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Goldman Sachs Goes Shopping In Japan


For an investment bank that normally goes out of its way to avoid the limelight in Japan, Goldman, Sachs & Co. () triggered an unusually public stir on Nov. 11. It snapped up DaimlerChrysler's () remaining 12.4% stake in Mitsubishi Motors Corp., then quickly resold it the same day. The $1.2 billion deal was the largest block trade ever executed in Japan. Market participants say Goldman bought DaimlerChrysler's shares for 20% less than their market price -- a figure Goldman won't confirm -- before selling them to institutional investors at a 14% discount, earning tens of millions of dollars in the process.

All in a day's work for Wall Street's most prestigious investment bank, which has become one of the most aggressive foreign investors in Japan. The deals have been coming thick and fast for Goldman, which has built up stakes in so many Japanese companies that it seems to be acting more like a private-equity firm than an investment bank. Indeed, it is arguably doing more buying than advising in Japan, sinking capital into everything from golf course operators to a mobile-phone carrier. It even formed a 50-50 joint venture with a local partner in May aimed at turning a profit from a very Japanese institution: traditional inns with hot springs called onsen.

Not all deals are that small. On Nov. 18, Goldman confirmed it is in talks about a possible equity purchase of Sanyo Electric Co. (), a $21.8 billion-a-year Japanese electronics maker that expects to lose $1.96 billion this year. "Goldman's business model is quite interesting," says Masaaki Kanno, chief economist at JPMorgan Chase & Co. (). "But more important, their timing is good."

It's a classic value-oriented strategy: invest in distressed companies, shake them up with some well-honed restructuring techniques, and eventually resell them as asset prices recover. Under Japan co-presidents Tom Montag and Masanori Mochida, both appointed in 2001, Goldman has put together a dedicated team of bankers who pore over balance sheets and do due diligence for its proprietary deals. With Japan's economy on track for sustained growth for the first time in a decade, Goldman is scrambling to buy up potential money-spinners while prices are still cheap. Is that a conflict of interest with clients who it advises on mergers and acquisitions? Goldman says no, due to internal rules that separate its principal investment and advisory businesses.

While Goldman has invested in Japa-nese equity and real estate for years, it has picked up the pace in recent months at a time when rivals complain about a shortage of deals. In June a fund set up by Goldman and Mori Trust Co. put up $350 million to buy a controlling stake in Fujita Corp., a struggling general contractor. The next month, Goldman pumped the lion's share of a $220 million investment into Universal Studios Japan, an unlisted Osaka-based theme park weighed down by debt. When USJ eventually goes public, Goldman and quasi-public partner Development Bank of Japan will own a combined 46.5% stake. Goldman has also bought into a privately held wedding consultancy and earmarked $220 million for a new mobile-phone carrier service.

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One key advantage is Goldman's longtime partnership with Sumitomo Mitsui Financial Group, one of Japan's Big Four banking groups, which has provided introductions that have opened doors to Japan Inc. It's no coincidence that SMFG has long been the main banker for Fujita, Universal Studios Japan, and Sanyo. In 2003, Goldman bought $1.3 billion worth of the bank's preferred shares in what has turned out to be a sweet bet. Within a few months, SMFG's stock traded as low as $1,360 a share. On Nov. 11, it hit a 10-year high of $10,326. "The difference between Goldman and other investment firms is its relationship with Sumitomo Mitsui," says Kunihiko Yogo, CEO of cosmetics company Kanebo Ltd. Goldman at one time considered making a bid for Kanebo in partnership with rival Kao Corp.

Goldman puts deals in Japan together in a number of ways. For example, its onsens and hotels are part of its real estate investment unit, which has plowed $6.4 billion into Japan since 1997. The deals for USJ and Fujita, though, are from an $8.5 billion global private-equity fund called Principal Investing Area, which closed to new investors earlier this year. Goldman also has something called the Asian Strategic Investment Group, which is focused on nonperforming loan and corporate rehabilitation investments.

Despite its many deals, for the most part Goldman has avoided being labeled as a hagetaka, or vulture investor, by Japanese peers and the media. That is a fate that has befallen -- and hampered -- many a foreigner. Goldman's cachet in Tokyo, by contrast, is such that its involvement is widely seen as a nod of approval for a savvy deal. "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.

What makes Goldman different? The firm treads very carefully. For instance, it has so far avoided local taboos such as hostile takeovers. Rival Lehman Brothers Inc. () brought on lots of hostile press coverage for itself when it helped raise money for livedoor Co., a Japanese Internet company, in its failed bid for Fuji Television Network Inc. earlier this year. Lehman made a killing but got a blast of negative publicity for its behind-the-scenes role.

Goldman's willingness to work alongside -- and listen to -- company management also helps seal deals. Executives at Fujita, for instance, note that Goldman did not insist that the company delist itself on the Tokyo Stock Exchange as part of its restructuring deal. Management said it was important to stay listed to maintain customer confidence. "Goldman was not pushing us into doing anything [we didn't want to do]," says Koh Nakahigashi, general manager in Fujita's corporate planning division in Tokyo. To get its message across, Goldman also sent bankers to eight town hall meetings to ease workers' concerns about foreign ownership.

That's just one example of how Goldman has worked to win over potential critics. Glenn Gumpel, chief executive of Universal Studios Japan, says Goldman agreed not to take more than a 50% stake in USJ and structured the deal to prevent a swift exit. Meanwhile, it worked with its mainly Japanese bankers, including Sumitomo Mitsui, to push the right buttons with impatient shareholders, including General Electric Co. () and the city of Osaka. "Goldman took the time to visit the city fathers and presented themselves well," Gumpel says.

Whether Goldman's private-equity deals in Japan will be as lucrative as its flipping of Mitsubishi Motor stock remains to be seen. Turning theme parks and hot springs resorts into profit centers is something that won't be achieved overnight. A test of Goldman's strategy will come next year, when it plans to spin off its golf course unit, Accordia Golf Japan, consisting of some 90 courses that it has been accumulating since the late 1990s. It's hoping a profitable exit will set a pattern for the Japanese IPOs that it will be taking to market for years to come.

By Ian Rowley, with Hiroko Tashiro in Tokyo


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