PE marginalized on Japan restructuring

At the same time, it put the Japanese government into defensive mode. Just as the earthquake and tsunami underlined the need for businesses to become more diversified, so that they aren't exclusively reliant on a particularly geography for customers or suppliers, it reminded Tokyo of the potential fallout in sectors where this reliance is already firmly entrenched.

Government bailouts aren't by definition band-aids that allow interested parties to postpone more drastic action, but neither is private equity-driven restructuring by necessity a social pariah. The recent fuss surrounding Renesas Electronics suggests that Japan's policymakers have yet to find the right balance.

Renesas is one of the world's leading microchip manufacturers and when the earthquake caused production lines to stutter, the impact on the car industry in particular was severe. However, it is also flirting with bankruptcy and expects to post a net loss of JPY150 billion ($1.9 billion) for the current financial year.

KKR reportedly stepped in with a JPY100 billion buyout offer. Innovation Network Corporation of Japan (INCJ) apparently responded by rounding up a band of Renesas' major domestic customers, including Toyota and Panasonic, and proposing a larger counter offer.

INCJ was set up 2009 as a partnership between the government and 19 large domestic corporations. It has JPY156 billion in capital to spend over a 15-year period - plus guarantees for another JPY1,800 billion - and it is tasked with providing "financial, technological and management support in order to promote the creation of next-generation businesses through ‘open innovation,' or the flow of technology and expertise beyond the boundaries of existing organizational structures."

It is debatable whether delivering Renesas from the hands of private equity fits within this remit. The company itself might argue that it was in the midst of restructuring its business when the earthquake hit, and simply needs more time to work out the debts. A more cynical take is that, if an INCJ-led investment happens, it would just be throwing good money after bad.

Renesas isn't the only Japanese chipmaker to run into difficulty. Earlier this year Elpida Memory sought protection from creditors for debts of JPY448 billion. US-based Micron Technology ended up buying the company, overcoming competition from Hony Capital and TPG Capital among others.

Saving Renesas from a similar fate via a government bailout would reassure customers and employees. It is also in keeping with a tradition of rivals supporting one another in order to preserve jobs and stability. Such moves have in the past led to massive mergers - Renesas itself is the product of a merger - as industries try to consolidate their way out of trouble.

The problem is they can't do this forever. Japan's microchip manufacturers must face up to a number of commercial realities that have eroded their positions: demand has been falling while competition rises, which creates pricing pressure, while the robust yen is of little help to exporters. Industrial development sometimes requires radical steps rather than incremental efficiencies within the context of the status quo.

For foreign buyout firms, the solution is tough love. Costs are cut and efficiencies are pursued with vigor, but provided you do business with the right investor, there is also capacity for equally aggressive reorientation and innovation. When it works, it really works.

Unfortunately for the likes of KKR - and perhaps for the long-term prospects of Japanese industry - the government apparently prefers to roll over the debt instead of take the risk.

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• Topics
• North Asia
• Buyouts
• Restructuring
• Japan
• buyout
• KKR