Small Merger Firms Grab More Japanese Deals

CalMat of Los Angeles was stuck with an unwelcome shareholder: New Zealand corporate raider Ronald A. Brierley. A small investment bank specializing in Japanese buyouts of U.S. firms, Peers & Co., noticed the situation at the end of last year and decided that Japan’s largest cement producer might be interested in seeking its fortune in the United States.

Peers went to a shareholder, Long-Term Credit Bank of Japan Ltd., which in turn approached Onoda Cement Co.

The fruit of Peers’ labors has become public, as giant CalMat announced that it had given Onoda an option to buy its cement operations in two years for $310 million. Onoda would become California’s biggest cement maker. And Peers, just 3 years old and employing only 16 professionals, will take home a fee of more than $1 million.

“Overall, small firms are willing to devote the resources to the Japanese business and to work to appreciate the culture and requirements of the Japanese clients, which are often different from the culture and requirements of American clients,” Peers managing director James A. Martens said.

The large firms--Morgan Stanley & Co., Goldman, Sachs & Co. and First Boston--all have their Japanese clients. But competing with them are small U.S. firms in which Japanese financial institutions have bought minority holdings.

Some experts suggest that the little guys may benefit from several tendencies among Japanese corporate investors. The Japanese have scant need to seek capital from their financial advisers, and they trust longtime Japanese financial advisers, who in turn steer them to affiliated U.S. firms. The Japanese are also reluctant to indulge in the fast-paced hostile takeovers and company auctions that may require human waves of investment bankers, and they fear that big Wall Street firms show them only the deals no one else wants. Finally, the Japanese exhibit a growing financial sophistication.

At the same time, investment boutiques also face at least two major obstacles. One is that they lack “coverage”--a roster of several thousand potential clients on several continents. The other barrier is lack of name recognition among Japanese firms. “They like big names, which is the reason Goldman and Morgan have gotten a big piece of the business,” said Daniel M. Schwartz, managing director of Ulmer Bros., a small investment firm specializing in Japanese clients.

May Move Into Field

“The biggest drawback that we face is that there is probably still a bias among some Japanese corporations to go with a big name,” Martens said.

Moreover, Japanese financial institutions may yet launch a long-expected effort to grab a chunk of the U.S. mergers and acquisitions business, hurting those already in the field, said Martin Sikora, editor of Philadelphia-based Mergers & Acquisitions magazine. “Once they move, it’s like the combined 28 NFL franchises coming at you at one time.”

Most recently, Nomura Securities bought for $100 million a 20% interest in Wasserstein Perella & Co., a 7-month-old firm formed by a handful of well-known defectors from First Boston’s mergers and acquisitions department.

Such alliances are increasingly common, and enable mergers and acquisitions boutiques to represent large clients which, if they were U.S. firms, would probably go to Wall Street giants. Other deals include Yamaichi Securities and Nikko Securities separately investing $100 million each in buyout funds set up by two small New York investment houses, and, less typically, the Industrial Bank of Japan’s accumulation of a 98% stake in Schroder Securities, a British investment firm with offices in New York.

Among larger firms, Goldman Sachs has sold a stake to Sumitomo Bank, while Nippon Life Insurance has invested in Shearson Lehman Hutton, and Yasuda Mutual Life Insurance has acquired a stake in Paine Webber Group.

Working with the Japanese has become increasingly profitable in the past few years. According to Japan M&A; Reporter, a bimonthly newsletter published by Ulmer Bros., in 1985 there were 37 deals totaling more than $600 million in which Japanese companies bought part or all of U.S. firms, while last year’s 110 deals totaled about $8 billion. So far this year there have been about 45 deals worth more than $7 billion, said Schwartz, the newsletter’s editor.

Impact on California

In addition, the Japanese are losing their initial reluctance to adopt the American practice of forking over large sums--up to 5% of a deal’s value-- to the financiers who put a transaction together, a senior investment banker said. “They seem to be more willing to pay normal fees,” said the banker, who asked not to be identified.

Four California deals done within several months last year by Peers & Co. show the impact on the state of one small boutique.

In June, 1987, Peers represented Shimizu Construction Co., one of Japan’s five biggest construction companies, in the acquisition of a 40% stake in Pleasanton-based Dillingham Construction Corp. The following month, Peers advised Sapporo Breweries Ltd. on the acquisition of a Napa Valley winery, and Nippon Mining Co. on the purchase of an 80% interest in Irvine Scientific Sales Co., a Santa Ana-based serum maker. And in late September, when Sports Shinko Co. announced that it had bought the La Costa Hotel & Spa, Peers again was the adviser.

Since its inception, Peers says it has represented Japanese clients in 20 deals totaling roughly $1.2 billion--one-tenth of the total value of all Japanese purchases of U.S. companies in that period. Long-Term Credit Bank, Peers’ second-largest shareholder, referred the great bulk of Peers’ customers, Martens said. Peers did not contribute any financing.

“It’s very difficult to crack into this business unless you have a substantial Japanese link,” a senior investment banker at another firm said.

By hiring small firms partly owned by Japanese financial institutions, Japanese acquirers may also make it easier to send along more trusted advisers from Japan.

The mergers and acquisitions department head from Long-Term Credit Bank sat in on most of the meetings between Peers & Co. and CalMat, Martens said. Such auxiliary financial advisers are very common, reflecting in part the desire of Japanese investment bankers to learn by observation the customs of their American colleagues, said Schwartz, who is also editor and publisher of Japan M&A; Reporter, a bimonthly newsletter.

Use Fewer Professionals

“Because of the cultural and language gap, Japanese companies are not quite comfortable in dealing with the American accounting firms and American lawyers by themselves. We act as kind of an intermediary,” said Yutaka Ono, a Nikko Securities senior vice president who heads the firm’s mergers and acquisitions division in New York. Nikko “explains” to Japanese companies the advice they receive from their American lawyers and financial advisers, he said.

Japanese companies tend to deal with more senior investment professionals and fewer professionals when they do business at boutiques, said Ken Miller, chairman and chief executive of Lodestar Group, a four-professional boutique that recently sold a 25% stake to Yamaichi Securities Co. Ltd. for an undisclosed price. “What they can get in a boutique is a personal relationship rather than an institutional relationship.”

Another advantage for small U.S. investment firms is the reluctance of many Japanese companies to plunge into fast-paced bidding wars that require battalions of investment bankers and lawyers drawing up reams of documents virtually overnight. A handful of competent bankers and lawyers can iron out the details of a friendly deal at a more leisurely pace.

“It takes much longer for the Japanese to come to a decision, and they dislike becoming involved in an auction process,” Schwartz said.

Even if a Japanese company’s executives reach a rapid consensus on the wisdom of a deal, the legal work may still slow matters down. “They review minutely the advice you give them and the drafts you give them, and comment on them minutely. . . . They take the boiler plate and go through it with a fine-toothed comb,” said Alfred J. Ross, an attorney with Shearman & Sterling, a prominent New York takeover law firm which represented Sumitomo Rubber Co. in its friendly purchase of Dunlop Tire Corp.

However, some observers argue that the decision making of Japanese companies is no slower than that of North American or European corporations. “They can move as quickly and as fast as they need to move,” said Philip E. Zachary, executive vice president and chief administrative officer of Daiwa Securities America.

Any pattern of slow response is not universal in any case. “There are exceptions, family-owned companies, where that man’s name is on the door,” Peers’ Martens said.

Suspect Big Firms

When a small chain of optometry stores in Boston came up for sale last fall, he said, it was quickly snapped up for $12 million by Mitani Corp., a leading, family-owned Japanese producer of eye frames. “Mr. Mitani was able to come over and decide he wanted to do a deal.” Small investment banks tend to show deals to one or two clients at a time--important to Japanese firms that value exclusivity. Some Japanese executives feel that big Wall Street firms have traditionally offered attractive deals first to favored U.S. customers, then to British customers and then to continental European clients, leaving only the dregs to hawk in Tokyo, Martens said.

“Almost the first question I’ll get is, ‘Have you shown it to anyone else?’ ” Schwartz said.

But the directors of U.S. public companies are under a legal obligation to find the best price for shareholders, and that usually requires showing a business to more than one prospective buyer, said Mergers & Acquisitions’ Sikora. Even owners of private companies are likely to want several bids and to be reluctant to indulge a Japanese desire for, “nice, quiet, confidential deals,” he said.

Without the growing financial sophistication of Japanese corporate investors, the other advantages of small investment firms would count for little. But experts say that through careful study over the past three to five years, many Japanese firms have gone from being novices in the mergers and acquisitions field to becoming experts, with the ability to analyze deals just as well as many Western corporations.

“I don’t think they require any different level of assistance to understand their objectives and how to achieve them. . . . There aren’t too many innocent Japanese companies around any more,” said Richard H. Murray, executive director of Touche Ross International, a Big Eight accounting firm with a large practice in Japan.