Markets & Finance

Goldman's Fast Mitsubishi Move


By Ian Rowley When DaimlerChrysler (DCX) sold its remaining stake in the ailing Mitsubishi Motor Corp on Nov. 11, most agreed it was high time the auto giant parted ways with the ailing Japanese carmaker (see BW Online, 11/11/05, "Auf Wiedersehen, Mitsubishi").

After all, DaimlerChrysler's investment -- $2.4 billion in return for a controlling stake in 2001 -- had ended with Mitsubishi mired in the red. The deal certainly stalled DaimlerChrysler CEO Jurgen Shremp's dreams of forming a truly global auto maker.

RECORD TRADE. But no one could accuse Goldman Sachs Group (GS), the acquirer of DaimlerChrysler's stake, of holding on to Mitsubishi for too long. Having snapped up DaimlerChrysler's 12.4% stake on Friday, Nov. 11 -- becoming Mitsubishi's largest shareholder in the process -- Goldman sold all but .01% the same day, making a tidy profit in the process. Indeed, having begun the day with a 1.03% stake in MMC, Goldman ended it with 1.04%.

The deal, the largest block trade in Japanese history, looks like a good one for Goldman. DaimlerChrysler sure seemed eager to sell. According to market participants, Goldman snapped up DaimlerChrysler's stake in Mitsubishi at a discount of about 20% of the closing share price on Nov. 11 -- a figure Goldman won't confirm or deny.

Institutional investors then bought the shares from Goldman at a 14% discount, or around $1.2 billion -- leaving the firm with a hefty profit running into many millions of dollars .

MANY ANGLES. It's difficult to say exactly how much, given that Goldman won't confirm the 20% premium. But the transaction appears even more deft when you consider that many traders have considered Mitsubishi's share price, which has risen rapidly in recent months, too rich of late.

Despite the fact that Mitsubishi posted a $4.7 billion annual loss in March, 2005, and put in an unremarkable performance thereafter, its stock price tripled between January and early November, 2005.

Buyers of Goldman's stake are likely to fall into one of three groups, sources familiar with the deal say. Some investors may be hoping to take advantage of the high volatility of Mitsubishi stock. Others may be looking to hedge against bets that the share price will fall. And still others may believe Mitsubishi is poised for recovery.

DEVELOPMENT PARTNERS. Despite recouping considerably less than the $2.4 billion paid by CEO Shremp four years ago for its stake in MMC, the deal is also a good one for DaimlerChrysler, analysts believe.

The risein Mitsubishi's share price this year more than made up for the hefty discount necessary to oil the deal. That should enable DaimlerChrysler, which had written off much of its stake in Mitsubishi, to include $585 million in capital gains when it posts its earnings later this year, most analysts believe.

Furthermore, the transaction need not have a negative impact on areas where Mitsubishi and DaimlerChrysler continue to partner -- on common engine technologies, for example. "You don't need to own shares in a company to do business," says Kurt Sanger, an auto analyst at Macquarie Securities in Tokyo.

PLAYER TO WATCH. The deal also highlights how boldly Goldman is willing to invest in troubled Japanese companies -- big or small. In addition to Mitsubishi and banking giant Sumitomo Mitsui Financial Group, in which Goldman took an equity stake well before the recent banking recovery in Japan, the U.S. firm has also taken equity stakes in a diverse range of smaller Japanese companies.

In July, for example, Goldman made a $180 million investment in the Universal Studios Japan theme park in Osaka and partnered with a hot-spring resort operator in May to help turn around a group of struggling inns. Goldman's Japan-based subsidiary Accordia Golf Japan is also one of the country's largest course operators after acquiring dozens of loss-generating golf links.

"The fact that Goldman Sachs becomes an investor in a particular segment of the market will add credibility to the notion that the segment is undervalued," says Sherman Abe, a professor at Hitotsubashi University and former CSFB banker.

TRADERS' DISMAY. It's also the kind of dealing that has helped Goldman establish itself as one of the leading foreign-investment firms in the Japanese marketplace, which it entered 30 years ago and has made into a good source of profits. For the year to March, 2005, net profits at Goldman's Japan operations reached $186.8 million, vs. $106 million a year earlier.

One group less than happy with Goldman's Mitsubishi deal will be the speculative day traders who, many market watchers claim, have contributed to driving Mitsubishi's share price through the roof this year. The company is still expected to post a $538 million loss in the spring of 2006.

Goldman's quick-fire buying and selling of DaimlerChrysler's stake seems to have brought the gains to a rapid close. On Monday, Nov. 14, as details of the deal emerged, MMC's stock price fell 12%, to 262 yen ($2.20), as 428 million shares -- 17% of total dealing on the Tokyo Stock Exchange's first section -- were traded.

OTHER PEOPLE'S LOSSES. On Tuesday, Nov. 15, the stock continued to fall, closing down 10.6%. Analysts say further falls will likely occur. "It's impossible for such a loss-making company to keep such a high share price." says Yasuhiro Matsumoto, an analyst at BNP Paribas in Tokyo. Mitsubishi stock peaked at 363 yen on Nov. 8, before the deal.

But at this point, Goldman probably doesn't care anymore.

Rowley is a correspondent in BusinessWeek's Tokyo bureau


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