Japan's Panasonic to Acquire Sanyo

After a weeklong drumbeat of news about an imminent takeover deal, Panasonic, the world’s largest consumer electronics company, finally revealed on Nov. 7 its plans to acquire smaller tech rival Sanyo Electric.

Panasonic’s move would create a $110-billion tech behemoth, but many details have yet to be worked out. Over the next few weeks, Panasonic and Sanyo officials will draw up a blueprint for combining their global operations, which includes everything from semiconductor chips to TVs to solar panels. “The harsh business environment makes it harder for us to attain the growth we were hoping for,” Ohtsubo told journalists at a joint news conference with Sanyo’s chief executive, Seiichiro Sano. “We could use a new pillar of growth.”

The takeover would be the biggest in Japan’s crowded consumer electronics sector, where about a dozen companies compete. It’s debatable whether Panasonic’s move will trigger a wave of mergers and tie-ups among Japanese firms. Some of the country’s struggling tech companies, such as Pioneer, have resisted the idea of putting themselves on the block or getting swallowed up by bigger brands, opting instead for alliances to ride out the economic downturn.

Panasonic and Sanyo officials said they had already agreed on some things, such as keeping Sanyo a separate brand for now. Panasonic could have a tougher time resolving other issues. One potential flashpoint: price. For that, Panasonic will have to sit down with Sanyo’s three largest shareholders, Goldman Sachs, Daiwa Securities SMBC and Sumitomo Mitsui Banking. The trio coughed up $2.6 billion to save Sanyo from bankruptcy in January 2006, and have since been helping the company turn itself around. They own preferred stock convertible to 4.3 billion common shares, which is equivalent to a 70% stake in Sanyo. Buying Sanyo could cost Panasonic anywhere from $4 billion to nearly $9 billion, analysts say.

Panasonic President Fumio Ohtsubo, who has talked about dipping into the company’s $10 billion cash pile since taking over in mid-2006, said he wants at least a majority stake in Sanyo. That would let Panasonic make changes at Sanyo, which is in the midst of a three-year growth plan through March 2010. Ohtsubo is likely to face pressure to give ordinary investors a chance to sell, while the three biggest shareholders may demand a bigger payout for their efforts in guiding Sanyo back to profitability. A dispute could either delay--or even end—Panasonic’s hopes for a deal.

Panasonic wants Sanyo’s expertise in two key areas: batteries and solar panels. Sanyo is the largest global supplier of rechargeable batteries for laptops, cameras, mobile phones and other portable gizmos. The business brings in more than $3.8 billion in revenues, and profit margins are a healthy 9%, NikkoCiti analyst Kota Ezawa noted in a report this week. Panasonic’s unit, by comparison, makes less than half that amount, has margins of 7%, and ranks fourth globally.

Sanyo makes nickel-metal hydride batteries inside gas-electric hybrid cars for Ford and Honda and has a lithium-ion battery partnership with Volkswagen, while Panasonic has a tie-up with Toyota. Ohtsubo said they two companies are likely to maintain their separate ties. But they would have a leg-up on the competition in future batteries for rechargeable electric vehicles. That’s not the only area the two could flash their green credentials. Imagine the day when you could buy a package of Panasonic’s fuel cells and Sanyo's solar panels for the home or office, Ohtsubo said.

Ohtsubo is betting that Sanyo will give Panasonic a better shot at raising profit margins to 10%. The bad news is that Panasonic will first have to restructure Sanyo's divisions that make electronics, semiconductor chips and home appliance. This fiscal year, Sanyo expects to post $500 million in operating profits, 34% lower than last year. Consider this: Last fiscal year, Sanyo's home appliances business had profit margins of minus 2%, while Panasonic's were above 6%. “Goldman and the other banks achieved about 60% to 70% of the reforms they set out to accomplish,” says Ryosuke Katsura, senior analyst at Mizuho Securities in Tokyo, pointing out that Sanyo has sold several divisions, including its financing arm and cell phone unit. “Sanyo’s home appliances and semiconductors are the most likely targets for restructuring.”

But there’s no guarantee that Panasonic will succeed. That would be disappointing after Ohtsubo found a buyer for part of subsidiary Victor of Japan (JVC) 16 months ago, effectively removing a burden from Panasonic's earnings. Adding Sanyo’s brand to Panasonic's stable doesn’t make sense, either. Panasonic just rebranded itself in October, adopting the familiar electronics marque for all of its mass-market products after removing both Matsushita Electric Industrial from its masthead and National from its rice cookers, washing machines, air conditioners and other home appliances.