KKR and Bain Capital have already broken the unspoken rule of the global private equity industry: do not fight your battles in public. Now the Tokyo market is asking: how high and how hard will they go in their $4bn fight to acquire Fuji Soft?
This month, KKR openly accused Bain of bidding in bad faith, while Bain has, in effect, accused its rival of exploiting activist investor influence over the IT services company to get an edge on the deal.
The escalating takeover battle, which industry observers said reflected both the opportunity Fuji Soft represented and decent doses of ego on all sides, showcases a very rare outbreak of public hostilities between two giants of the global buyout industry.
“I’ve never seen anything like it,” said one senior dealmaker in Tokyo who has worked with both buyout firms. “Honestly, we’d prefer to just stay out of it.”
The unusual tactics employed since the two foreign private equity groups began fighting over Fuji Soft last year reflect what lawyers and bankers say is the relatively wide discretion Japan allows company boards to choose bidders based on criteria other than price.
“This kind of dispute likely wouldn’t get to this stage in the US,” said Steven Kaplan, an expert on private equity who teaches at the University of Chicago.
“In the US, companies and managers have to make decisions based on fiduciary duty and that means — unless there is a very good reason, for example an issue with financing — preferring a bid that offers a higher price to shareholders,” Kaplan said.
Fuji Soft’s board has leaned heavily on the fact that KKR has already bought more than a third of its stock from activist investors, a blocking stake that could result in deadlocked decisions if both firms fail to get decisive positions, to justify its repeated rejection of Bain’s higher bids.
Bain has been backed by Fuji Soft’s founding family, still major shareholders, and has decided to press ahead without the board’s approval, another highly unusual move in Japan. The firm has questioned the independence of a special committee set up by Fuji Soft to evaluate and recommend offers, suggesting it has been unduly influenced by the activists and that this means it is wrong to call its latest offer “hostile”.
If KKR and Bain, both of which entered the country around 2006, emerge with their hard-won reputations in Japan unblemished, then their fight could presage further bloody contests between global private equity firms — and promise greater returns for minority investors in Japanese targets.
Fuji Soft might seem an odd focus of such intense competition. But below the surface the company appears a valuable opportunity for private equity groups under pressure to invest large amounts of capital.
Fuji Soft’s property portfolio, valued at upwards of $1bn by the buyout firms, makes the cost of acquiring it more manageable, while its core IT services business is considered an undervalued prize.
“Fuji Soft has been seen as the underdog of Japanese IT service companies . . . For many, many years, their margin has been hovering around mid-single digits,” said Mitsunobu Tsuruo, an analyst at Citi.
“They have thousands of young system engineers,” Tsuruo said. “But it’s a low-margin business, as they operate at the lower end of the value chain doing less complicated work and have been slow to pass on price increases.”
If whoever buys Fuji Soft can shed older or less productive employees, find higher-value clients, and channel revenues into better investments, then they could eventually have a turnaround story to sell.
KKR thought it had the acquisition sown up last year after it gained control of the stakes held by activist funds 3D Investment Partners and Farallon Capital Management, which had previously proposed the company go private.
But KKR’s hackles were raised by Bain’s first public non-binding proposal at the start of September, which drove Fuji Soft’s shares higher.
As the bids escalated, KKR began to accuse its rival of underhand tactics and of misusing confidential information. It has said that Fuji Soft’s founding family, while supporting Bain, had proposed all three parties work together — undermining, in KKR’s eyes, Bain’s claim to be acting as a white knight. As well as questioning Bain’s ability to execute its tender offer, set at ¥9,600, KKR this month publicly accused it of trying to keep Fuji Soft’s share price high so that its own current bid of ¥9,451 would fail. The company has traded at about ¥9,800 in recent days.
Bain has rejected all of KKR’s allegations, bemoaning the fact that the activists began the whole process, and said it would launch its tender in early February. KKR has extended its current tender to match. Bain has also consistently insisted it can still work with KKR or could buy its rival’s stake.
People close to Bain say it has the internal financing necessary to take Fuji Soft private. They say it could seek to replace its initial financing with loans from Japanese banks if it is able to alter the composition of the Fuji Soft board after gaining a sizeable shareholding.
Bain and Fuji Soft declined to comment.
The good news for Fuji Soft shareholders, as regulators have privately noted, is that the all-out competition is forcing up the price. And Bain and KKR may yet go higher. Some analysts have suggested a target close to ¥10,000 and even say the buyout firms might offer more than that, hoping to extract more synergies by combining Fuji Soft with other IT companies in their portfolios.
Bankers for KKR and Bain hope that ego and competitiveness do not push the firms to go too far.
“There is a line at which we will have to walk away . . . but it’s not as easy [as it normally is] to do that, considering everything that has happened,” said a banker involved in the deal.
