Japan’s Softbank to Buy 80% Stake in Kingston
Extending a two-year shopping binge that has already made it one of the most influential companies in the computer industry, Softbank Corp. of Japan said Thursday that it has agreed to acquire an 80% stake in Fountain Valley-based computer memory giant Kingston Technology Corp. for $1.5 billion.
The deal thrusts Softbank and its maverick chairman, Masayoshi Son, into a volatile business that appears to have little relationship to its core operations, which include the Ziff-Davis computer publishing empire, the Comdex trade show business and Japan’s dominant software distribution organization.
But executives at the two companies said the combination would enable Kingston to build new markets in Japan for its computer memory boards and other products while preserving the business practices that have made it one of Southern California’s great high-tech successes.
Under the terms of the deal, Kingston founders John Tu and David Sun would continue to run the company, “retaining all of its current management, its current personnel and its operating philosophies,” according to a Softbank news release.
The two Chinese immigrants started Kingston in 1987 and built it into a $1.5-billion powerhouse while garnering a reputation for going to great lengths to take care of their employees.
Softbank, which Son founded in 1981 with $1 million he made selling a pocket translator he invented at Sharp Corp., made its first big splash in the U.S. computer industry last year when it acquired the Comdex trade show business for $800 million. It quickly followed up with the February 1996 acquisition of the Ziff-Davis publishing operations--which include PC Magazine, Computer Shopper and PC Week--for a stunning $2.1 billion.
The company has also made dozens of investments in Internet software companies, including the search engine firm Yahoo and the electronic payment pioneer Cybercash, with the aim of becoming a comprehensive source for the marketing and distribution of computer products and information. Son, whose Korean heritage and business style are unheard of among the Japanese business elite, is often called Japan’s Bill Gates.
But all that buying, and the borrowing that has gone along with it, has led to concern that Softbank is dangerously over-extended. The company already sports $2.4 billion in debt and will borrow an additional $750 million and issue $475 million in stock to pay for Kingston.
The Nihon Keizai Shimbun, Japan’s leading financial daily newspaper, ran an article in today’s editions concluding that Son’s seemingly reckless buying spree is based on a carefully considered strategy. But the newspaper questioned whether the Kingston purchase would push the debt-laden Softbank into a precarious position if market conditions change.
Son’s gambit is possible in large part because Japanese interest rates are at record lows, whereas stock prices are relatively high. He has used low-interest loans to buy profitable U.S. companies that have a technological jump on Japan but are relatively inexpensive because of the strong yen.
Quinn Riordan, an analyst at BZW Securities in Tokyo, said Son has been “very savvy” about the way he has issued his debt.
“He’s got long-term fixed debt and low rates, so he’s a little bit protected against a rise in interest rates, which is usually the big risk,” Riordan said.
“In essence, you can buy a revenue stream in America for 20 times earnings, which is about what they paid this time, and the Japanese market will pay you 50 times,” Riordan said. “It makes a lot of sense.”
Softbank’s shares rose 4.3% Thursday in Tokyo on word that the company would make an announcement, but fell this morning as traders digested the news.
Ron Fisher, vice chairman of Softbank’s U.S. holding company, brushed aside concerns about the company’s debt level.
“Despite our aggressiveness in acquisitions, we manage our company conservatively on a fiscal basis,” Fisher said. “Softbank’s companies have very strong cash flow, which allows us to expand our business as rapidly as we have.”
He also pointed out that Kingston is virtually debt-free because the company’s founders didn’t rely on venture capital, never sold any stock in the company and financed its expansion by plowing profits back into the company.
Analysts also questioned the strategic fit of the Kingston acquisition. “It does seem like this is a step outside their core competency,” said Ron Bohn, an analyst at Dataquest in San Jose. “With the pricing in the [memory] market at this time, does Softbank know what they’re getting into?”
Fisher dismissed these concerns as well, noting that Kingston’s profit margins are healthy and that the deal came together because both companies saw an opportunity to take Kingston’s success and try to duplicate it in Asia.
“Kingston has a very limited presence in Japan, [which] accounts for about 10% of the PC market in the world,” Fisher said. “We are by far the leading distributor of software in Japan, so we have thousands of resellers that we can take the Kingston product and put through our channels.”
The deal would boost Softbank’s revenue to more than $3.5 billion this year.
For Sun and Tu, who landed on the Forbes 400 list of the nation’s wealthiest people last year, the acquisition is a gigantic payday. The two would be paid more than $1.1 billion in cash and $425 million in Softbank stock, making them the company’s second-largest shareholders with a combined 4.9% stake.
The two, who shun offices and instead sit at desks in the center of their company’s bustling sales floor, would also retain a 20% stake in Kingston. The firm is the world’s largest maker of memory products, mainly boards and modules in which the memory chips themselves are packaged, with 60% of the U.S. market.
Sun and Tu prided themselves on paying attention to the details of the business. The company is so nimble that it often rolls out add-on memory products for certain PCs the same day the computers hit the market. The two also foster employee loyalty and reward their workers by earmarking 5% of the company’s profit each quarter for employee bonuses.
As Kingston grew, the founders often fretted that they might not be able to preserve the company’s caring environment as the number of employees swelled. Tu and Sun also resisted the temptation to sell stock to the public largely because they did not want stock market pressures to change their approach.
Tu admitted that he and Sun have given up a significant amount of control over their company’s fate, but stressed that a key reason they agreed to the deal is that the culture of the two companies, Kingston and Softbank, match.
“Many companies [interested in buying Kingston] have approached us almost on a monthly basis,” said Tu, 55. “We always said no. This was the first time that we saw the chemistry and the culture and how we could help each other in the long run.” He also said that he and Sun may take positions on Softbank’s board of directors.
The deal was initially conceived two months ago as a distribution venture to help Kingston crack into the Japanese market, Tu said. After several dinner meetings with Softbank’s Son, the two found that “we liked each other as companies and people,” Tu said.
Kingston supplies major PC manufacturers and also makes memory boards that can be added to older computers to boost performance. The demand for memory has mushroomed partly because of the exploding popularity of computers and also because newer software and operating systems require increasing amounts of memory to function efficiently.
The Asian market represents a fertile new market for Kingston, which draws nearly 70% of its revenue from the U.S.
“That’s one of the compelling reasons,” Tu said. “We know that Asia is a huge market for Kingston’s product line--it could be as high as half a billion dollars in Japan alone.”
Times staff writer Sonni Efron contributed to this report from Tokyo.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Building an Empire
Japanese technology giant Softbank Corp., which announced plans to buy 80% of computer memory board maker Kingston Technology Corp. for $1.5 billion, has amassed an international network of high-tech publishing, trade show, distribution and software companies. A look at the 15-year-old firm’s holdings:
Publishing
The company is the world’s largest computer publisher because of its acquisition in February of Ziff-Davis Publishing, which prints more than 80 magazines, including PC Magazine, Computer Shopper, PC Week and Mac Week. Ziff also puts out about 200 instructional manuals each year.
Trade shows
The company’s purchase of Interface Group--known for running Comdex, the computer industry’s largest trade show--helped Softbank to become the world’s biggest computer trade show organizer.
Networking
The firm owns 20.4% of Novell Japan Ltd. and has an alliance with San Jose-based Cisco Systems.
Internet
Softbank has purchased stakes in about 30 Internet companies such as Yahoo, CyberCash Inc. and inquiry.com. It also holds 40% of the U.S. Web advertising market.
Software distribution
The multimedia conglomerate distributes 30% of Microsoft’s programs in Japan and is working with the Redmond, Wash.-based software maker to develop PC game software. Softbank controls more than 40% of Japan’s software market.
Multimedia programming
Softbank produces “The Site,” a daily computer show, for MSNBC. It is pursuing a joint venture with Nippon Telegraph & Telephone to distribute digital movies and software in Japan. Together with Rupert Murdoch, the company purchased 21.4% of the Japanese TV network Asahi National Broadcasting.
Source: Business Week
