Sanyo Abandons Semiconductor Sale

The Japanese company is holding on to the unit after the private equity buyer allegedly couldn't raise the money. Investors aren't pleased

by Kenji Hall

It's bad enough the U.S. subprime loan market is inflicting pain on lenders as far away as Japan. But lately the pain has spread beyond the banking sector into Japan's high-tech sector. The most prominent example: Sanyo Electric (6764.T). On Oct. 17, when news broke that the company has decided not to sell its semiconductor business to a private equity firm, there was the whiff of a potentially bigger problem. Neither Sanyo nor Advantage Partners, which had been planning to buy the division, would say why the deal fell through, but many people who follow the industry say the Tokyo-based private equity firm couldn't raise the money to pay for the acquisition.

The deal's collapse shows how a global credit crunch might slow the transformation of Japan's consumer electronics industry. Recently, the country's tech makers have turned to private equity money for help in reducing the bloat in their operations. Both Toshiba (6502.T) and Matsushita Electric Industrial (MC) successfully tapped private equity firms to revive neglected and chronically underfunded divisions in the recent past. That reliance on nontraditional credit sources has become essential for Japan's once-dominant tech titans as they try to improve profitability while keeping rivals at bay and lowering costs of products that must compete against those of ambitious rivals from Korea and low-cost upstarts from China.

So far this year, three of Japan's 10 largest bids from private equity firms have targeted tech companies, including Sparx's pursuit of Matsushita-owned Victor of Japan and Perry Capital's bid for NEC Electronics (6701.T). However, overall private equity spending, at $9.2 billion, is less than half the total from the first nine months of 2006, according to market tracker Thomson Financial (TOC).

Subprime Effect

Advantage's failed attempt to buy Sanyo Semiconductor wasn't entirely unexpected. Several months earlier, Advantage had won negotiating rights to buy the wholly owned subsidiary of Sanyo, which makes chips used in TVs and cell phones to sell to customers and for use in Sanyo's own electronics. Advantage outbid other suitors with its $850 million offer.

But even before Advantage's Oct. 15 deadline to have the money in hand, many creditors it had approached were reporting losses from subprime lending. The deadline coincided with the announcement that the quarterly profits at one such lender, Citigroup (C), were down 57% due partly to subprime loan trouble. Others, including Merrill Lynch (MER), also had to write off billions in bad loans.

Even so, investors reacted as if they had been handed a nasty surprise. At the close of trading Oct. 17, Sanyo's shares had dropped more than 6%, though a Tokyo bourse benchmark, the electrical machinery index, was down just 0.5%. A day later Sanyo's shares shed another 1.6%. By Friday, they had rebounded slightly.