Japan Display Earns 60% Return for State Fund Despite IPO Flop

Mar 25, 2014 9:20 am ET

March 25 (Bloomberg) -- Look beyond the messy initial public offering of Japan Display Inc. and there’s a surprising tale in the numbers: Japan’s government helped combine three struggling businesses, restructure them to turn the combined entity profitable -- and made money in the process.

The government-backed Innovation Network Corp. of Japan invested 200 billion yen ($2 billion) into the Tokyo-based company in 2012. Sony Corp., Toshiba Corp. and Hitachi Ltd., which all lacked the scale to compete individually in the market for making smartphones and tablet displays, dumped their units into one new company.

Less than three years later, INCJ’s investment was valued at 319.6 billion yen, or about 60 percent more than its initial injection, and the three corporate investors made money too. While Japan Display still has to prove it can compete over the long term, the deal is one sign that INCJ’s approach to restructuring Japan’s troubled industries holds promise.

“The government support helps companies to do business with a longer-term point of view,” said Yukio Sakamoto, chief executive officer of Win Consultant and the former president of Elpida Memory Inc. “If we wait for reorganization from companies themselves, there will not be progress. A strong push from the government is good for industry reorganization.”

Japan Display slumped 15 percent in its Tokyo debut after its initial offering price was set too high, according to Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore. The IPO was the worst debut of any Asia- Pacific initial public offering worth at least $1 billion since 2008.

Underlying Value

INCJ is a uniquely Japanese institution. It was created in 2009 with government funds with the goal of spurring new business growth. In practice, that has meant doling out small amounts of cash to startups and making bigger investments in helping Japan’s largest companies restructure troubled businesses.

Japanese companies tend to avoid closing money-losing businesses and firing workers, unlike in the U.S. for example where such moves are often applauded for serving shareholder interests.

“As a Japanese company you have a social responsibility to workers that is more important than the responsibility to shareholders,” said Yuuki Sakurai, president of Fukoku Capital Management Inc. “That makes it more difficult to lay people off.”

Renesas Electronics

Japan Display is not INCJ’s only success. The fund has seen the value of its investment in chipmaker Renesas Electronics Corp. grow almost six-fold since September when it led a group including Toyota Motor Corp. and Nissan Motor Co. for a 150 billion yen stake.

The chipmaker cut about a fifth of its workers last year as it struggles to compete with Samsung Electronics Co. and falling demand for large-scale integration chips.

After taking a 70 percent stake in Japan Display in 2012, INCJ sold 186 million shares in the initial public offering to Japanese and international investors for 900 yen each. The fund will retain 214 million shares, about 35 percent of Japan Display’s issued capital.

The fund’s investment in Japan Display was valued at 319.6 billion yen based on the IPO and the March 24 closing price, or about 60 percent more than its initial investment of 200 billion yen. Sony, Hitachi and Toshiba each made investments valued at about 10 billion yen, which are worth about 16 billion yen on the same basis.

The stock fell 0.6 percent to 707 yen as of the trading break today and is now 21 percent below the 900 yen IPO price.

A spokeswoman for INCJ, who asked not to be identified citing company policy, declined to comment. The fund doesn’t disclose overall returns.

Apple Sales

Spinning off the panel making divisions of Japanese conglomerates like Hitachi -- which makes everything from rail cars to power station equipment -- allows Japan to compete with manufacturers in Korea, Taiwan and China, said David Rubenstein, a managing director at Advanced Research Japan in Tokyo.

“It’s important to think of the rivalry in the industry,” said Rubenstein in a telephone interview. “They are combining the technologies from the three companies, so technology-wise they have a good lead. Now they have access to capital.”

Japan Display gets about 32 percent of its sales from Apple, according to data compiled by Bloomberg. Sony Corp., maker of the Xperia line of smartphones and tablets, generates 9.4 percent.

Increased Competition

As more technologies are commoditized, competition is intensifying between manufacturers throughout Asia, said Masahiro Mitsui, a Tokyo-based analyst at Federated Advisory Services Co.

Japan Display has said it plans to invest and create thinner organic light-emitting diode, or OLED, displays, to capture a greater portion of the market.

It’s too soon to judge whether the government’s intervention into Japan Display will be successful in the years to come, said Sakamoto.

“The issue is how the company will grow in five or 10 years,” said Sakamoto. “Japan Display has to invent products that are hard to imitate.”

--With assistance from Grace Huang, Jason Clenfield and Shigeru Sato in Tokyo.