Eiichi Maejima and John Brecken-ridge are an unlikely pair. Maejima is an engineer with strong hands, a stocky build and a lime-green factory smock. Breckenridge, by contrast, is a quintessential banker: tall, trim and assured in his smart blue suit.
If Japan has any hope of pulling itself out of its decade-long downturn, the two worlds these men inhabit must collide more often.
In their unlikely alliance, Maejima, president of a midsize maker of car parts called the Rhythm Corp, now shares a boardroom with Breckenridge, a managing director at J.P. Morgan Partners, the private equity fund that bought the company in August 2002.
Unthinkable in Japan just five years ago, the arrangement is one of a growing number of management buyouts, increasingly financed by foreign investors.
The market for these spinoffs, in which outside investors help managers buy their own company, first took off in the US in the 1980s and spread to Britain and Europe in the 1990s. It was slow to catch on in Japan, where lenient bankers, a lack of shareholder scrutiny and a rigid corporate code have let parent companies keep dozens and sometimes hundreds of unprofitable subsidiaries on their books.
But as corporate Japan splinters under the weight of too many loans, factories and workers, executives from all industries are now looking to cast off subsidiaries. Mergers are common, especially when they preserve jobs, a priority for managers here.
Lifeboat offer
For businesses with promise, though, the NEC Corp, the Nissan Motor Co, Daiei Inc and others are turning to private equity funds that are willing to buy their underperforming subsidiaries and improve them. In the process, these large corporations are breaking the longstanding bonds between parent company and subsidiary that formed the bedrock of Japan's post-war industrial system.
"Many Japanese companies are on the edge," said Yoshihiro Sakai, a senior adviser to Nomura Holding America who helps arrange management buyouts.
"The funds are a kind of rescue boat," he said.
Though the market for management buyouts in the US is more than 20 times larger than Japan's, the number of Japanese deals is growing. Last year 39 transactions were completed, compared with 22 the previous year, according to the Mitsubishi Research Institute and the ChuoAoyama Audit Corp.
The size of the deals dipped to ¥107 billion, or US$893 million, from ¥116 billion in 2001 as more small companies were spun off. But the number of deals and the total value should double this year, analysts said.
The trend has political implications. Prime Minister Junichiro Koizumi has pledged to double the amount of foreign investment in Japan by 2008, because the country's weak banks and deeply indebted government are unable to provide all the capital needed to revive the economy.
Finding the right candidates and assessing their prospects are difficult. Subsidiaries of big corporations are hard to value because much of their operations and accounting is blurred with that of their parent companies. And buyout specialists, especially foreign firms, are small and can concentrate on only a few companies at a time.
Despite the hardships, about 50 private equity funds have set up shop in Japan. Some have found it a difficult place to do business, particularly foreigners who are unprepared for the slow and opaque way that business is conducted here. The 3i Group of Britain has decided to quit the market, and many other foreign operators have not completed a deal in a year.
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