareholders of each of the new
independent companies.
Case Study 8: Chugai's Reactive Spin-Off to Avoid Anti-Trust Issues
Chugai Pharmaceutical merged with Nippon Roche, a wholly-
owned subsidiary of Roche Pharmholding, so that Roche became
Chugai's parent company, in October 2002. Prior to the merger,
Chugai resolved to spin off its wholly-owned U.S. subsidiary,
Gen-Probe, and completed the distribution of Gen-Probe shares
to Chugai's shareholders in September 2002 (Figure 2.16). The
purpose of the spin-off was to avoid anti-trust problems over
Chugai's merger with Nippon Roche.
Chugai decided on a spin-off through capital reduction with
compensation. Upon the capital reduction, each of Chugai's
shareholders was allotted 0.086 shares in Gen-Probe for each
Chugai share. The spin-off was taxable at the parent level.
The distribution was also taxable as a deemed dividend for the
Japanese shareholders of Chugai receiving the shares. Chugai paid
a cash distribution to cover Japanese withholding taxes.
This case study provides an example of using the spin-off method
to address regulatory issues.
Figure 2.17 Tracking Stocks
Source:ABeam Research
Providing stock incentives
to management of the
subsidiary
68.9%
31.1%
50.0%
32.5%
5.0%
5.0%
7.5%
Others
Interest in
Tracking Stocks
Potential Merits
Raising capital
without losing
control over the
subsidiary
Using the
tracking stocks
as acquisition
currency
Unlocking the value
in the underlying
subsidiary
Feel no need
to issue tracking
stocks
Examine the
possibility of
issuing tracking
stocks in the future
ABeam Research & Linklaters Corporate Restructuring
23
2.8 Tracking Stocks
Tracking stock is a class of parent company common stock that
provides a return to investors linked to the performance of a
particular business unit within the parent company. Under the
Code, prior to the amendment in April 2002, it was possible for
Japanese companies to issue tracking stocks. For example, in June
2001, Sony issued the frst tracking stock in Japan (see the Sony
case study 9 below). However, the amendments in April 2002 now
allow Japanese companies to issue stocks with various dividend
payments and voting rights. Although the April 2002 amendment
has made it easier for a company to issue tracking stocks, no other
Japanese company has yet followed Sony's lead.
Tracking stocks are a very different solution to the others
discussed in this paper. In theory, it can create many benefts for
both the parent company and the subsidiary. A tracking stock does
not require the parent company to make the tax, legal, governance
and organizational changes required for an equity carve-out or
spin-off (e.g., no separate board of directors is required). This
provides the main appeal to the parent company over other
alternatives.
There are other advantages to using tracking stocks, including
the following:
• the parent company continues to control the business unit and
maintain ownership of its assets;
• a tracking stock can raise capital on attractive terms;
• a publicly listed tracking stock establishes a market value for
the business to which management compensation programs
can be tied;
• a tracking stock preserves the operating benefits of a single,
integrated corporation; and
• the parent company may use the tracking stock as acquisi-
tion currency.
The disadvantages of a tracking stock include the following:
• the parent company issuing a tracking stock must create fnancial
"frewalls" between the business and the rest of its operations;
• the parent company will shoulder the administrative burden in
connection with a tracking stock;
• a company that issues a tracking stock creates the potential for
a conflict at the board level between the interests of the two
sets of shareholders; and
• investors may not give as much value to the tracking stock as
if shares represented a direct ownership interest in the assets of
the tracked business.
Tracking stocks are often terminated when the circumstances and
objectives of the business and/or parent company change and
consequently the parent company decides to sell, spin off or spin
in the tracked business.
According to the results of our survey, 31% of respondents say
they intend to examine the possibility of issuing tracking stocks
in the future (Figure 2.17). Our study also identifed the perceived
merits of issuing tracking stocks. Half of our survey respondents
believe that a tracking stock would enable them to raise capital
without losing control over the subsidiary.
Figure 2.18 Sony: Stock Performance
Source:Yahoo! Finance
Sony
SCN
+100
+50
0
-50
1999/1 2000/1 2001/1 2002/1 2003/1
The SCN tracking
stock has not
outperformed Sony
ABeam Research & Linklaters Corporate Restructuring
24
2.9 Joint Ventures
When well crafted, joint ventures can achieve many of the same
objectives for the parent company as an acquisition of the other
company, including access to the resources and capabilities of the
joint venture partner, but at a lower cost and without many of the
risks associated with an acquisition (see the Tomen case study
10 below). Consequently, the parent can increase the value of a
subsidiary by way of a joint venture. Successful joint ventures are
often followed by IPOs.
Joint ventures may be also used as a means of divesting a business
(see the Takeda case study 11 below). The frst step is the creation
of a joint venture with a strategic partner. Often the strategic
partner controls a major stake (i.e., over 50%) in the joint venture
company. The second step is the acquisition of the minority shares
of the joint venture company by the strategic partner.
Such two-stage transactions provide the acquiring partner with
benefts, including the following:
• a means to encourage the partner to assist in building the business;
• a means to get to know the business before a subsequent acqui-
sition; and
• a means to lay the groundwork for smooth integration after a
later acquisition.
As mentioned in section 2.5, buyout firms are active buyers of
non-core subsidiaries of large public companies. Although joint
ventures are not their traditional business model, buyout firms
today may be interested in forming joint ventures. Such buyout
partnerships can be used as a means of divesting non-core
businesses when a cash sale is unavailable or undesired.
The advantages of a buyout partnership for the parent company
and the subsidiary include:
• experienced buyout frms can greatly assist in building the sub-
sidiary, recruiting a management team, forming relationships
with customers and setting business strategy;
• buyout frms invest cash into the subsidiary and assist in fund-
ing key business initiatives; and
• the involvement of experienced and respected buyout firms
may be a signifcant asset to the subsidiary in a later IPO.
The challenges of a buyout partnership for the parent company
and the subsidiary include:
• most subsidiaries will not meet the criteria for a buyout invest-
ment; in particular, a buyout frm may not invest in an entity
when the parent company controls its strategic direction; and
• buyout frms are usually interested in executing an exit strategy
within a reasonable time frame.
Case Study 9: Sony's Issuing of the First Tracking Stock
In November 2000, Sony Corporation announced that the
company had begun preparations to issue a new class of stock
linked to the performance of Sony Communication Network
(SCN). SCN is a wholly-owned subsidiary of Sony, engaged in
internet-related businesses. Sony believed that a tracking stock
would enable the company to realize the value of SCN while
maintaining full parent ownership.
Though the company planned to issue the tracking stock by the
end of March 2001, Sony postponed the issuance because of the
depressed stock market. In June 2001, Japan's frst tracking stock
was listed on the frst section of the Tokyo Stock Exchange. There
was, however, a lack of enthusiasm amongst investors. Figure
2.18 demonstrates the performance of SCN tracking stock against
that of Sony itself. As can be seen, the SCN tracking stock has not
outperformed the parent company. Issuing the frst tracking stock
resulted in disappointment to both Sony and shareholders.
Figure 2.20 Takeda Chemical: Joint Ventures to Be Followed by Sell-Offs
Source:ABeam Research
Sale of shares
40% 60% 100%
New Co.
Takeda's agrochemical business has
been transferred to a new JV company
The JV company will be made a wholly-
owned subsidiary of Sumitomo Chemical
Takeda
Chemical
Agro-
Chemical
business
Sumitomo
Chemical Takeda
Agro Company
Sumitomo
Chemical
Takeda
Chemical
Sumitomo
Chemical
Takeda
Chemical
Sumitomo
Chemical
Nov. 1, 2002 5 years later
Takeda will sell
the remaining 40%
to Sumitomo
after 5 years
Figure 2.19 Tomen: A Corporate Split to Facilitate
the Formation of a Joint Venture
Source:ABeam Research
Tomen Tomen Tomen
Sale of TPHC shares
*Tokyo Electric Power Company
100% 50%
TEPCO*
50%
Tomen Power
Holdings Corp
(TPHC)
Eurus Energy
Holdings Corp.
Power &
Utility
Projects
Division
Nov. 1, 2001 Sep. 30, 2002
ABeam Research & Linklaters Corporate Restructuring
25
Case Study 11: Takeda's Sell-Offs of Non-Core Businesses through Joint Ventures
Takeda Chemicals have established three joint venture companies
with the intention of leading to a later divestiture of these non-
core businesses. In April 2001, Takeda established Mitsui Takeda
Chemicals, a urethane chemicals joint venture company, with
Mitsui Chemicals. Mitsui acquired 51% and Takeda 49%. Mitsui
is scheduled to purchase Takeda's shares in the joint venture fve
years after start-up.
Takeda entered into similar joint venture agreements with Kirin
Brewery and Sumitomo Chemical.
In April 2002, Takeda and Kirin established Takeda Kirin Foods
in the food business, producing mainly seasonings and flavor
enhancers. Kirin has a 51% stake in the new company and
Takeda 49%. Kirin plans eventually to acquire all of the shares.
In November 2002, Takeda and Sumitomo formed Sumitomo
Chemical Takeda Agro Company in the agrochemical business.
Sumitomo controls a 60% stake in the joint venture and Takeda
40%. Sumitomo plans to acquire Takeda's shares in the joint venture
after the expiry of the fve-year joint venture period (Figure 2.20).
Case Study 10: Tomen's Formation of a Joint Venture to Foster Growth
Tomen Corporation, a general trading house, announced a
restructuring plan in 1998 and has recently been intensifying
its restructuring efforts. In December 2002, Tomen announced
a medi um-t erm management pl an t o i mpl ement furt her
restructuring. As part of the plan, Tomen will complete
management integration with Toyota Tsusho. Tomen also received
signifcant debt forgiveness from UFJ Bank.
In November 2001, Tomen split part of its Power & Utility
Projects Division and established a new wholly-owned subsidiary,
Tomen Power Holdings Corporation, through the corporate
split procedure described in section 2.4 (Figure 2.19). The new
company is involved in worldwide development of wind power
generation business. The objective of the split was to facilitate the
participation of strategic partners in the business.
In September 2002, Tomen sold a 50% stake in Tomen Power
Holdings to Tokyo Electric Power Company (TEPCO). At
the same time, Tomen Power Holdings was renamed Eurus
Energy Holdings Corporation. TEPCO is expected to bring
complementary expertise, resources and capabilities that will
propel growth in the wind power generation business.
This case study shows that where external capabilities need to be
provided to a subsidiary, a corporate split may be a frst step in
the facilitation of a joint venture to allow such capabilities to be
provided.
Figure 2.21 Possible Migration in Restructuring Structures
Source:ABeam Research
Osaka Gas (case study 6) Takeda (case study 11)
Taxable transactions and therefore rarely implemented in Japan
Japan Telecom (case study 7)
Matsushita (case study 2) Thermo (case study 3)
Corporate Splits
Joint Ventures
Sell-Offs
Spin-Offs
Spin-Ins/Mergers
Minority
Carve-Out
IPOs
Majority Carve-
Out IPOs
(Follow-on POs)
Osaka Gas (case study 6)
Tomen (case study 10)
ABeam Research & Linklaters Corporate Restructuring
26
2.10 Summary
In this chapter, we have reviewed in depth alternative divestiture
structures, including sell-offs, carve-outs, and tracking stocks.
We have also looked at spin-ins, corporate splits and joint
ventures. These are the key ways in which companies can prepare
businesses for divestiture. We believe divestitures will play an
increasingly crucial role in corporate restructuring in Japan.
Corporate splits, joint ventures and minority carve-outs are often
used as interim solutions toward an eventual exit (Figure 2.21). In
Japan the most common exit alternatives are sell-offs and full or
majority carve-outs.
In the U.S. and Europe, spin-offs (including minority carve-outs
followed by a spin-off) are among the most popular structures
used to implement a corporate restructuring. Japanese companies,
however, generally cannot receive the tax benefts of spin-offs, i.e.,
although the legal barriers have been removed, the tax disincentive
remains. If spin-offs could be made tax-free, we believe that it
would encourage companies to consider spin-offs and lead to
more corporate restructurings using this structure in the same way
as the introduction of the corporate split procedure has led to more
corporate restructurings by facilitating the separation of parent
companies' businesses.
Some of the most successful corporate restructurings have been
where parent companies have prepared exit strategies at the start
of the corporate restructuring process and have used interim
solutions as a means to develop stronger subsidiaries before a full
exit at a later date (see the GM case study 13 below).
Figure 3.1 Growth Through Restructuring
Source:ABeam Research
A
s
s
e
t

G
r
o
w
t
h

(
g
)
0
Return (ROE-Ke)
Return (ROE-Ke)
0
- +
-
+
A
s
s
e
t

G
r
o
w
t
h

(
g
)
0
Return (ROE-Ke)
- +
-
+
0
0
- +
-
+
0
Business
Rebuilding
+
A
s
s
e
t

G
r
o
w
t
h

(
g
)
Financial
Restructuring
Value-Building
Growth
Source:ABeam Research
Lack of strong leadership
Others
66.0%
53.2%
40.4%
31.9%
23.4%
21.3%
21.3%
4.3%
2.1%
0% 10% 20% 30% 40% 50% 60% 70%
Weak corporate headquarters running the whole group
Shortage of capable outside experts
Biased sense of parent-subsidiary relations
Firm orientation toward a self-contained entity
Higher priority on securing employment
Difficulty of making a break with internal politics
and tradition
Limited concern for shareholder value creation
Figure 3.2 Obstacles to Restructuring
ABeam Research & Linklaters Corporate Restructuring
27
3. Achieving Value-Building Growth
Corporate restructuring is not an end in itself but rather a means
for companies with underperforming businesses to achieve value-
building growth over the long term. Once the fnancial situation
has been stabilized and proftability in core businesses has been
improved, the next challenge is to move toward value-building
growth (Figure 3.1). In this chapter, we will turn our attention to
value-building growth through restructuring.
It is generally accepted that many Japanese companies have
tended to restructure only reactively in response to pressure and
have preferred to delay restructuring initiatives until action has
become unavoidable. The results of our survey identifed the most
common obstacles to restructuring success (Figure 3.2).
66% of our respondents recognize employment security is a major
obstacle to restructuring success. Even though lifetime employment
and seniority-based promotion are gradually becoming less common
in Japan, saving jobs, even at the expense of shareholder interests,
continues to sway executive decision-making.
53% of our respondents regard concern for constraints of internal
politics and long-held tradition as a major obstacle. Restructuring
efforts can fail because the initiatives are not followed group-
wide and are changed shortly after announcement, when politics
and tradition stand in the way. Many restructurings happen as a
result of a change in a company's leadership. It is interesting to
note that a successful turnaround of Nissan was achieved under
the leadership of a foreigner, Carlos Ghosn. Needless to say,
incumbent management can achieve the same results if it can
overcome organizational constraints.
40% of our respondents said that they believe that executives'
disregard for shareholder value hampers restructuring success.
When Japanese companies divest their businesses, those
businesses are often incurring heavy losses as a result of several
years of poor performance. This demonstrates that executives can
be reluctant to divest underperforming businesses, even when they
know that the divestiture will maximize the value for shareholders.
3.1 Common Obstacles to Restructuring
Figure 3.3 Restructuring Structures to Be Used Over the Next Three Years
Source:ABeam Research
Spin-ins of subsidiaries through share exchange
Increase in the size of controlling stakes in subsidiaries
Merger with companies outside the group
Sale of businesses/subsidiaries to buyout funds
Sale of businesses/subsidiaries through MBO
Dissolution of a JV with companies outside the group
91.5%
55.3%
80.9%
44.7%
21.3%
40.4%
23.4%
42.6%
55.3%
36.2%
14.9%
2.1%
34.0%
12.8%
10.6%
6.4%
6.4%
91.5%
59.6%
55.3%
46.8%
42.6%
38.3%
38.3%
36.2%
29.8%
27.7%
27.7%
27.7%
21.3%
14.9%
12.8%
12.8%
12.8%
Closure of unprofitable businesses
Sale of subsidiaries to companies outside the group
Creation of a JV with companies outside the group
Sale of businesses to companies outside the group
Cash acquisition of companies outside the group
Purchase of businesses from companies outside the group
Split of business units into subsidiaries through
corporate split procedure
Reorganization of business units/subsidiaries
through corporate split procedure
Acquisition of companies outside the group
through share exchange procedure
Creation of a holding company through share
exchange/share transfer procedures
0% 20% 40% 60% 80% 100%
Over the past three years
Over the next three years
indicates a significant increase in usage.
Carve-outs of subsidiaries as publicly traded
businesses
ABeam Research & Linklaters Corporate Restructuring
28
3.2 Future of Corporate Restructuring
The results of our survey indicate that creating shareholder value
is becoming a more common objective for Japanese companies.
At the same time, perhaps as a result of this development, equity
redeployment transactions are becoming more common and
more widely accepted. Accordingly, we believe that current
restructuring trends will continue in the future. The results of our
survey bear this out: reorganization of subsidiaries by increasing
parent ownership or executing spin-ins will slow down over the
next three years (Figure 3.3). Instead we expect to see an increase
in equity redeployment transactions, including the following:
• splitting business units into subsidiaries through Bunsha-type
splits (21.3%?42.6%);
• reorganizing business units/subsidiaries through corporate
splits (23.4%?38.3%); and
• carving out subsidiaries through an IPO (14.9%?27.7%).
Although not equity redeployment in the strict sense, we also
expect to see an increase in the number of acquisitions of
non-group companies using the share exchange method (2.1%
?27.7%).
Figure 3.4 Key Factors for Successful Restructuring
Source:ABeam Research
Setting specific short- and long-term objectives to be
achieved through restructuring
Planning growth scenarios after restructuring
in advance
Defining core businesses and focusing on them
Developing a restructuring plan toward
superior shareholder value
Demonstrating leaders' commitments to restructuring
Sharing a restructuring plan across the group
organizations
Setting objective criteria to identify candidates
for restructuring
Assessing restructuring alternatives and selecting
the best option
Executing restructuring in a swift
and intensive manner
Monitoring the progress of a restructuring plan on
a regular basis
Involving external advisors in the restructuring process
Finding the right partners to complete the transactions
4.83
4.66
4.43
4.19
4.13
4.13
3.98
3.94
3.91
3.83
3.74
3.15
3.96
3.98
3.50
3.80
3.39
3.39
3.39
3.30
3.48
2.91
3.20
3.11
Importance rating
Performance rating
1 2 3 4 5
indicates high importance rating (>average=4.1)
but low performance rating (