Linklaters (Corporate Restructuring - Shrink To Grow

Corporate Restructuring
Shrink to Grow
CONTENTS
Executive Summary
1.
Understanding Corporate Restructuring in Japan

1.1 Regulatory Reforms
1.2 Trends in M&A Transactions in Japan
1.3 The Corporate Restructuring Survey
1.4 Summary
2
2
4
7
10
2.
Creating Value through Divestitures

2.1 The Pattern of a Typical Corporate Restructuring Process
2.2 Alternative Divestiture Structures
2.3 Spin-Ins
2.4 Corporate Splits
2.5 Sell-Offs
2.6 Equity Carve-Outs
2.7 Spin-Offs
2.8 Tracking Stocks
2.9 Joint Ventures
2.10 Summary
11
11
13
14
16
19
20
21
23
24
26
3.
Achieving Value-Building Growth

3.1 Common Obstacles to Restructuring
3.2 Future of Corporate Restructuring
3.3 Key Factors for Successful Restructuring
3.4 Managing Balanced Business Portfolios
3.5 Pruning the Portfolios through Proactive Divestitures
3.6 Summary
27
27
28
29
30
31
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 Difficulty in Finding Buyers
32
Case Study 13: GM's Preparing for a Successful Spin-Off of Delphi
33
ABeam Research & Linklaters
Executive Summary
Since 1997, there has been a series of legislative and tax changes
(as they are in the U.S. and Europe) if the tax disadvantages were
in Japan with the aim of facilitating corporate restructuring. In
removed. Some of the most successful corporate restructurings
particular, the introduction of procedures such as share exchanges,
have been where parent companies have prepared exit strategies
share transfers and corporate splits has provided companies with
at the start of the corporate restructuring process and have used
greater flexibility in pursuing corporate restructuring. Although
interim solutions as a means to develop stronger subsidiaries
corporate restructuring is not facilitated by legislative and tax
before a full exit at a later date. See Chapter 2.
changes alone, the increased level of M&A activities over the
We conducted a survey to determine the current and future
same period is evidence that the recent reforms have, to some
trends in restructuring activities. Our findings revealed that many
extent, achieved their aims. See Chapter 1.
companies rated planning growth strategies prior to restructuring
A typical corporate restructuring process comprises three phases.
as very important, but assessed their own performance as less
Faced with debt and cash flow problems, companies should
satisfactory. To achieve value-building growth, companies must
execute financial restructuring immediately to stabilize their
develop and maintain balanced business portfolios. The key
financial situation. Once the situation is stabilized, companies
challenge is to nurture growth options while proactively divesting
need to start business rebuilding to strengthen their core
underperforming or non-core businesses. Success in proactive
businesses. Finally, companies can shift their focus to long-term
divestitures is likely when companies deliberately use interim
value-building growth. Across the three phases of the restructuring
solutions before an eventual exit and lay the groundwork for
process, divestitures play an increasingly crucial role in Japan.
creating a stand-alone entity. See Chapter 3.
Divestitures may take several different forms: corporate splits,
We include in this report a number of case studies. One of the
sell-offs, equity carve-outs, spin-offs, tracking stocks and joint
lessons that these demonstrate is:
ventures.
The more extensive the restructuring, the greater
Corporate splits, minority carve-outs and joint ventures are often
the growth prospects; the stronger the growth, the
used as interim solutions toward an eventual exit. In Japan the
greater the need for restructuring. Shrink to grow
most common exit alternatives are sell-offs and full or majority
and vice versa.
carve-outs. We believe spin-offs would also be popular in Japan
1. Understanding Corporate Restructuring in Japan

This first chapter presents an overview of the recent regulatory
of this survey illustrate the recent trends in M&A transactions
reforms in Japan related to corporate restructuring and recent
in Japan and give an insight into how Japanese companies are
trends in M&A transactions in Japan.
conducting (or intending to conduct) corporate restructurings in

the future, in particular how Japanese companies are starting to
This chapter also sets out certain results of our survey on corporate
make use of alternative methods to conduct such restructurings (see
restructuring which we conducted in March 2003. The results
1.1
Chapter 3).
Regulatory Reforms
1.1.1 Overview
Over the past several years, many of the obstacles to corporate
In April 2001, the Code was amended to introduce the corpo-
restructuring contained in the Commercial Code of Japan (the
rate split procedure.
"Code") have been amended or removed, beginning in 1997 with
In April 2001, the corporate reorganization rules were intro-
the introduction of simplified mergers. This was followed by the
duced under the 2001 tax reform.
introduction of equity redeployment procedures such as share
In October 2001, the treasury stock system was introduced.
exchanges (Kabushiki Koukan), share transfers (Kabushiki Iten)
This system allows companies to buy back their shares and
and corporate splits (Kaisha Bunkatsu). Consequently, examples
hold them for unspecified purposes, including later use in
of corporate restructuring, including divestitures, have become
M&A transactions through share exchanges.
more commonplace in Japan.
In August 2002, the consolidated taxation system was enacted.

In April 2003, the Industrial Revitalization Law was revised
The Japanese tax rules have also been amended to provide
to facilitate corporate restructuring. Under this law, companies
incentives to companies to take advantage of the new restructuring
whose restructuring plans receive approval from the relevant
measures. The corporate reorganization tax reforms have been
authorities are eligible for tax incentives and governmental
effective since April 1, 2001 and allow for tax-free restructuring
financial assistance. They may also take advantage of a less
under certain circumstances.
restrictive corporate law regime.
The following presents a brief list of recent changes to the Code
As part of the revision of the Industrial Revitalization Law, there
and other legislation and the taxation rules that are relevant to
are measures designed to encourage inward investment by non-
corporate restructuring in Japan.
Japanese companies. For example, in a statutory merger, the
In October 1997, the Code was amended to simplify and ratio-
revisions to the law allow shares in a third company to be issued to
nalize merger procedures.
the shareholders of the extinguishing company (whereas normally
In December 1997, the Anti-Monopoly Law was amended to
they could only receive shares in the surviving company). What
allow pure holding companies to be established in Japan.
is more, the third company issuing shares can be a non-Japanese
In October 1999, the Code was amended to introduce the share
company, which makes this new law a potentially significant
exchange and share transfer procedures.
additional tool to facilitate inward investment and corporate
In April 2000, the Composition Law was abolished and the
restructuring in Japan.
Civil Rehabilitation Law was introduced to facilitate corporate workouts.
1.1.2 Share Exchanges

The share exchange procedure, which was introduced in October
Figure 1.1 Share Exchanges
1999, allows companies to make other companies both within the
Shareholder Shareholder
New shares
group and outside the group wholly-owned subsidiaries (Figure

1.1). X Co. acquires all of Y Co.'s outstanding shares in exchange
Y Co. shares
X Co.
for new shares issued by X Co. at a predetermined exchange
Y Co.
X Co.
Y Co.
X Co.
100%
Share
exchange
agreements
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.
Source:ABeam Research
Y Co. become shareholders of X Co.
1.1.3 Share Transfers

The share transfer procedure, which was introduced along with
Figure 1.2 Share Transfers
the share exchange procedure in October 1999, allows companies
Shareholder
to create a new holding company (Figure 1.2). X Co. incorporates
New shares
a new company. New Co. acquires the entire shares of X Co. in
X Co.
shares
exchange for new shares issued by New Co. Subsequently, X Co.
X Co.
New Co.
New Co.
becomes a wholly-owned subsidiary of New Co. and shareholders
100%
X Co.
X Co.
of X Co. become shareholders of New Co.
1.1.4 Corporate Splits

The corporate split procedure was introduced in April 2001.
For tax purposes, corporate splits are further classified according
Under the Code, corporate splits are classified into two types:
to whether the new shares as consideration are distributed to the
(i) where a business is transferred into a new company; and (ii)
transferor company or directly to the shareholders of the transferor
where a business is transferred to an existing company, in each
company. Accordingly, there are the following types of corporate
case, in exchange for shares in the transferee company. It is also
splits (Figure 1.3).
possible to transfer a business to a newly established joint venture

company in exchange for shares in the JV company.
Figure 1.3 Types of Corporate Splits
Allotting new shares to

the shareholders
Allotting new shares to

a transferor company
Transferring a business to
a new company
X Co.
A
New
shares
X Co.
B
New Co.
X Co.
X Co.
A
Y Co.
New
shares
X Co.
Y Co.
B
X Co.
Y Co.
B2 C
B1
New
shares
X Co.
New Co.
X Co.
A
Y Co.
X Co.
New
shares
Y Co.
C
New Co.
B1 B2
New shares
Shareholder
X Co.
a newly created joint venture company
Shareholder
an existing company
New shares
Y Co.
X Co.
Y Co.
X Co.
New Co.
Y Co.
B2 C
B1 B2
B1
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
Figure 1.4 Number of Japanese Company Related

M&A Transactions
transactions up to the end of 2002. The total number of Japanese
Number of Transactions
2,000
company related M&A transactions announced in 2002 increased

companies ("In-In deals") constituted 84% of all deals in 2002. It
Note: In-In M&As mean M&As between Japanese companies.

1,881
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.
1,600
1,442
1,344
is interesting to note the significant increase in the number of In-In
1,200
to 2,244. The number of M&A transactions between Japanese
deals in the five-year period from 19972002 (Figure 1.4).
Increased number
of In-In M&As
800
In this paper, we have only included data for the number of M&A
525
454
400
transactions completed; complete data showing the value of these

transactions is not available. Data was available for 931 out of
93
2,244 M&A transactions announced in 2002 (i.e., 41% of all
382
354
394
94
95
96
In-In
968
636
In-Out
Out-In
97
98
99
00
01
02
Year
Source:Nomura Securities
M&A transactions). The value of these 931 cases was 3.42 trillion
yen. While the value of In-In deals remained roughly flat for the
Figure 1.5 Total Value of Japanese Company Related M&As
period from 2000 to 2002, the value of M&A transactions of non-
bn
3,500
Japanese companies by Japanese companies ("In-Out deals")

and M&A transactions of Japanese companies by non-Japanese
3,000
companies ("Out-In deals") fell dramatically during the same
2,500
period (Figure 1.5). This data suggests the following trends:
2,000
there are fewer high profile (i.e., big value) transactions now
1,500
than two or three years ago; and
Note : The total value of transactions is based only on cases for which data is available.
Data availability differs widely depending on transaction types.
In-Out
While the value of In-In

deals remain flat, the value
of both In-Out and Out-In
deals collapsed
1,000
Japanese rather than foreign companies are driving an increase
500
in M&A transactions but such Japanese companies are pre-
dominantly active in Japan rather than abroad.
In-In
Out-In
93
94
95
96
97
98
99
00
01
02
Year
M&A transactions can be categorized into four types:

Figure 1.6 Number of In-In M&A Transactions by Type
(1) mergers;
(2) equity acquisitions (controlling over 50% of the voting
Equity
participations
shares in a company);
Asset
acquisitions
(3) asset acquisitions (whether an entire business or a collection

of assets); and
21%
14%
8%
62%
16%
Equity
acquisitions
(4) equity participations (controlling up to 50% of the voting
21%
Mergers
26%
32%
shares in a company).
Mergers constituted the majority of In-In deals in the 1990s. While
800
the number of equity acquisitions, asset acquisitions and equity
700
participations increased during the 2000 to 2002 period, the number
600
of mergers remained flat during the same period and consequently
500
accounted for only 21% of In-In deals in 2002 (Figure 1.6).
400
300
Significantly, asset acquisitions rose by 70% in 2002 over 2001.
200
This sharp rise in asset acquisitions reflected the increasing
100
number of business divestitures and sell-offs of assets as part of
corporate restructuring.
Increased diversity in
M&A transaction type
489
395
389
Mergers
281
Asset
acquisitions
Equity
participations
74
62
37
93
94
95
Equity
acquisitions
608
96
97
98
99
00
01
02
Year
M&A transactions are often categorized as either inter-group
Figure 1.7 Number of Inter- and Intra-group M&A Transactions
or intra-group. An inter-group M&A transaction is when
1,200
companies from two different groups are involved. An intra-group
1,073
Inter-group M&As
1,000
M&A transaction is when all of the companies involved in the

transaction belong to the same group.
800
Inter-group and intra-group M&A transactions increased in
600
400
parallel from 1995 to 1999. Thereafter, the number of intergroup M&A transactions surpassed that of intra-group M&A
200
transactions, reflecting the increased level of restructuring in
Increased number
of inter-group M&As
825
750
808
500
279
199
179
213
175
183
175
181
93
94
95
96
277
468
320
617
594
Intra-group M&As
316
248
97
98
99
00
01
02
Year
Japan generally (Figure 1.7).

The mix of inter-group M&A transactions underwent significant
Figure 1.8 Number of Inter-group M&A Transactions by Type
changes during the 20002002 period. Equity participations
tripled in number to 377 in 2002. Asset acquisitions showed a
400
2.5-fold increase (Figure 1.8).
350
300
Although mergers are still the most popular form of transaction
250
in intra-group M&A transactions, asset acquisitions and equity
200
acquisitions have grown in popularity in recent years (Figure 1.9).
150
The growth in asset acquisitions has been fueled by the increase
100
in the number of business transfers as part of reorganizations and
50
0
consolidations within groups.
377
Equity
participation
Inter-group mergers have

leveled out but other
inter-group M&A
transactions have
increased significantly
367
294
Asset
acquisitions
Equity
acquisitions
Mergers
93
94
95
96
97
98
99
35
00
01
02
Year
The number of equity acquisitions has risen as the review of

capital policy became prominent in business trends. Major
Figure 1.9 Number of Intra-group M&A Transactions by Type
companies are increasingly turning majority-owned subsidiaries
400
into wholly-owned subsidiaries. Such transactions are sometimes
350
referred to as spin-ins. According to the Tokyo Stock Exchange,
300
48 publicly listed companies were spun in by their parent
250
companies and consequently were delisted in 2002, up from 30 in
200
the previous year.
150
354
Intra-group acquisitions of
assets and equity have
increased significantly
Mergers
241
Asset
acquisitions
Equity
acquisitions
100
Equity
participations
50
0
18
93
94
95
195
96
97
98
99
00
01
02
Year
1.2.2 Use of New Procedures for Equity Redeployment

The introduction of equity redeployment procedures such as share
Figure 1.10 Number of Share Exchanges/Share

Transfers and Corporate Splits
exchanges and share transfers (in October 1999) and corporate
splits (in April 2001) gave companies greater flexibility with
100
Note: Share exchanges include both intra- and inter-group share exchanges.
regard to corporate restructuring.
Growing use of
the share exchange
procedure within
the group
80
The number of M&A transactions using share exchanges

increased 59% from 51 in 2001 to 81 in 2002. Among these,
60
75% were effected to make majority-owned subsidiaries into
81
61
51
wholly-owned subsidiaries. The number of share transfers to

40
2001 and the number of corporate splits increased to 26 in 2002

20
from 23 in 2001 (Figure 1.10).
23
20
15
between parents and subsidiaries. If such deals are included, the
Corporate
splits
26
34
32
12
These figures for corporate splits, however, do not include deals
Intra-group
share
exchanges
Share
transfers
45
create holding companies decreased to 9 in 2002 from 15 in
Share
exchanges
99
01
00
02
Year
number of corporate splits increased to 224 in 2002, an increase of

nearly 50% on 2001 (Figure 1.11).
Figure 1.11 Number of Corporate Splits by Objective

250
Growing use of
the corporate split
procedure
200
224
2002
2001
151
150
100
92
84
68
50
46
29
33
8
M&A
Source:Recof
15
Intra-group Split of business Reorganization Total

M&A
unit into a wholly- into a holding
company
owned subsidiary
1.3
The Corporate Restructuring Survey
We conducted a survey on corporate restructuring in March 2003
Figure 1.12 Profile of the Survey Respondents
to determine:
Number of Employees
current and expected levels of restructuring activities in Japan;
Type of Industry
Transportation &
Services
Less than 3,000

4.3%
3,000~
5,000
8.5%
motives for engaging in restructuring activities;

restructuring methods that are used today and will be used in
the future; and
70.2%
10.6%
5,000~10,000
10,000 and
over
Questionnaires were sent to executives of 250 listed companies
6.4%
Financial
6.4%
Services 6.4%
27.7%
59.6%
key factors for successful corporate restructuring.
Utility & Others
Construction &
Manufacturing
Wholesaling
& Retailing
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
Figure 1.13 Organizational Structure
manufacturers (Figure 1.12).
Other system
Holding
4.3%
company
system
8.5%
1.3.1 Organizational Structures

55% of our respondents adopt a divisional unit system. 32%
55.3%
have gone one step further, creating quasi-companies within
31.9%
In-house
company
system
themselves (Figure 1.13). This divisional company or in-house

company system is designed to increase management efficiency
through swift decision-making and clearly defined responsibility
Divisional
unit system
and authority. 9% of our respondents have established holding

companies.
Figure 1.14 Performance Metrics

0%
1.3.2 Increased Focus on Shareholder Value
20%
40%
60%
Sales and
profits
The results of our survey indicate that Japanese companies are
76.6%
Cash flows and

return on assets
beginning to focus more on shareholder value. Though 77% of

our respondents use sales and profits as key metrics, 21% use such
Value metrics
(e.g, EVA)
performance metrics as economic value added (EVA) to measure
Balanced
Score Card
shareholder value creation (Figure 1.14).
80%
44.7%
21.3%
10.6%
100%
1.3.3 Current Corporate Restructuring Activities and Motives

60% of our respondents are currently pursuing corporate
Figure 1.15 Present Situation in Corporate Restructuring
restructuring through intra-group and inter-group M&A
No M&As
2.1%
transactions simultaneously. More than 72% are conducting
Wrapping up
M&As
10.6%
inter-group M&A transactions (Figure 1.15). These statistics

are consistent with the increased level of inter-group M&A
Focusing on
intra-group M&As
14.9%
12.8%
transactions over the past three years (Figure 1.7).
59.6%
Focusing on
inter-group M&As
Conducting intra-group
and
inter-group M&As
simultaneously
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
Figure 1.16 Motives for Corporate Restructuring
our respondents say it is too early to assess the results of their
0%
restructuring efforts. No respondents say that their objectives have
10%
20%
30%
40%
50%
Strengthening
core businesses
been fully achieved. 55% say that their objectives were nearly or
55.3%
Increasing
shareholder
value
moderately achieved (Figure 1.17).
60%
42.6%
Achieving
growth
40.4%
Improving
financial position
31.9%
Pursuing group
synergy
27.7%
Eliminating
duplication of
businesses
Divestiture of less
profitable
businesses
Divestiture of
non-core
businesses
23.4%
21.3%
21.3%
Unlocking
intrinsic value
4.3%
Figure 1.17 Degree of Attainment of Objectives

Fully achieved
No answer
2.1% 0.0%
27.7%
Unable to assess
Unachieved
4.3%
10.6%
Partially achieved
21.3%
Nearly achieved
34.0%
Moderately achieved
1.3.4 Restructuring Methods

There is a wide range of options available for companies to
Many companies executed restructurings using the new
implement restructuring. The results of our survey indicate that
methods available to companies, including share exchanges and
91% of our respondents have closed unprofitable businesses
corporate splits. 34% of our respondents have made majority-
over the past three years (Figure 1.18). Creation of joint ventures
owned subsidiaries into wholly-owned subsidiaries through
(81%) is the second most popular method. Other widely
share exchanges. 23% have reorganized their business units and
used methods for restructuring include: increasing the size of
subsidiaries by way of corporate splits. 21% have established
controlling stakes in subsidiaries (55%), selling off subsidiaries
new subsidiaries, again using the corporate split procedure.
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%).
Figure 1.18 Restructuring Methods Used Over the Past Three Years
0%
20%
40%
60%
80%
Closure of unprofitable businesses
91.5%
Creation of a JV with companies outside the group
80.9%
Increase in the size of controlling stakes in

subsidiaries
55.3%
Sale of subsidiaries to companies outside the group
55.3%
Sale of businesses to companies outside the group
44.7%
Cash acquisition of companies outside the group
42.6%
Purchase of businesses from companies outside

the group
40.4%
Dissolution of a JV with companies outside the group
36.2%
Spin-ins of subsidiaries through share exchange
34.0%
Reorganization of business units/subsidiaries through

corporate split procedure
23.4%
Split of business units into subsidiaries through

Carve-outs of subsidiaries as publicly traded
businesses
21.3%
14.9%
Merger with companies outside the group
12.8%
Sale of businesses/subsidiaries through MBO
10.6%
Creation of a holding company through share

exchange/share transfer procedures
6.4%
Sale of businesses/subsidiaries to buyout funds
6.4%
Acquisition of companies outside the group through

share exchange procedure
100%
2.1%
1.4
Summary
Since 1997, there has been a series of legislative and tax changes
The results of our survey provide anecdotal evidence for the
in Japan with the aim of facilitating corporate restructuring. In
increased level of corporate restructuring and, more importantly,
particular, the introduction of procedures such as share exchanges,
suggest that a high proportion of large companies continue
share transfers and corporate splits has provided companies
to engage in restructuring activities with the objectives of
with greater flexibility in pursuing corporate restructuring. The
strengthening core businesses and increasing shareholder value,
number (and, to the extent data is available, value) of M&A
among others. Almost every large company has been engaged
transactions has increased over the same period. In particular, the
in some form of corporate restructuring. Most of them have
number of M&A transactions using new procedures has increased
closed unprofitable businesses and created joint ventures and
significantly. This seems to indicate that, at least on a superficial
approximately half of them have made divestitures and/or
level, the recent changes in legislation and taxation have achieved
acquisitions.
or begun to achieve their aims.
10
2. Creating Value through Divestitures

Recent changes in the Code and taxation rules allow Japanese
engaged in divestitures of underperforming business units or
companies to use a wide range of restructuring options. Many
subsidiaries. In this chapter, we will describe the pattern of a
companies have executed restructurings using the new options
typical corporate restructuring process and examine in depth
available to companies. Large companies are coming under more
various alternative divestiture structures. This chapter will also
pressure to create shareholder value. We believe that this trend
explore many case studies, which demonstrate specific examples
will continue and that large companies will become increasingly
of how companies put various divestiture structures into practice.
2.1
The Pattern of a Typical Corporate Restructuring Process
The pattern (as illustrated in Figure 2.1 below) of a typical
Figure 2.1 Shrink to Grow
corporate restructuring process calls for a company to stabilize

its financial situation, return to profit and then focus on growth.
+
ROE < Ke
g>0
If companies incur excessive debts and suffer from deteriorating
ROE > Ke
g>0
cash flows, short-term measures will need to be taken immediately

Asset Growth (g)
to generate cash for debt payments and stabilize the financial

situation. To release cash (and thus reduce debts), companies can
sell off fixed assets or underperforming businesses and rationalize
working capital (e.g., accelerate debtor collections, extend creditor
Financial
Restructuring
ValueBuilding
Business
Rebuilding
Growth
payments or reduce inventories). The priority in this phase, called

ROE < Ke
g<0
financial restructuring, is to stabilize financial situations.

-
Once the financial restructuring phase is over, companies will

need to strengthen their core businesses so that they can generate
enough cash to finance subsequent growth initiatives. No growth
ROE: return on equity

Ke: cost of capital
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 profitability to long-term profitable 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 valuebuilding growth take place simultaneously rather than one after
the other (see the Nissan case study 1 below).
11
ROE > Ke
g<0
0
Return (ROE Ke)
Case Study 1: Nissan's Dramatic Turnaround

Nissan Motor faced serious problems in the early 1990s. Nissan, led
Figure 2.2 Nissan: Automotive Cash Flow
by Yoshifumi Tsuji, announced in 1993 a restructuring plan including
Billion yen
1,000 *
PPE: Property, plant and equipment
the closure of its major assembly plant. Although the plan aimed
15.6
to return to profitability by 1997, Nissan continued to suffer a loss.
94.8
900
134.6
38.2
Yoshikazu Hanawa, who succeeded Tsuji in 1996, announced a new
800
restructuring plan in 1998. However, Nissan was still saddled with

700
more than 2 trillion yen in debt and needed a capital injection to
215.2
600
The Renault-Nissan Alliance was formed in 1999 and Carlos Ghosn
500
31.0
Proceeds 40.4
from sales
of PPE* 98.7
308.7
was named Nissan's COO in that year. Ghosn's aggressive Nissan

400
Revival Plan (NRP) was announced in October 1999. Although he

had earned the nickname "le cost killer" in France, Ghosn understood
491.0
302.0
106.3
Others
accelerate its debt reduction.
39.8
108.9
Proceeds from
sales of
operations
Proceeds
from sales 169.7
of securities
80.2
287.4
395.1
797.3
629.2
300
Others
that Nissan would not achieve lasting profitable growth by cost

200
reductions alone. The NRP focused on building the foundations

for long-term growth whilst simultaneously undergoing systematic
Operating
cash flow 296.6
100
financial reform.
293.1
195.7
Capital
investment
The first phase of the NRP was financial restructuring. For two years
up to the end of March 2002, Nissan sold off fixed assets and non-
376.4
45.4
Cash
Cash
generated used
Cash
Cash
generated used
FY00
FY01
Cash
Cash
generated used
FY02
Source:Nissan
core businesses and raised cash worth 524 billion yen to pay down
interest-bearing debt (Figure 2.2). The second phase was business
The third phase of value-building growth was started with the launch
rebuilding. Nissan implemented the "3-3-3" initiative to reduce
of the three-year Nissan 180 plan in April 2002. Nissan 180 plan
purchasing costs by 20%. The "3-3-3" initiative means: 3 partners
means one million additional unit sales by the end of fiscal 2004
(suppliers, purchasing and engineering) working together in 3 regions
compared with fiscal 2001, 8% operating profit margin and zero net
over 3 years. Nissan achieved a 20% reduction in purchasing costs
automotive debt at the end of fiscal 2004. Nissan also continued the
by March 2002, one year ahead of schedule (Figure 2.3). Lower
"3-3-3" initiative to further reduce costs by 15% over three years.
purchasing costs increased operating cash flow to 629 billion yen for
The first year of Nissan 180 marked net sales of 6.85 trillion yen, up
the fiscal year 2001 and thus further reduced interest-bearing debt to
10.6% from the fiscal year 2001, and net income of 495 billion yen,
432 billion yen at the end of the fiscal year 2001 (Figure 2.4).
up 33.1% (Figure 2.5).
Figure 2.3 Nissan: Purchasing Cost Reduction
Figure 2.4 Nissan: Net Automotive Debt

Billion yen
100
2,500
Nissan beat its own

purchasing cost
reduction
targets
-8%
2,100
Plan
90
-751
2,000
1,500
-11%
-14.5%
Nissan eliminated its

automotive debt
1,349 -396
953
1,000
-521
Actual
-20%
80
-20%
FY00
FY01
500
432
-440
NRP Target
0
FY02
Source:Nissan
Source:Nissan
12
-8.6
3/99
3/00
3/01
3/02
3/03
While the foundation is being laid in business rebuilding, Nissan
Figure 2.5 Nissan: Net Sales and Net Income
180 also focuses on growth. This demonstrates that the business
Billion yen
1,000
rebuilding phase and value-building growth phase may take place
Billion yen
7,000
6,659
800
simultaneously rather than one after the other.
600
Nissan's growth initiatives include launching new models and
6,500
6,196
6,198
6,090
6,039
5,801
200
fiscal year 2002, to be followed by 16 new models during fiscal years
6,580
Net sales
400
developing new markets. Nissan introduced 12 new models in the
6,829
6,565
5,977
5,834
331
495
372
6,000
78
2003 and 2004. In addition, Nissan and China's DongFeng Motor
established a new joint venture, which commenced operations in July
-200
2003. This paved the way for Nissan's first entry into the Chinese
-400
market. The new company aims to sell 550,000 units by 2006.
-600
-14
-56
-800
5,500
-87
-88
-166
-28
With NISSAN 180, Nissan

took a step toward valuebuilding growth
Net income
-684
3/93
3/94
3/95
3/96
3/97
3/98
3/99
3/00
3/01
3/02
NRP
3/03
5,000
4,500
4,000
180
Source:Nissan
2.2
Alternative Divestiture Structures
Whereas section 2.1 focused on the general principles of corporate
Electron case study 3 below). A joint venture can be used as a
restructurings, in this section we describe alternative divestiture
means of acquiring or exiting a business in two stages. In the first
structures, other than the closure of unprofitable businesses.
stage, a parent company and its partner company create a joint
Divestitures play a major role in corporate restructuring in the U.S.
venture company. In the second stage, the parent company sells its
and Europe. There are three basic ways to divest a subsidiary: sell-
remaining shares of the joint venture to the partner after a certain
off, equity carve-out and spin-off (Figure 2.6). Other methods
period of time (see the Takeda case study 11 below).
of divesting a subsidiary include corporate splits and tracking

stocks. Corporate splits are commonly used to effect intra-group
Figure 2.6 Options to Implement
Corporate Restructurings
corporate restructurings and to prepare a business for divestiture.

A tracking stock is a specialized option for a parent company
M&As
to realize hidden value in a business unit or subsidiary while
Mergers
Acquisitions
retaining control of the unit or subsidiary concerned.
Inter-Group Acquisitions
2.3 Spin-Ins
We also describe spin-ins and joint ventures. A spin-in is the
Divestitures
2.4 Corporate Splits
acquisition of minority shares in majority-owned subsidiaries.
2.5 Sell-Offs
Consequently, majority-owned subsidiaries become wholly-owned
2.6 Equity Carve-Outs

2.7 Spin-Offs
subsidiaries. In many cases spin-ins are executed with the aim of
2.8 Tracking Stocks
implementing groupwide restructuring and are followed by further
2.9 Joint Ventures
divestitures (see the Matsushita case study 2 and the Thermo
13
2.3
Spin-Ins
Increasingly, companies are making majority-owned subsidiaries
groupwide restructuring by streamlining overlapping businesses and
into wholly-owned subsidiaries. Such transactions are referred
redeploying assets and capabilities within the group. Consequently,
to as spin-ins. Often spin-ins are implemented through the share
spin-ins will often lead to divestitures (see the Matsushita case
exchange procedure. Spin-ins allow a parent company to implement
study 2 and the Thermo Electron case study 3 below).
Case Study 2: Matsushita's Spin-Ins to Implement Groupwide Restructuring

As part of its restructuring program, in October 2002, Matsushita
between Kyushu Matsushita Electric and Matsushita Graphic
Electric Industrial (MEI) made five majority-owned subsidiaries
Communications Systems. MEI also split its environmental
into wholly-owned subsidiaries by way of the share exchange
systems sales unit into Matsushita Seiko and the company was
procedure described in section 1.1.2. The five group companies
renamed Matsushita Ecology Systems. Finally, by combining the
were Matsushita Communications Industrial, Kyushu Matsushita
FA Company, an in-house company of MEI, and the FA division
Electric, Matsushita Seiko, Matsushita Kotobuki Electronics
of Kyushu Matsushita Electric, Panasonic Factory Solutions was
Industries and Matsushita Graphic Communications Systems.
newly established. These transactions are examples of the use of
Four of these companies had been publicly listed companies and
the corporate split procedure described in section 1.1.4 (corporate
consequently were delisted (Figure 2.7).
splits are described in more detail in section 2.4).
Thereafter, MEI implemented its groupwide restructuring in
In line with the restructuring initiatives, MEI also made two
January 2003. MEI split its sales unit of mobile communication
other group companies, Matsushita Electronic Components and
equipments into Matsushita Communications Industrial and the
Matsushita Battery Industrial, into wholly-owned subsidiaries
company was renamed Panasonic Mobile Communications.
through share exchanges in April 2003.
Panasonic Communications was established through a merger

Figure 2.7 Matsushita: Spin-Ins to Implement Groupwide Restructuring
Matsushita Electric Industrial Co. (MEI)
67.8%
Matsushita
Graphic
Comm.
51.5%
56.3%
57.6%
Matsushita
Communication
Industrial
Kyushu
Matsushita
Electric
57.6%
Matsushita
Kotobuki
Electronics
Matsushita
Seiko
Listed on the Tokyo Stock Exchange

Oct. 1, 2002
MEI made five majority-owned subsidiaries into

wholly-owned subsidiaries by way of share exchanges
100%
Matsushita
Graphic
Comm.
100%
100%
Matsushita
Communication
Industrial
Kyushu
Matsushita
Electric
100%
100%
Matsushita
Kotobuki
Electronics
Matsushita
Seiko
Jan. 1, 2003
Then, MEI implemented groupwide restructuring

Automotive
electronics
related
divisions
Matsushita
Graphic
Comm.
Merger
Panasonic
Comm. &
Imaging
FA
Company
Env.
systems
related
divisions
Matsushita
Kotobuki
Electronics
Matsushita
Seiko
Matsushita
Kotobuki
Electronics
Matsushita
Ecology
Systems
Auto. Mobile System

multi solu media Comm. tions
FA
Div.
Panasonic
Automotive
Systems
Corporate
systems
related
divisions
Matsushita
Communication
Industrial
Kyushu
Matsushita
Electric
Car
navi gation
Corporate
Info. &
Comm.
Sales Div.
Panasonic
Factory
Solutions
Panasonic
Mobile
Comm.
In-house company
Panasonic
Systems
Solutions
In-house company
14
Case Study 3: Thermo Electron's "De-Conglomerating" through Spin-Ins

In the early 1980s, the founder of U.S.-based Thermo Electron,
Kadant (former Thermo Fibertek) and Thermo Fibergen. Spectra-
George Hatsopoulos, began to carve out subsidiaries as publicly
Physics was spun into the company in 2002. These acquisitions
listed businesses. Using carve-outs, he hoped to increase the
enabled Thermo to undertake groupwide restructuring.
overall valuation of the group and inspire entrepreneurship.
After the acquisition of minority interests, Thermo implemented
Thermo completed 24 minority carve-outs between 1983 and
a groupwide restructuring. Thermo split into three independent
1998. The initial success of Thermo's carve-outs became an
publicly listed entities. The company spun off as a dividend to its
appealing model for other companies. Subsequently, however,
shareholders Kadant and Viasys Healthcare in 2001 (spin-offs are
the company structures became too complex and unmanageable
described in more detail in section 2.7). In addition, Thermo sold
(Figure 2.8).
several non-core businesses. As part of the sell-offs, the company
A new management team led by Richard Syron started the process
sold its interest in Thermo Cardiosystems in 2001. As a result of
of "de-conglomerating." The goal was to consolidate Thermo
the completion of spin-offs and sell-offs, Thermo's continuing
into one publicly traded entity focused on its core business of
operations consist solely of its instruments businesses.
measurement and detection instruments. In January 2000, Thermo
This case study highlights some of the disadvantages of minority
announced a major reorganization plan. During 2000, Thermo
carve-outs and the fact that minority carve-outs are perhaps
acquired the minority interest in all of its formerly publicly held
better thought of as an interim solution (minority carve-outs are
subsidiaries other than Spectra-Physics, Thermo Cardiosystems,
described in more detail in section 2.6).
Figure 2.8 Thermo Electron: Increased Complexity of the Company Structures
Shareholders
Thermo
Electron
85%
Thermo
Instrument
Metrika
Systems
76%
ONIX
Systems
81%
Thermo
BioAnalysis
84%
Thermo
Optek
95%
74%
86%
Thermedics
Thermo
TerraTech
Thermedics
Detections
The Randers
Killam Group
88%
96%
Sell-off
Thermo
Cardiosystems
Thermo
TerraTech
60%
71%
64%
Thermo
Trex
94%
Thermo
Ecotek
Thermo
Lase
91%
Sell-off
Thermo
Fibertek
79%
Sell-off
Thermo
Power
Thermo
Fibergen
80%
73%
Trex
Medical
77%
Thermo
Sentron
86%
Thermo
Voltek
Spin-Ins
69%
Shareholders
Thermo
Quest
90%
Thermo
Spectra
Thermo
Electron
92%
Kadant *
Viasys
Healthcare
*former Thermo Fibertek
Thermo
Vision
80%
Note: % reflects combined ownership by direct parent company and Thermo Electron as of year end 1998.
Source:Thermo Electron 10K, ABeam Research
15
2.4
Corporate Splits
The corporate split procedure makes it easier for companies to
improve the control span of the parents management team by
split business units into new companies (or existing companies).
reducing parental involvement; and
Prior to the introduction of the corporate split procedure, it
accommodate differing personnel and compensation systems.
was possible for a company to split a business unit into a new
At the same time, such Bunsha-type splits enable a parent
subsidiary through either an investment-in-kind or a post-
company to unlock the value of a business unit by:
establishment transfer of business. However, the traditional
clarifying the business units responsibility and authority;
methods to complete such transactions were expensive and time-
providing a certain degree of autonomy to foster an indepen-
consuming procedures. For example, an asset valuation by a court-
dent culture;
appointed inspector was required. We call this type of corporate
expediting the business units decision-making to improve
split Bunsha-type splits.
business performance; and
In addition, the corporate split procedure makes it possible for the
enhancing visibility for customers, suppliers and potential alli-
first time for a transferee company to distribute its shares directly
ance partners or buyers.
to the shareholders of a transferor company. This type of corporate
More significantly, Bunsha-type splits facilitate the participation
split is broadly equivalent to the concept of a spin-off in the U.S.
of strategic partners who can provide necessary capabilities (e.g.,
or the concept of a demerger in the European market (spin-offs
by way of joint ventures, see section 2.9 and the Tomen case
are described in more detail in section 2.7).
study 10 below). Alternatively, Bunsha-type splits are commonly
The Matsushita case study 2 above and the NEC case study 4
used to prepare a business for divestiture. The Osaka Gas case
below show examples of restructurings that made use of different
study 6 below illustrates how corporate splits may be used to
types of corporate splits.
divest selected assets into a subsidiary in preparation for a selloff. Bunsha-type splits may be also used to establish a holding
Bunsha-type splits (whether in the traditional method or by a
company (i.e., a parent company splits its business units into new
corporate split which does not involve the distribution of shares
companies and the parent becomes a holding company). In many
directly to the shareholders of a transferor company) enable a
cases, a parent company establishes a holding company to manage
parent company to:
its business portfolio more efficiently (see the Japan Telecom case
focus on core businesses (see the Sumitomo Rubber case
study 7 below). These examples show that Bunsha-type splits are
study 5 below);
often interim solutions leading to more strategic transactions.
16
Case Study 4: NEC's Restructuring through Corporate Splits

NEC recorded a 151 billion yen net loss in the fiscal year 1998
In April 2000, NEC formed three in-house companies (NEC
and since that time has been implementing a restructuring. NEC
Solutions, NEC Networks and NEC Electron Devices) to focus on
set the short-term goal of returning to profitability and the long-
solutions businesses. NEC has also completed many splits of non-
term goal of transforming NEC into a solutions provider. As part
core businesses through the corporate split procedure described
of the restructuring efforts, Packard Bell NEC was liquidated in
in section 2.4. Some of these splits are described below; these
November 1999, Elpida Memory, a DRAM joint venture with
splits include examples of transfers of business to new companies,
Hitachi, was established in December 1999 and NEC Home
newly created JV companies and existing companies both inside
Electronics was dismantled in January 2000.
and outside the NEC group.
Figure 2.9 NEC: Restructuring through Various Corporate Splits

Type
Examples of Corporate Splits
Transferring a business
to a new company
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.
to a new JV company
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.
to an existing company
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.
Case Study 5: Sumitomo Rubber's Splitting of its Non-Tires Businesses

Sumitomo Rubber Industries is Japan's third largest tire maker and
respectively (Figure 2.10). This reorganization will enable the
a major manufacturer of sporting goods and industrial products.
parent company to focus on its tire business and promote further
While the tire business posted operating income of 28.1 billion
restructuring in its non-tire businesses.
yen and the sporting goods business 6.4 billion yen in the fiscal
year 2002, the industrial products business caused an operating
Figure 2.10 Sumitomo Rubber: Corporate Splits to

Focus on Core Business
loss of 2.8 billion yen in the same year. Sumitomo Rubber

announced a restructuring plan in December 2002.
Tire
51%
Ohtsu Tire
business
As part of its restructuring initiatives, Sumitomo Rubber merged

with its 51% controlled subsidiary, Ohtsu Tire & Rubber, in July
Sumitomo Sporting
Rubber
good
business
(SRI)
2003. At the same time, using the corporate split procedure,
Industrial
products
business
Sumitomo Rubber split its sporting goods and industrial products

businesses into new subsidiaries, SRI Sports and SRI Hybrid,
17
Merger
Sumitomo
Rubber
July 1, 2003
SRI
Sports
SRI
Hybrid
Case Study 6: Osaka Gas's Corporate Splits followed by Sell-Offs

In September 2001, Osaka Gas split its kitchen appliance
In October 2001, Osaka Gas sold 90% of its shares in Harman
business subsidiary, Harman, into three companies through the
Pro and 40% of its shares in Harman to Noritz, a leader in gas
corporate split procedure (Figure 2.11). The three companies
water heaters. One and a half years later, Osaka Gas sold its 50%
are: Harman Pro (manufacturing), Harman (sales) and Harman
stake in Harman to Noritz. Noritz now controls a 90% stake in
Planning (real estate).
both companies.
Figure 2.11 Osaka Gas: Corporate Splits for Later Sell-Offs
Osaka Gas
Osaka Gas
65.3%
100%
.....
OG Capital
OG Housing
100%
Sep. 1, 2001
6.4%
65.3%
OG Capital
.....
28.3%
OG Housing
65.3%
28.3%
Harman Planning
Harman Co.
Mfg
65.3%
6.4%
Harman
Harman Pro
Sales
Oct. 1, 2001
Osaka Gas
100%
.....
OG Capital
OG Housing
65.3%
60%
6.4%
10%
90%
Harman Pro
28.3%
Harman
Noritz
40%
Harman Planning
Apr. 1, 2003
Osaka Gas
100%
.....
OG Capital
OG Housing
65.3%
10%
10%
Harman Pro
6.4%
28.3%
Harman
90%
Noritz
90%
Harman Planning
Case Study 7: Japan Telecom's Use of a Holding Company as a Restructuring Vehicle

In December 2001, Japan Telecom initiated its "Project V"
Japan Telecom Holdings announced that, with the sale of Japan
restructuring plan to improve profits of its fixed-line business. In
Telecom Max, it has completed its program to dispose of all of its
August 2002, Japan Telecom established a new holding company
non-core assets. In August 2003, Japan Telecom Holdings further
structure under which it operates fixed-line, mobile and other
announced that it had reached agreement to sell its wholly-owned
businesses as separate subsidiaries (Figure 2.12). In March 2003,
fixed-line subsidiary, Japan Telecom, to Ripplewood Holdings.
Figure 2.12 Japan Telecom: Restructuring Under the Holding Company Structure
Japan Telecom Holdings Co.
Japan
Telecom
Japan
System
Solution
Telecom
Express
J-Phone
Sale to
Ripplewood
JENS
JT
Information
Services
Sale of telemarketing
business to JT Max
& Transfer to JT
JT Network
Information
Services
Telecom
Services
JT
Data
JT
Networks
Absorption into JT
Source:Japan Telecom Holdings
18
JT MAX
Sale to
Moshi Moshi
Hotline Co.
JT
America
Asahi
Telecom
JT
Engineering
JT Create
Sale of
assets to JT
& liquidation
Sale to Toho
Electrical
Construction
Sale of assets to
Toppan Forms &
liquidation
JT
UK
JT
Singapore
2.5
Sell-Offs
A sell-off is the sale of a business or subsidiary of the parent company
Figure 2.13 Nissan's Sell-Offs of Subsidiaries to Buyout Firms
to another firm outside the group, generally resulting in a payment
Target
Company
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
Nissan's
Form
Stake
Buyout Firms
Vantec
3i Group
66.7%
Niles Parts
Nissan
Transport
Ripplewood Holdings
AIG Japan Partners;
Tokyo Marine Capital
40.0%
Nissan Altia Fuji Management

NIF Ventures; Fuji Capital
IID Inc.
Markets (now Mizuho Capital);
New Business Investment
KIRIU
Unison Capital
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).
Rhythm
Strategic buyers are typically companies engaged in the same
MBO
Date
Jan.'01
Buyout Apr.'01
100.0%
MBO
May'01
86.9%
MBO
Oct.'01
100.0%
MBO
Nov.'01
36.7%
MBO
Dec.'01
51.0%
MBO
Aug.'02
J.P. Morgan Partners
business as, and therefore competing with, the business or company

under consideration. In contrast, financial buyers are those who
Due to the pressure for banks to dispose of non-performing loans, it is
are interested in acquiring a business to secure a financial return in
expected that turnaround deals will increase dramatically over years
the short- to medium-term before selling the business or otherwise
to come. Consequently, the number of corporate turnaround funds
exiting the investment. Financial buyers are likely to be buyout firms.
has increased sharply and is expected to increase even further. For
Buyout firms raise funds in order to be able to take equity stakes
buyout firms, corporate turnarounds provide an important source of
in companies though funding and assisting with management
investment opportunities. Accordingly, most buyout firms have been
buyouts (MBOs) and leveraged buyouts (LBOs). Buyout firms
expanding their activities into corporate turnarounds.
generally focus on established companies with potential to grow
There are several types of buyout firms in Japan (Figure 2.14):
after transformation. Non-core divisions and subsidiaries of large
venture capital-affiliated buyout firms (e.g., JAFCOs Structured
public companies are their typical targets. For example, as part of
Investment Group);
its restructuring efforts, Nissan Motor sold its shares in at least 24
domestic independent buyout firms (e.g., Advantage Partners,
subsidiaries from 2000 to 2002. 17 were sold to strategic buyers
Unison Capital, MKS Partners);
and the remaining 7 were sold to buyout firms (Figure 2.13). It was
foreign independent buyout firms (e.g., Ripplewood Holdings,
expected that, like Nissan, large companies would sell off non-core
Carlyle Japan Partners);
divisions and subsidiaries as they pursued restructuring initiatives.
domestic principal investment firms (e.g., Nomura Principal
Fueled by expectations, the number of new buyout firms rose
Finance, Daiwa Securities SMBC Principal Investments, Mizuho
significantly. However, some buyout firms have been unable to find
Capital, Tokio Marine Capital); and
places to invest, as evidenced by the withdrawal of some such firms
foreign principal investment firms (e.g., Goldman Sachs, BNP
(e.g., 3i) from Japan.
Paribas, J.P. Morgan Partners).

Figure 2.14 Buyout Firms in Japan
Transformation
Corporate Life Cycle
Turnaround
Start-Up
Start-Up
Transformation
Traditional Venture Capitals
Traditional Buyout Firms
Turnaround
Turnaround Funds
Extended Venture Capitals (e.g., JAFCO)

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
Source: ABeam Research
19
2.6
Equity Carve-Outs
An equity carve-out is the sale of an equity interest in a subsidiary
in difficult markets, a minority carve-out may impede a selling
to public investors in an IPO or to professional investors in a
strategy by setting a price for the shares of the subsidiary which is
private placement.
below their "real" value; and

a minority carve-out may reduce the flexibility with which the
Equity carve-outs come in two forms: minority carve-outs and
parent and subsidiary can cooperate to capture synergies.
majority carve-outs. A minority carve-out occurs when a parent

company sells a minority interest in a wholly-owned or majority-
The parent should anticipate that a minority carve-out is often an
owned subsidiary to investors while retaining the majority interest.
interim solution. In most cases, a minority carve-out is later followed
A majority carve-out involves the sale of a majority interest in a
by another transaction, such as a sell-off, follow-on public offering or
wholly-owned or majority-owned subsidiary to investors. It should be
spin-off. In practice, a minority carve-out is likely to lead to complete
noted that the preparation for either an IPO or a private placement to
separation over time because the carved-out subsidiary tends to drift
professional investors takes longer than that for a sell-off. In addition,
away from and interact less with the parent due to its independence.
In addition, the carved-out subsidiary, if it becomes a publicly listed
a parent company will have to ensure that a carved-out subsidiary
company, will issue its own financial statements and establish a
should be a viable independent company. This is often the most
public market value, resulting in the increased possibility of a merger
difficult part of the preparation for an equity carve-out.
(or takeover) offer. A minority carve-out IPO may be combined with
Minority carve-outs have the following benefits, among others:
a later spin-off (such two-stage spin-offs, which are particularly
after a minority carve-out, the parent company continues to remain
popular in the U.S., are described in more detail in section 2.7).
in control of the subsidiary;
If unsuccessful, the minority carve-out may be followed by a
a minority carve-out allows the parent company to take advantage
spin-in, i.e., the parent company acquires the shares held by minority
of a high valuation of part of its operations and provides opportu-
shareholders and turns the majority-owned subsidiary into a wholly-
nities to raise capital on advantageous terms;
owned subsidiary (see the Thermo Electron case study 3 above).
if the minority carve-out unlocks value and a higher-rated or
When a substantial or complete separation is desired, a majority carve-
higher value stock is created (in aggregate), the stock of the
out may be implemented (again usually by way of an IPO or private
parent company (or subsidiary) has more value as an acquisi-
placement). A majority carve-out is beneficial in the following ways:
tion currency;
a majority carve-out may generate substantial cash for the parent
a minority carve-out gives the subsidiary time to become a stron-
and/or the subsidiary;
ger company before a sale or majority or full carve-out;
a majority carve-out may allow the parent to terminate its respon-
a minority carve-out may create business opportunities for the
sibility toward the subsidiary;
subsidiary by demonstrating that the subsidiary will be an inde-
a majority carve-out means that there will be fewer potential con-
pendent business; and
flicts of interests between the parent and the subsidiary after the
a minority carve-out IPO allows the subsidiary to offer market-
carve-out than is the case with a minority carve-out;
linked or other equity incentives to management.
notwithstanding that it will only be a minority shareholder, the
Minority carve-outs also have disadvantages. These include:
parent may maintain a significant influence on the subsidiary after
the parent company maintains control of the subsidiary, which
the carve-out; and
may cause a potential conflict of interests with the minority share-
a majority carve-out allows continued financial participation by

the parent.
holders of the subsidiary;

if the initial public float (i.e., the value of shares available for
Disadvantages of a majority carve-out include:
public investors in the IPO) is too small, it may fail to attract insti-
neither the parent nor its shareholders will participate fully in the
tutional investors;
upside of the subsidiary; and
small public floats may increase the volatility of the stock;
the parent will lose control over the subsidiary after the carve-out.
20
2.7
Spin-Offs
A spin-off (or demerger) often consists of the distribution of a
business model. This poses a major challenge for all spin-offs. In
subsidiary's stock to the parent company's existing shareholders
addition, spin-offs have disadvantages, including the following:
by way of a dividend. A spin-off has become an increasingly
unlike an equity carve-out or a sale for cash, neither the parent
popular way of undertaking corporate restructuring in the U.S.
company nor the subsidiary receives any cash in the transac-
and Europe (see the Thermo Electron case study 3 and the GM
tion itself;
the parent company loses the income and cash flow of the sub-
case study 13). The main reason for the popularity of spin-offs in
sidiary without receiving any cash in return;
the U.S. and Europe is that the distribution can often be made tax-
unlike a carve-out IPO, the shares are distributed to the parent's
free for both the parent corporation and the receiving shareholder.
shareholders as a dividend and therefore the parent company
This can represent significant savings to the parent company.
may not work hard to create investor interest in the stock as
In Japan, the corporate split procedure allows a transferee
much as in a carve-out IPO; and
company to distribute new shares as consideration directly to
if the spun-off subsidiary fails to meet their investment criteria
the shareholders of the transferor company. However, spin-offs
(e.g., minimum size of market capitalization or portfolio hold-
have been rarely executed to date. This may be because spin-offs
ings), institutional investors of the parent company may sell
are only tax-free for Japanese companies if they are executed as
the shares distributed to them in the spin-off.
part of reorganization within the group or reorganization for the

purpose of a joint venture. Otherwise, spin-offs are taxable and
Although spin-offs are currently rare in Japan, the results of our
hence have been executed only in special cases (see the Chugai
survey revealed that many companies found potential merits
case study 8 below).
in spin-offs (see Figure 2.15). 84% of our respondents believe

that spin-offs are a unique measure offering several advantages
Spin-offs are a means to unlock the value of a subsidiary and
over alternatives. 60% of our respondents believe that, unlike
transfer that value directly to the parent company's shareholders.
Bunsha-type splits, spin-offs enable a parent to focus more
It is especially useful for a subsidiary that does not completely
completely on core businesses and allow a subsidiary to become
fit with the parent company's core activities or would otherwise
fully independent from the parent company and develop its own
benefit from being a stand-alone public company. Spin-offs
business strategy. Where spin-offs can be structured so that they
are also a means to obtain full value for the parent company's
incur no tax, we expect them to become a more widely accepted
shareholders when a spun-off subsidiary is viable but will not
method of implementing corporate restructurings in Japan.
command a reasonable price in a cash divestiture because of

market conditions.
Figure 2.15 Potential Advantages of Spin-Offs
Where the shares of the parent company are publicly listed, in
Spin-offs provide a valid IPO

alternative in difficult market
order to ensure that the parent company's shareholders can realize
Spin-offs enable the parent's

shareholders to retain
the value of a subsidiary
the value of the distribution, the shares of the subsidiary generally

need to be (or become) publicly listed to give the shareholders
0.0%
11.6%
Spin-offs separate
a subsidiary from the 11.6%
parent's balance sheet
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
Spin-offs have no
advantages over 16.3%
alternatives
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
21
Spin-offs create a
focused parent and
a fully independent
subsidiary
60.5%
A carve-out IPO may be combined with a later spin-off. Such two-
companies with small public floats are less attractive to institu-
stage transactions have become a common means of implementing
tional investors; and
a spin-off in the U.S. (see the GM case study 13 below).
a depressed stock price may prevent the parent from undertaking the subsequent spin-off.
The advantages of such two-stage transactions include the

following:
A split-off is a variant of a spin-off. In a split-off, a parent
the IPO establishes a public market for the subsidiarys stock
company distributes shares it owns in a subsidiary to its
in advance of the spin-off;
shareholders in exchange for their shares of the parent. A split-off
the scrutiny which comes with being a publicly listed company
is a way to create value for the parent's shareholders by reducing
should make the subsidiary a stronger company; and
the parent's outstanding shares. Reducing the parent's shares
the IPO generates cash for either the parent company or sub-
outstanding increases the earnings and cash flow per share and,
sidiary or both.
thereby, the value of the remaining shares.
The disadvantages of these two-stage transactions are similar to
A split-up is a form of split-off where a parent company is
those of minority carve-outs, including:
broken up into two or more independent companies. In the
the IPO is dependent on equity market conditions;
split-up, a parent company is often liquidated and the parent
preparing for and implementing the IPO is time consuming;
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-
Figure 2.16 Chugai Pharmaceutical: Gen-Probe Spin-Off
owned subsidiary of Roche Pharmholding, so that Roche became
Chugai
shareholders
Chugai's parent company, in October 2002. Prior to the merger,
Chugai
shareholders
Chugai resolved to spin off its wholly-owned U.S. subsidiary,
Gen-Probe
shares
Gen-Probe, and completed the distribution of Gen-Probe shares
Chugai
to Chugai's shareholders in September 2002 (Figure 2.16). The
Chugai
Gen-Probe began
trading on the NASDAQ
on Sept. 16, 2002
100%
purpose of the spin-off was to avoid anti-trust problems over
Gen-Probe
Chugai's merger with Nippon Roche.

Chugai decided on a spin-off through capital reduction with
Gen-Probe was spun-off from

Chugai on September 16, 2002.
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.
22
Gen-Probe
2.8
Tracking Stocks
Tracking stock is a class of parent company common stock that
The disadvantages of a tracking stock include the following:
provides a return to investors linked to the performance of a
the parent company issuing a tracking stock must create financial
particular business unit within the parent company. Under the
"firewalls" between the business and the rest of its operations;
Code, prior to the amendment in April 2002, it was possible for
the parent company will shoulder the administrative burden in
Japanese companies to issue tracking stocks. For example, in June
connection with a tracking stock;
2001, Sony issued the first tracking stock in Japan (see the Sony
a company that issues a tracking stock creates the potential for
case study 9 below). However, the amendments in April 2002 now
a conflict at the board level between the interests of the two
allow Japanese companies to issue stocks with various dividend
sets of shareholders; and
payments and voting rights. Although the April 2002 amendment
investors may not give as much value to the tracking stock as
has made it easier for a company to issue tracking stocks, no other
if shares represented a direct ownership interest in the assets of
Japanese company has yet followed Sony's lead.
the tracked business.
Tracking stocks are a very different solution to the others
Tracking stocks are often terminated when the circumstances and
discussed in this paper. In theory, it can create many benefits for
objectives of the business and/or parent company change and
both the parent company and the subsidiary. A tracking stock does
consequently the parent company decides to sell, spin off or spin
not require the parent company to make the tax, legal, governance
in the tracked business.
and organizational changes required for an equity carve-out or
According to the results of our survey, 31% of respondents say
spin-off (e.g., no separate board of directors is required). This
they intend to examine the possibility of issuing tracking stocks
provides the main appeal to the parent company over other
in the future (Figure 2.17). Our study also identified the perceived
alternatives.
merits of issuing tracking stocks. Half of our survey respondents
There are other advantages to using tracking stocks, including
believe that a tracking stock would enable them to raise capital
the following:
without losing control over the subsidiary.
the parent company continues to control the business unit and

maintain ownership of its assets;
Figure 2.17 Tracking Stocks
a tracking stock can raise capital on attractive terms;
Interest in
Tracking Stocks
a publicly listed tracking stock establishes a market value for
Potential Merits
Providing stock incentives

to management of the
Others
subsidiary
5.0%
Using the
31.1%
tracking stocks 5.0%
Examine the
as acquisition
possibility of
7.5%
currency
50.0%
issuing tracking
68.9%
stocks in the future
Raising capital
without losing
32.5%
Feel no need
control over the
to issue tracking
Unlocking the value subsidiary
stocks
in the underlying
subsidiary
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 acquisition currency.
23
Case Study 9: Sony's Issuing of the First Tracking Stock

In November 2000, Sony Corporation announced that the
Figure 2.18 Sony: Stock Performance
company had begun preparations to issue a new class of stock
+100
linked to the performance of Sony Communication Network

(SCN). SCN is a wholly-owned subsidiary of Sony, engaged in
The SCN tracking

stock has not
outperformed Sony
+50
internet-related businesses. Sony believed that a tracking stock

would enable the company to realize the value of SCN while
0
Sony
maintaining full parent ownership.

-50
SCN
Though the company planned to issue the tracking stock by the

1999/1
end of March 2001, Sony postponed the issuance because of the
2000/1
2001/1
2002/1
2003/1
Source:Yahoo! Finance
depressed stock market. In June 2001, Japan's first tracking stock

was listed on the first 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 first tracking stock
resulted in disappointment to both Sony and shareholders.
2.9
Joint Ventures
When well crafted, joint ventures can achieve many of the same
As mentioned in section 2.5, buyout firms are active buyers of
objectives for the parent company as an acquisition of the other
non-core subsidiaries of large public companies. Although joint
company, including access to the resources and capabilities of the
ventures are not their traditional business model, buyout firms
joint venture partner, but at a lower cost and without many of the
today may be interested in forming joint ventures. Such buyout
risks associated with an acquisition (see the Tomen case study
partnerships can be used as a means of divesting non-core
10 below). Consequently, the parent can increase the value of a
businesses when a cash sale is unavailable or undesired.
subsidiary by way of a joint venture. Successful joint ventures are
The advantages of a buyout partnership for the parent company
often followed by IPOs.
and the subsidiary include:
Joint ventures may be also used as a means of divesting a business
experienced buyout firms can greatly assist in building the sub-
(see the Takeda case study 11 below). The first step is the creation
sidiary, recruiting a management team, forming relationships
of a joint venture with a strategic partner. Often the strategic
with customers and setting business strategy;

buyout firms invest cash into the subsidiary and assist in fund-
partner controls a major stake (i.e., over 50%) in the joint venture
ing key business initiatives; and
company. The second step is the acquisition of the minority shares
the involvement of experienced and respected buyout firms
of the joint venture company by the strategic partner.
may be a significant asset to the subsidiary in a later IPO.
Such two-stage transactions provide the acquiring partner with

benefits, including the following:
The challenges of a buyout partnership for the parent company
a means to encourage the partner to assist in building the business;
and the subsidiary include:
a means to get to know the business before a subsequent acqui-
most subsidiaries will not meet the criteria for a buyout investment; in particular, a buyout firm may not invest in an entity
sition; and
when the parent company controls its strategic direction; and
a means to lay the groundwork for smooth integration after a
buyout firms are usually interested in executing an exit strategy
later acquisition.
within a reasonable time frame.

24
Case Study 10: Tomen's Formation of a Joint Venture to Foster Growth

Tomen Corporation, a general trading house, announced a
Energy Holdings Corporation. TEPCO is expected to bring
restructuring plan in 1998 and has recently been intensifying
complementary expertise, resources and capabilities that will
its restructuring efforts. In December 2002, Tomen announced
propel growth in the wind power generation business.
a medium-term management plan to implement further
This case study shows that where external capabilities need to be
restructuring. As part of the plan, Tomen will complete
provided to a subsidiary, a corporate split may be a first step in
management integration with Toyota Tsusho. Tomen also received
the facilitation of a joint venture to allow such capabilities to be
significant debt forgiveness from UFJ Bank.
provided.
In November 2001, Tomen split part of its Power & Utility

Projects Division and established a new wholly-owned subsidiary,
Figure 2.19 Tomen: A Corporate Split to Facilitate

the Formation of a Joint Venture
Tomen Power Holdings Corporation, through the corporate
Sale of TPHC shares
split procedure described in section 2.4 (Figure 2.19). The new
Tomen
company is involved in worldwide development of wind power
Power &
Utility
Projects
Division
generation business. The objective of the split was to facilitate the

participation of strategic partners in the business.
Tomen
Tomen
Nov. 1, 2001
Sep. 30, 2002

100%
Tomen Power
Holdings Corp
(TPHC)
In September 2002, Tomen sold a 50% stake in Tomen Power

Holdings to Tokyo Electric Power Company (TEPCO). At
TEPCO*
50%
50%
Eurus Energy
Holdings Corp.
*Tokyo Electric Power Company

the same time, Tomen Power Holdings was renamed Eurus
Case Study 11: Takeda's Sell-Offs of Non-Core Businesses through Joint Ventures
Takeda Chemicals have established three joint venture companies
In April 2002, Takeda and Kirin established Takeda Kirin Foods
with the intention of leading to a later divestiture of these non-
in the food business, producing mainly seasonings and flavor
core businesses. In April 2001, Takeda established Mitsui Takeda
enhancers. Kirin has a 51% stake in the new company and
Chemicals, a urethane chemicals joint venture company, with
Takeda 49%. Kirin plans eventually to acquire all of the shares.
Mitsui Chemicals. Mitsui acquired 51% and Takeda 49%. Mitsui
In November 2002, Takeda and Sumitomo formed Sumitomo
is scheduled to purchase Takeda's shares in the joint venture five
Chemical Takeda Agro Company in the agrochemical business.
years after start-up.
Sumitomo controls a 60% stake in the joint venture and Takeda

40%. Sumitomo plans to acquire Takeda's shares in the joint venture
Takeda entered into similar joint venture agreements with Kirin
after the expiry of the five-year joint venture period (Figure 2.20).
Brewery and Sumitomo Chemical.
Figure 2.20 Takeda Chemical: Joint Ventures to Be Followed by Sell-Offs

Sale of shares
Takeda
Chemical
AgroChemical
business
Sumitomo
Chemical
Takeda
Chemical
Sumitomo
Chemical
5 years later
Nov. 1, 2002
Takeda's agrochemical business has

been transferred to a new JV company
40%
60%
Sumitomo
Chemical Takeda
Agro Company
25
Takeda
Chemical
Takeda will sell

the remaining 40%
to Sumitomo
after 5 years
The JV company will be made a whollyowned subsidiary of Sumitomo Chemical
Sumitomo
Chemical
100%
New Co.
2.10 Summary
In this chapter, we have reviewed in depth alternative divestiture
Figure 2.21 Possible Migration in Restructuring Structures
structures, including sell-offs, carve-outs, and tracking stocks.
Japan Telecom (case study 7)
Sell-Offs
We have also looked at spin-ins, corporate splits and joint
Osaka Gas (case study 6) Takeda (case study 11)
ventures. These are the key ways in which companies can prepare
businesses for divestiture. We believe divestitures will play an
Joint Ventures
increasingly crucial role in corporate restructuring in Japan.
Osaka Gas (case study 6)

Tomen (case study 10)
Corporate splits, joint ventures and minority carve-outs are often
Majority CarveOut IPOs

(Follow-on POs)
Corporate Splits
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.
Spin-Offs
Minority
Carve-Out
IPOs
In the U.S. and Europe, spin-offs (including minority carve-outs

followed by a spin-off) are among the most popular structures
Matsushita (case study 2) Thermo (case study 3)
Spin-Ins/Mergers
used to implement a corporate restructuring. Japanese companies,

however, generally cannot receive the tax benefits of spin-offs, i.e.,
Taxable transactions and therefore rarely implemented in Japan

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).
26
3. Achieving Value-Building Growth

Corporate restructuring is not an end in itself but rather a means
Figure 3.1 Growth Through Restructuring

Asset Growth (g)
building growth over the long term. Once the financial situation
has been stabilized and profitability 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
3.1
Asset Growth (g)
value-building growth through restructuring.
Common Obstacles to Restructuring
It is generally accepted that many Japanese companies have
Business
Rebuilding
+
0
-
0
+
Return (ROE-Ke)
Financial
Restructuring
Asset Growth (g)
for companies with underperforming businesses to achieve value-
0
-
0
+
Return (ROE-Ke)
tended to restructure only reactively in response to pressure and
Value-Building
Growth
0
-
0
+
Return (ROE-Ke)
have preferred to delay restructuring initiatives until action has

become unavoidable. The results of our survey identified the most
result of a change in a company's leadership. It is interesting to
common obstacles to restructuring success (Figure 3.2).
note that a successful turnaround of Nissan was achieved under
66% of our respondents recognize employment security is a major
the leadership of a foreigner, Carlos Ghosn. Needless to say,
obstacle to restructuring success. Even though lifetime employment
incumbent management can achieve the same results if it can
and seniority-based promotion are gradually becoming less common
overcome organizational constraints.
in Japan, saving jobs, even at the expense of shareholder interests,
40% of our respondents said that they believe that executives'
continues to sway executive decision-making.
disregard for shareholder value hampers restructuring success.
53% of our respondents regard concern for constraints of internal
When Japanese companies divest their businesses, those
politics and long-held tradition as a major obstacle. Restructuring
businesses are often incurring heavy losses as a result of several
efforts can fail because the initiatives are not followed group-
years of poor performance. This demonstrates that executives can
wide and are changed shortly after announcement, when politics
be reluctant to divest underperforming businesses, even when they
and tradition stand in the way. Many restructurings happen as a
know that the divestiture will maximize the value for shareholders.
Figure 3.2 Obstacles to Restructuring

0%
10%
20%
30%
40%
50%
60%
Higher priority on securing employment
66.0%
Difficulty of making a break with internal politics

and tradition
53.2%
40.4%
Limited concern for shareholder value creation

Firm orientation toward a self-contained entity
31.9%
Lack of strong leadership
23.4%
Biased sense of parent-subsidiary relations
21.3%
Weak corporate headquarters running the whole group
21.3%
Shortage of capable outside experts

Others
70%
4.3%
2.1%
27
3.2
Future of Corporate Restructuring

splitting business units into subsidiaries through Bunsha-type
The results of our survey indicate that creating shareholder value

is becoming a more common objective for Japanese companies.
splits (21.3%42.6%);
At the same time, perhaps as a result of this development, equity
reorganizing business units/subsidiaries through corporate
redeployment transactions are becoming more common and
splits (23.4%38.3%); and
more widely accepted. Accordingly, we believe that current
carving out subsidiaries through an IPO (14.9%27.7%).
restructuring trends will continue in the future. The results of our
Although not equity redeployment in the strict sense, we also
survey bear this out: reorganization of subsidiaries by increasing
expect to see an increase in the number of acquisitions of
parent ownership or executing spin-ins will slow down over the
non-group companies using the share exchange method (2.1%
next three years (Figure 3.3). Instead we expect to see an increase
27.7%).
in equity redeployment transactions, including the following:
Figure 3.3 Restructuring Structures to Be Used Over the Next Three Years
Over the past three years
0%
20%
40%
60%
80%
100%
91.5%
91.5%
Closure of unprofitable businesses
Over the next three years
55.3%
59.6%
Sale of subsidiaries to companies outside the group

Creation of a JV with companies outside the group
55.3%
44.7%
46.8%
Sale of businesses to companies outside the group

Split of business units into subsidiaries through
21.3%
42.6%
40.4%
38.3%
Purchase of businesses from companies outside the group

Reorganization of business units/subsidiaries
through corporate split procedure
23.4%
38.3%
42.6%
36.2%
Cash acquisition of companies outside the group

Increase in the size of controlling stakes in subsidiaries
29.8%
55.3%
36.2%
27.7%
Dissolution of a JV with companies outside the group

Carve-outs of subsidiaries as publicly traded
businesses
Acquisition of companies outside the group
through share exchange procedure
80.9%
14.9%
2.1%
27.7%
27.7%
34.0%
Spin-ins of subsidiaries through share exchange
21.3%
12.8%
14.9%
Merger with companies outside the group

Sale of businesses/subsidiaries through MBO
10.6%
12.8%
Sale of businesses/subsidiaries to buyout funds
6.4%
12.8%
Creation of a holding company through share

exchange/share transfer procedures
6.4%
12.8%
indicates a significant increase in usage.
28
3.3
Key Factors for Successful Restructuring
The most successful restructurings have been where a parent
3.4, our survey results identified the three most important success
company and its subsidiary have followed a well-planned and well-
factors as: specific objectives (4.83, where 5=most important);
organized process to ensure the best outcome. As shown in Figure
leaders' commitment (4.66); and growth planning (4.43).
Figure 3.4 Key Factors for Successful Restructuring

Performance rating
Importance rating
1
Setting specific short- and long-term objectives to be

achieved through restructuring
5
4.83
3.96
4.66
Demonstrating leaders' commitments to restructuring
3.98
4.43
Planning growth scenarios after restructuring

in advance
3.50
4.19
Defining core businesses and focusing on them
3.80
4.13
Developing a restructuring plan toward

superior shareholder value
3.39
Executing restructuring in a swift

and intensive manner
3.39
Assessing restructuring alternatives and selecting

the best option
3.39
4.13
3.98
3.94
Finding the right partners to complete the transactions
3.30
Monitoring the progress of a restructuring plan on

a regular basis
3.91
3.48
Setting objective criteria to identify candidates

for restructuring
3.83
2.91
Sharing a restructuring plan across the group

organizations
3.74
3.20
3.15
3.11
Involving external advisors in the restructuring process
indicates high importance rating (>average=4.1)

but low performance rating (<average=3.5).
Our study also revealed self-assessment of performance against
Figure 3.5 Importance-Performance Matrix

5.0
each factor. The highest rated factors are: leaders' commitment

(3.98, where 5=fully implemented); specific objectives (3.96); and
4.5
Degree of Performance
core focusing (3.80).

Linking importance rating to performance rating casts a spotlight
on the challenges, i.e., crucially important factors in which
companies underperform to the greatest extent (Figure 3.5). These
factors are growth planning, value creation and swift restructuring.
Setting objectives
Demonstrating commitments
Defining core
4.0
3.5
Monitoring progress
average
3.0
Finding partners
Involving advisors
Sharing a plan
Assessing alternatives
Setting criteria
High importance
but
average low performance
2.5
2.0
2.0
2.5
29
Planning growth
Developing a
value-creating plan
Executing swiftly
3.0
3.5
4.0
Degree of Importance
4.5
5.0
3.4
Managing Balanced Business Portfolios
Just as each company has its own corporate life cycle, each
Figure 3.6 Balanced Business Portfolios
business has its own business life cycle. A business life cycle
Operate
contains four phases (Figure 3.6). In the "seed" phase (phase I),
Transform
Grow
a growth option is seeded. The "grow" phase (phase II) is about

nurturing the option and growing the business. In the "operate"
Seed
phase (phase III), the emphasis shifts from growing the business
Business Life Cycle
to managing it for profitability. A business in this phase is usually

called a core business. Finally, if the business begins to decline,
High
the "transform" phase (phase IV) seeks to reverse the trend and
A company's business portfolio typically consists of multiple

businesses in various phases of the business life cycle. To
achieve value-building growth, companies must develop and
maintain balanced business portfolios. No growth can be
Seed
Grow
Low
achieved without having strong core businesses; cash flows
Funding
Medium
Growth Expectation
regenerate growth.
Core
generated by core businesses are essential to fund for growth

initiatives. Yet strong core businesses alone do not guarantee
Small
Medium
Operate
Profit Generation
value-building growth. What is needed is a continuous stream
of new growth options in phase I and new businesses in phase

II. Companies must seed numerous growth options and nurture
promising options to generate new streams of revenue for the
future. Successful value-growing companies boast balanced
portfolios that contain growth options and new businesses to
supplement their strong core businesses.
In the current market environment, the "focus is better" or "back
to core" argument has become more generally accepted. In many
cases, financial problems stem from premature departure from
core businesses and excessive diversification in pursuit of new
opportunities. When this happens, in order to stabilize the financial
situation, companies must then reduce diversification to refocus
on core businesses. However, the "focus is better" argument is not
always the right answer. It should be noted that core and non-core
arguments are relatively static and core businesses will eventually
mature and decline. When core businesses mature and there are no
growth initiatives in the business portfolios, a company's growth
will slow and ultimately stall. The challenge for companies is
to strike a balance between focusing on core businesses and
developing and nurturing growth initiatives.
30
Large
3.5
Pruning the Portfolios through Proactive Divestitures
To develop and maintain balanced portfolios, the challenge is to
underperforming or non-core businesses can often release tied-up
nurture promising options while reviewing frequently the growth
resources and thus can create capacity for growth.
potential of each business and divesting quickly underperforming
We believe that the two cornerstones of successful divestitures are:
businesses with diminishing potential or distracting non-
deliberate use of interim solutions to an eventual exit; and
core businesses (Figure 3.7). Growth initiatives call for
laying the groundwork for creating a stand-alone entity.
funds, management time and other resources. Divestitures of
Figure 3.7 Divestitures across Life Cycle Phases

Operate
Seed
X
X
Medium
Grow
Grow
Divestitures
Grow
X
X
Seed
Low
Growth Expectation
High
Business Life Cycle
Divestitures
Small
Medium
Operate
Options
Large
Profit Generation
3.5.1 Deliberate Use of Interim Solutions to an Eventual Exit

As we explained in section 2.10, transactions such as corporate
applies only to business units or subsidiaries which are likely to
splits, joint ventures and minority carve-outs are often only
find buyers at acceptable prices. Unfortunately, underperforming
intermediate steps to eventual exit alternatives, the most
businesses often find trouble making this case (see the Hitachi
common of which in Japan are sell-offs and full or majority
carve-outs. We believe spin-offs would also be popular in Japan
As a further interim solution, before implementing a full exit
if the tax disadvantages were removed. After executing such
strategy, companies may consider minority carve-outs or joint
exit strategies, the parent company no longer holds a significant
ventures. As can be seen in the results of our survey, joint ventures
stake in the subsidiary. In order to execute such exit strategies
have been used extensively in Japan. To date, most joint ventures
successfully, the split business or subsidiary generally needs to
have been designed to contain and share risks when entering new
be a strong company that can survive as a viable stand-alone
markets. Takeda Chemical's recent joint ventures, in contrast, were
company, at least where the chosen exit alternative is an equity
formed with the aim of a later divestiture of non-core businesses
carve-out or spin-off.
(see the Takeda case study 11 above).
In many cases, Japanese companies split their underperforming
As divestitures become more popular, we believe that Japanese
businesses into new subsidiaries by way of corporate splits before
companies will increasingly use such interim solutions to create
a future sell-off or full or majority carve-out. Such an approach
viable stand-alone subsidiaries.
31
Case Study 12: Hitachi's Difficulty in Finding Buyers

In November 1998, Hitachi unveiled a three year-plan (fiscal 1999
In January 2003, Hitachi launched a new plan (fiscal 2003 to
to 2002), "i.e.HITACHI Plan." The plan set the growth vision
2005), "i.e.HITACHI Plan II", calling for a thorough restructuring
of becoming the "best solution partner". Under the plan, Hitachi
of its business portfolio. In the early phase of the new plan,
split its Consumer Products Group and Industrial Components
Hitachi will exit underperforming businesses altogether amounting
& Equipment Group into two new subsidiaries in April 2002.
to 20% of its 8 trillion yen consolidated sales, while focusing
They were Hitachi Home & Life Solutions and Hitachi Industrial
on two business domains: "new era lifeline support solutions"
Equipment Systems. Hitachi also completed splits of businesses,
and "global products incorporating advanced technologies". It
including the display, printer, telecommunications equipment,
has been publicly reported that approximately 30 money-losing
substation and system LSI businesses. However, none of the split
businesses have been listed for divestiture. However, since the
businesses have been divested.
plan was announced, no divestitures have been made. The greatest

challenge confronting Hitachi seems to be finding suitable buyers
for underperforming businesses.
3.5.2 Laying the Groundwork for Creating a Stand-Alone Entity

In mergers and acquisitions, two distinctly separate organizations
is a valuable executive tool. However, in Japan, it is widely
come together to create a whole. It is widely recognized that the
accepted that there is a strong bias against divestitures and that
success of mergers and acquisitions depends on effective post-
when parent companies make a divestiture, they tend to do so
merger integration. The most successful companies link M&A
reactively, usually in response to pressures on the parent company
strategy, pre-merger decision-making and post-merger integration.
or subsidiary and sometimes only after the parent company or
Planning and structuring for integration early on increases the
subsidiary has suffered from weak performance for a period
likelihood of M&A success. Companies that have achieved
of time. Such reactive divestitures often have to be conducted
successful integration have often launched task teams that work
quickly and are therefore typically less well-planned and executed.
on solutions to specific issues for defined periods of time. These
As a result, such reactive divestitures are unlikely to secure the
teams may be coordinated by a steering committee that sets
best price for an asset.
objectives, reviews team decisions, resolves disputes and provides
One example of a well-planned and executed divestiture is
ongoing leadership and overall management.
General Motors' disposal of its Delphi Automotive Systems
Conversely, in divestitures, one organization either sells a
business. When it decided to spin off the business, GM was aware
business unit or separates a business unit into a subsidiary to
of the challenges posed by the spin-off and was unsparing of effort
create a viable stand-alone entity and executes an exit strategy
in laying the necessary groundwork for the spin-off (see the GM
in respect of the subsidiary, e.g., by selling the shares in that
subsidiary. A well-planned and well-organized divestiture program
32
Case Study 13: GM's Preparing for a Successful Spin-Off of Delphi

In May 1999, General Motors spun off its Delphi Automotive
Figure 3.8 GM: Organizing the Separation Project
Systems business, the world's largest automotive supplier, as an
GM
President's
Council
independent company. This is one of the largest divestitures in

history. Prior to the spin-off, Delphi had been a wholly-owned
GM
Oversight
Committee
Delphi
Strategy
Board
subsidiary of GM. In August 1998, the GM Board of Directors

approved a plan to create a fully independent Delphi through a
two-stage spin-off during 1999.
Separation
Execution
Team
As discussed in section 2.7, the first step in a two-stage spin-off
Regular Updates
is a minority carve-out (generally accompanied by an IPO). In
Delphi
Stand-Alone
Team
February 1999, GM sold 100 million shares of Delphi in an IPO,

representing 17.7% of Delphi's total outstanding stock. After
Information
Sharing
Program
Management
Office
Regular Updates
17
Task
Teams
Information
Sharing
IPO
Team
Source:General Motors
the first phase, GM continued to hold the remaining 465 million

shares of Delphi. The second stage is a spin-off. In April 1999,
led by senior executives. These Task Teams each worked on
the GM Board of Directors approved the complete separation of
discrete areas of the project, including: information technology;
Delphi from GM by means of a tax-free spin-off. In May 1999,
technology; shared services; purchasing; supply; facilities and
GM announced a distribution ratio and distributed approximately
environmental; executive management and compensation;
452.6 million shares to GM shareholders by way of a dividend.
salaried personnel; labor relations; internal controls;
The remaining 12.4 million shares were contributed to a Voluntary
international; legal; audited financials; treasury; tax; aftermarket
Employee Beneficiary Association (VEBA) trust to fund benefits
sales; and communications.
for retirees. After the second stage, Delphi became a fully
GM was aware of the IT challenges posed by the separation.
independent company.
The IT Task Team addressed the issues, including dividing the
The IPO and subsequent spin-off was the culmination of a long
IT infrastructure, software and operating system licenses and
process to implement a successful divestiture. Prior to the spin-off,
service agreements.
GM made thorough preparations for the divestiture. In May 1998,
The Task Teams involved both Delphi and GM staff. They needed
a kickoff meeting was held for the separation project. The kickoff
to resolve differences between parent and subsidiary concerning
meeting was opened by the speech on the goal and rationale of the
business plans and the financial terms of separation. They also
project by John F. Smith, Jr., GM Chairman, CEO and President.
needed to negotiate the separation agreements that balanced the
J.T. Battenberg III, Delphi President and GM Executive Vice
interests of the parent and subsidiary and maximized shareholder
President, also made a speech. Early and visible commitment
value. GM understood the necessity for an effective dispute
of senior executives communicated the sense of urgency for
resolution process. Team leaders took the initial responsibility to
successfully achieving the separation. An aggressive timeline was
resolve their disputes. Unresolved disputes were elevated to the
established to complete the project within seven months.
SET and then to the Oversight Committee for final resolution.
GM developed a project structure that provided clear control and
GM also understood that communication and people issues
accountability (Figure 3.8). Under the GM Oversight Committee,
were critical. Massive change as a result of the separation would
the Separation Execution Team (SET) was organized. The SET
create anxiety for all employees. GM prepared a structured
assumed a central role in mobilizing the project. The Program
communication plan to deal with concerns of all stakeholders.
Management Office (PMO) was established to support the SET's
GM's case illustrates the benefits to both the parent and the
project management work. GM hired consultants of solid PMO
subsidiary of following a well-planned and well-organized process
experience in separation projects. To address a wide range of
to prepare for a divestiture.
issues within a short timeline, 17 Task Teams were formed, each

33
3.6
Summary
Our findings revealed that many companies rated planning growth

strategies prior to restructuring as very important, but assessed
their own performance as less satisfactory. To achieve valuebuilding growth, companies must develop and maintain balanced
business portfolios. The key challenge is to nurture growth
options while divesting underperforming or non-core businesses
proactively. Success in proactive divestitures is more likely when
companies use deliberately interim solutions to an eventual exit
and lay the groundwork for creating a stand-alone entity.
34
Glossary
In the Japanese context, corporate restructuring usually means downsizing by reducing the number of employees and/or contraction of
assets. In this paper, we use the term corporate restructuring in a broader sense to refer to the restructuring of business portfolios through
mergers, acquisitions and divestitures. We set out below a list of some of the terms used in this paper. Where these appear for the first time
in the paper, the terms have been highlighted in bold text.
asset acquisition
business rebuilding
Code
corporate restructuring
corporate split
demerger
divestiture
equity acquisition
equity carve-out
equity participation
financial restructuring
in-house company
In-In deal
In-Out deal
inter-group
intra-group
IPO
leveraged buyout or LBO
M&A transactions or M&A
majority carve-out
management buyout or
MBO
merger
minority carve-out
Out-In deal
private placement
sell-off
share exchange
share transfer
spin-in
spin-off
split-off
split-up
value-building growth
a purchase of assets (including purchases of a collection of assets or a business as a going concern),

usually for cash
the second stage of the three stages involved in a typical corporate restructuring process which usually
involves companies attempting to improve profitability of core businesses
the Commercial Code of Japan
restructuring of business portfolios through M&A transactions
the separation by a company of a business into a new subsidiary or an existing company
a transaction involving the distribution of an equity interest in a business unit of a parent company to the
parent company's existing shareholders, often preceded by a transfer of the business unit concerned into a
new subsidiary
a disposal of assets (including an equity interest in a company) to a third party outside the group of the
selling company whether by sale or other means, e.g. an equity carve-out, IPO, etc.
a purchase of more than 50% of the voting share capital in a company
the sale of a minority or majority of the shares in a wholly-owned or majority-owned subsidiary by its
parent to investors
a purchase of 50% or less of the voting share capital in a company
the first stage of the three stages involved in a typical corporate restructuring process which usually
involves companies taking short-term measures to stabilize their financial situation
a system of internal organization designed to mimic the effect of business units being separated into
different legal entities, intended to increase management efficiently through swift decision-making and
clearly defined responsibility and authority, sometimes knows as an internal divisional company
an M&A transaction between Japanese companies
an M&A transaction involving a Japanese company acquiring or disposing of a non-Japanese company
involving companies from two different groups
involving companies belonging to the same group
Initial Public Offering of shares in a company to the public or to professional investors combined with a
listing of the company concerned on a stock exchange
a variation on an MBO including the acquisition of a target company or business with a large element of
debt financing
mergers, acquisitions and divestitures
a form of equity carve-out (see above)
a transaction in which a management team forms a new company which, with the assistance of outside
financiers, purchases a target company or business; the financial backing is usually a combination of
equity provided by private equity investors and management and debt provided by lending banks
two companies joining, generally accompanied by the liquidation or dissolution of one company and the
issue of shares in the surviving company to the shareholders of the disappearing company
a form of equity carve-out (see above)
an M&A transaction involving a non-Japanese company acquiring or disposing of a Japanese company
an offering of shares or other investments to a group of professional investors, often institutional investors
a sale of a business or subsidiary of a parent company to a company outside its group
a transaction in which an acquiring company issues new shares and exchanges them for the shares of
the firm being acquired (this procedure enables companies to make other companies wholly-owned
subsidiaries)
a transaction in which an existing company incorporates a new company, which issues new shares and
exchanges them for the shares of the existing company (this procedure was introduced to facilitate the
creation of holding companies)
making a non-wholly-owned subsidiary into a wholly-owned subsidiary by the acquisition by the parent
company of the shares in the subsidiary which are held by minority shareholders
demerger (see above)
a variant of a spin-off in which a parent company distributes its shares in a subsidiary to its shareholders
in exchange for the shareholders' shares in the parent company
a form of split-off in which a parent company is broken up into two or more independent companies
the third stage of the three stages involved in a typical corporate restructuring process which usually
involves companies focusing on delivering new products and developing new markets
35
Authors
Kimiaki Kimura
ABeam Consulting
Director, ABeam Research
Direct Telephone: +81-3-4288-5840
E-mail: kikimura@abeam.com
Kimiaki Kimura leads ABeam Research, ABeam's thought leadership group. ABeam Research, founded in 2002, conducts original
research and develops unique points of views on business issues facing corporate leaders today.
Casper Lawson
Partner
Linklaters
Direct Telephone: +81-3+3568+3837
E-mail: casper.lawson@linklaters.com
Matthew Bland
Associate
Linklaters
E-mail: matthew.bland@linklaters.com
About ABeam Consulting

ABeam Consulting is a full-service management consulting firm, now with about 2,000 professionals. We work with clients across such
industries as manufacturing, fi nancial services, consumer business, energy, telecom and media and public sectors, offering a broad range
of services from strategy and organization to BPR, IT and outsourcing.
For more information, visit ABeam Consultings website at www.abeam.com/jp.
About Linklaters
Linklaters is a law firm which specialises in advising the world's leading companies, financial institutions and governments on their most
challenging transactions and assignments. With offices in major business and financial centers, we deliver an outstanding service to our
clients anywhere in the world. In Tokyo we advise clients on English and U.S. but not Japanese law.
For more information, visit the Linklaters website at www.linklaters.com.
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any
questions on issues reported here, please contact the people listed below.
ABeam Consulting
Linklaters (Tokyo)
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Tokyo, Japan 107-0052
Telephone: +81-3-3568-3800
Facsimile: +81-2-3568-3888
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E-mail: tosoka@abeam.com
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Copyright 2004 by ABeam Consulting/Linklaters, All rights reserved.

Linklaters (Corporate Restructuring - Shrink To Grow

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Corporate Restructuring

Understanding Corporate Restructuring in Japan

Creating Value through Divestitures

Achieving Value-Building Growth

List of CASE STUDIES

Nissan's Dramatic Turnaround

Matsushita's Spin-Ins to Implement Groupwide Restructuring

Thermo Electron's "De-Conglomerating" through Spin-Ins

NEC's Restructuring through Corporate Splits

Sumitomo Rubber's Splitting of its Non-Tires Businesses

Osaka Gas's Corporate Splits followed by Sell-Offs

Japan Telecom's Use of a Holding Company as a Restructuring Vehicle

Chugai's Reactive Spin-Off to Avoid Anti-Trust Issues

Sony's Issuing of the First Tracking Stock

Case Study 10: Tomen's Formation of a Joint Venture to Foster Growth

Case Study 12: Hitachi's Difficulty in Finding Buyers

Case Study 13: GM's Preparing for a Successful Spin-Off of Delphi

ABeam Research & Linklaters

in Japan with the aim of facilitating corporate restructuring. In

removed. Some of the most successful corporate restructurings

particular, the introduction of procedures such as share exchanges,

have been where parent companies have prepared exit strategies

share transfers and corporate splits has provided companies with

at the start of the corporate restructuring process and have used

greater flexibility in pursuing corporate restructuring. Although

interim solutions as a means to develop stronger subsidiaries

corporate restructuring is not facilitated by legislative and tax

before a full exit at a later date. See Chapter 2.

changes alone, the increased level of M&A activities over the

We conducted a survey to determine the current and future

same period is evidence that the recent reforms have, to some

trends in restructuring activities. Our findings revealed that many

extent, achieved their aims. See Chapter 1.

companies rated planning growth strategies prior to restructuring

A typical corporate restructuring process comprises three phases.

as very important, but assessed their own performance as less

Faced with debt and cash flow problems, companies should

satisfactory. To achieve value-building growth, companies must

execute financial restructuring immediately to stabilize their

develop and maintain balanced business portfolios. The key

financial situation. Once the situation is stabilized, companies

challenge is to nurture growth options while proactively divesting

need to start business rebuilding to strengthen their core

underperforming or non-core businesses. Success in proactive

businesses. Finally, companies can shift their focus to long-term

divestitures is likely when companies deliberately use interim

value-building growth. Across the three phases of the restructuring

solutions before an eventual exit and lay the groundwork for

process, divestitures play an increasingly crucial role in Japan.

creating a stand-alone entity. See Chapter 3.

Divestitures may take several different forms: corporate splits,

We include in this report a number of case studies. One of the

sell-offs, equity carve-outs, spin-offs, tracking stocks and joint

lessons that these demonstrate is:

The more extensive the restructuring, the greater

Corporate splits, minority carve-outs and joint ventures are often

the growth prospects; the stronger the growth, the

used as interim solutions toward an eventual exit. In Japan the

greater the need for restructuring. Shrink to grow

most common exit alternatives are sell-offs and full or majority

and vice versa.

carve-outs. We believe spin-offs would also be popular in Japan

ABeam Research & Linklaters