Longtime Japan watchers could be forgiven for getting a bad feeling upon learning that a government-backed fund is shelling out $6 billion to take control of a domestic technology company.
History is littered with examples of past investments that amounted to bailouts for struggling firms in their twilight years. Elpida Memory Inc. was once a global leader in memory chips before industry dynamics changed and management was caught flat-footed. Around 160 billion yen ($1.7 billion) in fresh investments and loans back in 2009 amounted to naught when it filed for bankruptcy three years later.1 Then there’s Japan Display Inc., the government-coordinated amalgam of the flat-screen divisions of Sony Group Corp., Hitachi Ltd., and Toshiba Corp. which was formed in 2011 at the peak of the liquid-crystal display boom. It has posted accumulated operating losses north of $1.6 billion since 2017.
There’s good reason to believe that Japan Investment Corp.’s purchase of chemicals-maker JSR Corp. could be different. JSR makes specialty materials used in life sciences, plastics, and electronics, with each of these divisions posting growth over the past two years. Most importantly, the Tokyo-based company is consistently profitable. One of JSR’s key products is used in semiconductor production. Its photoresists are a key component in extreme ultraviolet photolithography, the most difficult and advanced part of chip manufacturing.
Looking at its income statement and product catalog, it seems there’s no financial reason why JSR needs a bailout. That’s why it could be a great move for the government.
Rather than trying to save a dying industry, Tokyo’s policy now appears to be focused on strengthening existing champions and ensuring their long-term viability. This is a continuation of its broader strategy aimed at rebuilding the semiconductor sector, for both national security and economic development reasons.
In the past two years, the government has played local and international matchmakers, including luring Taiwan Semiconductor Manufacturing Co. to build a fab in Kumamoto with Sony. A mark of success for this venture is that auto parts maker Denso Corp. is joining the project.
A similar future may be on the cards for JSR. Speaking after the announcement of its buyout on Monday, Chief Executive Officer Eric Johnson heavily hinted that the firm would seek to lead consolidation in the Japanese chip materials sector.
“The capabilities here are superb, but there's a lot of us and all of us are spending money redundantly,” Johnson told reporters. “The opportunities for efficiency gains are significant, and the need to drive scale is paramount.” While he wouldn’t be drawn on specific targets or tie-ups, the photoresist industry is dominated by Japanese peers, including Tokyo Ohka Kogyo Co. and Shin-Etsu Chemical Co. Johnson spoke repeatedly of the need to reform not just JSR, but the broader domestic industry.
For this buyout to work, though, JIC needs to act like a private-equity fund but with a public-equity goal. If the buyer, funded mostly by the government along with a sliver from private industry, turns JSR into a state-owned enterprise, then all will be lost. PE firms have a reputation for buying, stripping, and flipping their targets, quite often leaving behind a shell of a company, but with lower costs and fatter margins.
In JSR’s case, management needs to be empowered to make necessary large-scale renovations, including cutting staff and shuttering strategically expendable businesses. Yet it needs to resist a slash-and-burn tactic that would strip the firm of resources to keep developing new and niche materials that would make it an indispensable piece of global supply chains for years to come.
The government’s matchmaking role could also be put to good use as it marches toward relisting, something Johnson said the firm was targeting within five to seven years. The American CEO, still an unusual sight in Japanese boardrooms, indicated that he would seek to leverage Japan’s intermediary position by utilizing JIC’s network of contacts to speed up deals.
Since JSR doesn’t seem to be struggling, the rationale for this move is a little hard to understand. Conversely, that’s also why it might succeed. Rather than wait until it’s too late, this seems to be a more proactive step than is typical for the Japanese industry. “We're coming to this deal from a position of strength,” Johnson said. “This is an opportunity, not a crisis that we're trying to solve.”
The moves to consolidate the likes of Japan Display, Elpida, and OLED display maker Joled Inc. came too late, but the success of the 2012 rescue of Renesas Electronics Corp. by INCJ, the predecessor to JIC, gives more room for optimism. Having set the chipmaker on the road to profitability, with the firm now a component of the Nikkei 225 Stock Average, the fund has been reducing its stake.
If there is one caveat to be made of the JSR deal, though, it’s the price. At 52 times last year’s net income, that $6.3 billion it is spending seems a bit rich. Admittedly, the outlook for this year and next appears good at both the top and bottom lines. But the company needs to quadruple profit if it’s to be in line with the 13.65-times ratio of its peers and go beyond that if JSR’s board is to give public-equity investors a reason to buy into its IPO toward the end of this decade.
Japan seems serious about its chip intentions. The fate of JSR may prove how much its competence matches its ambition.
1The announced amount was 160 billion yen, though the final amount in equity and loans was revised down.
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