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When Panasonic President Fumio Ohtsubo said in early November that the company was interested acquiring mid-sized tech manufacturer Sanyo Electric, he envisioned finalizing the deal by late December (BusinessWeek.com, 11/7/08). The path to forming a tech giant with $110 billion in annual revenues seemed clear-cut: Panasonic would start by buying out Sanyo's three biggest investors (BusinessWeek.com, 11/6/08)—Goldman Sachs (GS), Daiwa SMBC Capital and Sumitomo Mitsui Banking—for their combined 70% stake.

But that's not how things are playing out. On Nov. 26, after nearly three weeks of discussions, Goldman Sachs said it had rejected Panasonic's offer earlier in the week and walked out of the talks. "We didn't agree on the price and the deal structure," says Goldman Sachs spokeswoman Miyako Takebe in Tokyo.

Panasonic was offering 120 yen for each Sanyo share, according to Daiwa SMBC and other sources. That's roughly $7.8 billion, or three times the $2.6 billion that Goldman, Daiwa, and Sumitomo Mitsui coughed up for their Sanyo stakes in January 2006, less than three years ago.

Daiwa SMBC left the door open

Still, the offer was 23% below Sanyo's stock price at the close of trading on Nov. 25. (Sanyo stock lost 3.9% Nov. 26.) And it fell far short of the 250 yen per share that Goldman wanted, according to the Yomiuri Shimbun and financial daily Nikkei newspapers.

Among Sanyo's trio of key investors, Goldman was the only one to break off talks. While Daiwa SMBC also dismissed Panasonic's offer as too low, the difference was that Daiwa spokesman Kenichi Kanda didn't rule out more discussions in the future. (Sumitomo Mitsui and Panasonic both declined to comment.)

Panasonic is eager to add Sanyo's expertise in two areas—batteries and solar panels. Sanyo is the largest global supplier of rechargeable batteries for laptops, cameras, mobile phones, and other portable gizmos. It's also the world's seventh-biggest manufacturer of solar cells. Together, the two companies would have a strong portfolio of green technologies, giving them an edge in developing new batteries for hybrid and electric cars and solar energy equipment for homes and offices.

First, however, Panasonic must negotiate a compromise with Sanyo's investors. A key reason for the dispute stems from the two sides' differing views about how to value the 430 million Sanyo preferred shares held by the three key investors. Each share will be convertible to 10 common shares as of mid-March 2009. Added together, the 4.3 billion shares would account for 70% of Sanyo's stock.

Sumitomo Mitsui Favors the deal

According to sources close to the talks, Panasonic wants the price to reflect the reduction in value of each Sanyo share after such a stock conversion took place. For its part, Goldman is said to contend that Sanyo's current share price already reflects that dilution. The truth lies somewhere in the gray zone between the two claims, says Macquarie Securities analyst David Gibson, who has done the math. "The market has not [fully] factored in the dilution from the preferred shares," Gibson says.

Without Goldman's cooperation, Panasonic would have to woo the remaining two. Getting Sumitomo Mitsui Banking on its side shouldn't be a problem. Apart from being a major shareholder, Sumitomo Mitsui Banking is also Sanyo's main creditor. It has said its top priority is finding a buyer that can help Sanyo pay back the loans, according to someone with knowledge of the discussions between Panasonic and Sanyo. Indeed, it was a top Sumitomo Mitsui Banking Group executive who set up the first secret meetings between the heads of Panasonic and Sanyo a couple of months ago, says this person.

Panasonic might try to lure Daiwa by sweetening the offer a bit. If Daiwa agrees, then what? Panasonic would still face a battle if it asks all Sanyo shareholders to vote on the matter, although it's too early to know whether this might happen and whose side ordinary shareholders would rally behind. The uncertainty has hurt Panasonic's shares, which fell 2.7% on the news—a bigger drop than that sustained by the Tokyo Bourse's electrical machinery index, which slid 1.4%.

By Kenji Hall and Hiroko Tashiro
Hall and Tashiro cover Japan's corporate sector from BusinessWeek's Tokyo bureau .

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.