Kubota and others may wish they had been a little more daring. In January, 2001, U.S. private equity firm Lone Star made a bet that it could find value in Tokyo Sowa: It bought the bank from the Japanese government for $339 million.
Now, after an aggressive restructuring by Chief Executive L. Todd Budge, a former Mormon missionary, the bank, renamed Tokyo Star Bank Ltd., is one of Japan's most dramatic turnaround stories. Tokyo Star earned $107 million for the 12 months through Mar. 31, 2003, up 60% from a year earlier and a vast improvement over the $2 billion loss it reported 24 months before. Its books look healthy, too, showing a ratio of net income to total assets that's four times higher than giant Sumitomo Mitsui Banking Corp. Tokyo Star looks set for steady growth as it profits from new credit and debit cards and a service that consolidates customers' debt.
The lesson is that there may be more hidden value in left-for-dead Japanese financial institutions than meets the eye. Tokyo Star is one of three Japanese banks that have been scooped up and rescued by foreigners. The former Long-Term Credit Bank, now called Shinsei Bank, is about to enrich its new owners, led by Ripplewood Holdings of New York, with a richly valued share offering on Feb. 19. WL Ross, which acquired Kansai Sawayaka Bank in October, 2000, reaped an 85% return on its $220 million investment when it sold most of its stake to Bank of Kansai Ltd. Tokyo Star is the newest celebrity in Tokyo's finance industry.
To be sure, investors who have bought Japanese banks from the government have benefited from massive bailouts. In Tokyo Star's case, the state injected $6.86 billion in return for Lone Star's agreement to take the bank's bad loans along with the good. Still, Budge and his new management lost no time restructuring Tokyo Star -- reducing the staff from 1,100 to 900, closing 24 of its 55 branches, and centralizing its back-office operations at a remote office west of Tokyo. It also introduced a new array of products, from car loans to credit cards, aimed at the Japanese middle class. "We won't be everything to everybody," says CEO Budge, "but we'll help average Japa-nese people manage their assets."FOREIGN AID. By all accounts, the bank is in good hands under the 44-year-old California native. A graduate of Brigham Young University in Utah who learned fluent Japanese during his two-year stint as a missionary, he is the first foreigner to become CEO of a Japanese bank -- and the youngest of any nationality. Budge spent 20 years cutting his teeth at Bain & Co., Citibank, and GE Capital in Tokyo, where he ran its life insurance business before being hired away by Lone Star.
Of course, Budge and his bite-size bank aren't out of the bonsai forest just yet. The bank's growth has stemmed in part from a windfall: When Lone Star made its investment, the government agreed to a price that discounted the bank's nonperforming loans by 25% to 80% of face value. Many of those soured loans have since been recovered, at profits Tokyo Star won't reveal. Budge will have to scramble to find new revenue at a time when competition is heating up.
Yet the future looks bright. Tokyo Star posted net earnings of $60 million for the six months through Sept. 30, and is expected to beat its 25% annual revenue growth target this year. The question now is when Lone Star will cash out. Budge won't discuss an initial public offering. "I'm more interested in helping to increase the value of the bank," he says. Given that he dragged it back from the edge of the abyss, he has already done plenty. By Ian Rowley in Tokyo