The Wall Street Journal-20080129-Goldman-s Lesson- No Quick Payoff in Japan- Sanyo Investment Proves to Be a Time-Consuming -- and Tricky -- Affair

Return to: The_Wall_Street_Journal-20080129

Goldman's Lesson: No Quick Payoff in Japan; Sanyo Investment Proves to Be a Time-Consuming -- and Tricky -- Affair

Full Text (999  words)

To see why investors are so cautious about putting money into Japanese companies right now, look at the challenges facing Goldman Sachs Group Inc. in rehabilitating one of Japan's ailing electronics conglomerates.

In early 2006, Goldman's private-equity arm invested 125 billion yen ($1.17 billion) in Sanyo Electric Co., of Osaka. Goldman, which made the investment with two Japanese financial institutions, thought it was clear what Sanyo needed to do: focus on strong areas such as rechargeable batteries and solar panels while selling weaker units and noncore assets.

The turnaround has been painfully slow. Sanyo's founding Iue family and the new investors clashed, according to people familiar with the situation. The family resisted selling many of Sanyo's far-flung businesses -- ranging from home appliances to a nursing home -- and has since been ousted.

Sanyo's situation deteriorated further last month. On Christmas Day, the company announced it had restated its earnings for six fiscal years.

The revised earnings, which followed an investigation by Japanese authorities, showed Sanyo had posted big losses at the parent level in fiscal 2000 and 2001, rather than the profits it had reported. The Tokyo Stock Exchange placed Sanyo on review for a possible delisting, though analysts say the company will likely keep its status. Since Goldman and its partners made their investment, Sanyo's stock has tumbled 57%.

A Sanyo spokesman says the company is committed to its restructuring and is confident its accounting issues are in the past.

A spokeswoman for Goldman declined to comment.

Sanyo's slow rehabilitation and sliding stock price demonstrate how difficult it is to reinvent Japanese companies. Many observers thought Sanyo was an obvious choice for restructuring and that Goldman would navigate the turnaround nimbly. Challenges like those at Sanyo have discouraged the broader investing community and helped push the Nikkei Stock Average of 225 companies to its lowest level in more than two years.

"If you're thinking of big Anglo-Saxon restructurings with plant closures and swapping of assets, it doesn't often happen," says Jonathan Allum, a strategist at investment bank KBC Financial Products. "There's change, but it's slower and it takes longer."

To be sure, Goldman and its partners, Daiwa Securities SMBC Co. and Sumitomo Mitsui Financial Group Inc., aren't about to lose money. The preferred shares they hold eventually will convert into common stock at an effective cost of 70 yen a share.

Based on Monday's close of 122 yen, the investors would earn about 75% on their money. The shares are eligible for conversion, but the investors have indicated they won't convert them soon.

Goldman doesn't plan to sell until it feels the restructuring has been a success, according to people familiar with the bank's thinking. The New York investment-banking powerhouse wants the deal -- its biggest in Japan since it put $1.3 billion into Sumitomo Mitsui, a banking group that is part of the investment syndicate, in 2003 -- to help attract other Japanese candidates for rehabilitation, a business that is increasingly active.

Like other Japanese electronics makers, Sanyo's problems stem from being in too many businesses. While the Goldman-led investors hoped Sanyo would sell some of those, the company's management has resisted. In particular, it wants to maintain a strong presence in household appliances such as washing machines -- which compete against low-cost rivals in Asia -- as well as in the crowded consumer-electronics space, where it also is seeing sales shrink. While the company's refrigerators and air conditioners, among other products, have strong brand awareness in much of the world, they don't make a profit in some of the countries they operate in, according to people familiar with the situation.

The company also is hard to manage. Many of its units have operated almost independently for a long time. The original management wanted the units to have that freedom so they could adapt flexibly to changes in the economy and the market.

That has made it difficult to keep track of all their operations, which exacerbated the company's accounting difficulties, according to people familiar with the company.

Still, the restructuring is making some progress. Sanyo has sold its stake in a liquid-crystal-display joint venture, though it abandoned advanced talks to sell a semiconductor-chip unit. Last week, the company also signed an agreement to sell its mobile-phone making business to Kyocera Corp. The price is expected to be about 40 billion yen.

In March, the investors forced out the Iue family. The new president, a Sanyo veteran named Seiichiro Sano, has the support of the investor group.

In November, Sanyo announced a three-year plan that focuses on three main businesses -- energy, electronics and appliances. The energy business will house Sanyo's two most promising technologies -- batteries and solar panels -- and is expected to drive the company's growth.

On Friday, the company said it will reorganize its reporting lines to give executives at the headquarters direct responsibility for key divisions.

Sanyo has seen smart growth in its battery business, which is expected to expand amid growing demand from everyone from MP3 makers to hybrid automobile makers. Battery revenue rose 16% to 230.4 billion yen -- more than 20% of the company's total sales -- in the fiscal first half. In that period, the business generated 92% of Sanyo's 24 billion yen in operating profit, a measure of how much money a business earns before accounting and tax charges.

And Sanyo has returned to profitability. The company posted a consolidated net profit of 16 billion yen in those six months, up from a 3.6 billion yen loss a year earlier. It also raised its forecast for full-year operating profit.

Sanyo has said it wants to double its operating profit to 100 billion yen by March 2011, a goal analysts say is realistic.

Still, analysts worry that a brief burst of strength doesn't necessarily mean the company will enter a period of sustainable growth.

"It will take time before Sanyo enters a growth phase," Kota Ezawa, an analyst at Nikko Citigroup Ltd., wrote in a recent report.