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What to Expect from a Panasonic-Sanyo Deal

Posted by: Kenji Hall on November 06

Any day now, tech giant Panasonic is expected to announce that it will buy Sanyo, creating Japan’s largest consumer-electronics maker. For Sanyo’s largest investors the prospect of a payday would seem enticing. Since coughing up $2.6 billion for Sanyo back in January 2006, Goldman Sachs, Daiwa Securities SMBC and Sumitomo Mitsui Banking have pushed the company to reform its sprawling businesses. Those three haven’t completed a turnaround at Sanyo yet, but analysts figure that Panasonic could still end up paying them anywhere from $4.5 billion to nearly $9 billion. (Media reports indicate that Panasonic is haggling with Sanyo’s investors over price.)

So what’s in it for Panasonic? The simple answer: growth. Panasonic’s president, Fumio Ohtsubo, has been on the hunt for deals ever since he took over in mid-2006. From the start, he has stressed his intention of dipping into Panasonic’s $6.7 billion war chest if it means scooping up key technology that will help the company grow faster than it can alone. Integrating Sanyo wouldn’t be too hard for Panasonic since the two have overlapping businesses and are located near each other along an industrial corridor in Osaka.

Buying Sanyo would give Panasonic 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.

The two would also have a leg-up on the competition in lithium-ion batteries for gas-electric hybrid cars (Panasonic has paired up with Toyota and Sanyo with Volkswagen)--and possibly future electric-powered cars when they eventually hit the road en masse. That would let Panasonic brandish its green-energy credentials, an area that would be bolstered if it can combine its fledgling business in fuel cells for homes and offices with Sanyo's solar panels.

If only that were all Panasonic would get. The bad news is that it would have to absorb Sanyo’s struggling electronics, high-tech parts and appliances divisions. This fiscal year, Sanyo expects to post $500 million in operating profits, 34% lower than last year. Many analysts think Panasonic would have no choice but to restructure Sanyo's divisions that make electronics, electrical equipment, semiconductor chips and electronics parts. Consider this: Last fiscal year, Sanyo's home appliances business had profit margins of minus 2%, while Panasonic's were above 6%. Ohtsubo may have to put on hold his hopes of raising Panasonic's operating profit margin closer to 10%, 16 months after he got a step closer by finding a buyer for a chunk of subsidiary Victor of Japan (JVC), effectively removing the unit from Panasonic's consolidated earnings.

It's questionable whether adding Sanyo’s brand to Panasonic's stable makes much sense. 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.

Yesterday, Sanyo’s President Seiichiro Sano told journalists that he’s considering the deal with Panasonic but stubbornly insisted on keeping the Sanyo brand intact. He and others will probably argue that selling Sanyo heat pumps in Indonesia and appliances in China gives their brand visibility in the world’s fastest growing markets. But unless there's some way to keep the two brands' products in separate markets, their air conditioners, refrigerators, silicon chips and electronic parts would compete against each other for limited space on store shelves and inside other brands' consumer gizmos. And how wise would that be?

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BusinessWeek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies. Eye on Asia’s bloggers include Asia regional editor Bruce Einhorn, Tokyo reporters Kenji Hall and Ian Rowley, Korea bureau chief Moon Ihlwan, India bureau chief Manjeet Kripalani, Asia News Editor and China Bureau Chief. Dexter Roberts, and Hong Kong-based Asia correspondent Frederik Balfour.

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