Published in the Nikkei Asian Review 30/7/2015
In Japan these days it almost feels like the 1980s all over again. Back then the prime minister was Yasuhiro Nakasone, a controversial conservative with a new economic programme and a desire to strengthen ties with the US and restore national pride. Now we have Prime Minister Shinzo Abe following a similar path. Then as now the Tokyo stock market was storming upwards. Honda is even re-launching its NSX supercar, once a symbol of Japanese corporate ambition and consumer exuberance.
All that is missing are the dancing flowerpots, the gold flakes on the sushi and the splurge of headline-grabbing overseas acquisitions – such as Sony’s 1989 purchase of Columbia Pictures which inspired a notorious Newsweek cover featuring the Statue of Liberty in geisha garb.
In fact the acquisitions are happening, but with much more sobriety and less publicity than before. Year to date, Japanese overseas M&A activity is running at the highest pace since 1990, the year of the NSX’s debut. This is good news for the Abe administration, which has been encouraging corporate Japan to make use of its Mount Fuji-sized cash pile in order to boost what J.M.Keynes termed “animal spirits” and support economic revival.
So far most of the deals have been medium-scale and strategic. Japan’s 1980s role as top bidder for trophy assets has been taken over by Chinese and Indian buyers, who have been snapping up New York hotels such as the Waldorf Astoria and The Plaza.
The Nikkei’s purchase of the Financial Times is no exception. It has excited a fair amount of media comment because it concerns the media industry itself. In reality, the scale of the transaction, at $1.4 bn., is not that large. Another Japanese purchase announced the same day, Meiji Yasuda’s $5bn purchase of US insurer Stanhope Financial, passed under the radar.
Even so, the Nikkei-FT deal is instructive in several ways. In the global media industry, as in many others, a vast valuation disparity has built up between perceived winners and perceived losers. When Amazon founder Jeff Bezos bought the venerable Washington Post in 2013, the $250 million price tag was considered rich. Yet Vice Media, a youth media company that is just 21 years old, has a valuation tag of around $2.5bn. And back in 2007 Rupert Murdoch’s News Corp paid north of $4 bn for the Wall Street Journal, a comparable asset to the FT.
What do Vice, the FT and the WSJ have that Wapo (and Newsweek, Business Week and many other once iconic titles) does not? The answer is a defined and reasonably loyal readership that is valuable to advertisers and other commercial entities. As an asset, these customers may not have been fully “monetized” yet, but at least they exist and, even if not paying, are signed up.
In a sense this is not so different from Facebook and Amazon, which are clearly enormous enterprises and have the stock market capitalizations to match, even though their current level of profit is meagre. Far from being incorrigibly “short-termist,” financial markets can take a remarkably long-term view if prospects warrant it. The M&A market simply follows the trend.
How do we know that the brand value of Wapo will never recover, whereas Vice, the FT and the WSJ will maintain their advantage? We don’t know, is the honest answer. Some brands do come back from the dead – Lacoste, Doc Martens and Burberry are examples – but there is a reason why Warren Buffet welcomes all kinds of investment ideas except turnaround situations. In highly competitive markets for goods and services, once you have tripped up the odds against getting back on your feet are formidable.
Vice, the FT and the WSJ – or for that matter, Facebook and Amazon –might trip up too, but their track records to date suggest that they have the judgement and capabilities to navigate the new media environment. The internet makes it easier to copy and steal content, but it does not change the basic verities of the market economy – quality products command premium prices.
M&A always carries risks because the seller has better information than the purchaser. There is also, inevitably, a large amount of luck involved. When Rupert Murdoch bought MySpace for $580 million in 2005, it was running neck-and-neck with Facebook in the social media space. Eight years later he admitted that he had made “a huge mistake” and sold out at a 93% loss. Today Facebook is worth $260 billion, thirty times as much as News Corp itself. Murdoch had the right idea, but he backed the wrong horse.
Likewise, the price paid is important, but the choice of asset and the management skill in conserving and expanding its brand value are far more important. Sony definitely overpaid for Columbia Pictures, but today it is one of the company’s most valuable assets. Mitsubishi Estate were guilty of poor timing when they bought the Rockefeller Center for nearly $2 billion in 1989. Their timing was even worse when they wrote the investment off and pulled out in 1995. Today the Rockefeller Center is probably worth over $8 billion.
Japanese corporate managements may have drawn the wrong conclusions from their 1980s bubble experience. By shunning overseas entanglements for most of the last two decades, they avoided embarrassing headlines but also guaranteed loss of global status.
There is no crystal ball or, the modern equivalent, spread-sheet capable of predicting economic and technological change. Acquirers will continue to make mistakes, as they always have. There will be corresponding successes- such as the Glaxo merger with Smith Kline or Softbank’s takeover of Vodafone Japan – that in retrospect seem almost inevitable.
Business is risk. Life is risk. And doing nothing is sometimes the riskiest course of all.