By Finn Donnelly
Japanese corporate culture is heavily centred around respect and group harmony over individual gain. Prior to any deal, trust and a positive rapport are built up with all parties involved. So, when private equity giants KKR and Bain Capital both sought to acquire Japanese company Fujisoft, one would expect the same standards to be upheld—but that wasn’t the case. This story is not just about the integrity of Bain or KKR but also reflects the warming up of the Japanese M&A market.
Fujisoft is a Japanese IT company that develops and provides software services globally. Fujisoft is a fairly low-margin business, with its operating profit margin hovering around 6.9%. This begs the question, why are they so sought after? Like many Japanese companies, Fujisoft has a sizeable real estate portfolio of almost $1BN, which gives it a very solid base against which to borrow. Furthermore, it has been speculated that Fujisoft could double its margins under new management. This presents the perfect opportunity for private equity to come in and reshape Fujisoft to increase profitability and create value.
In June of 2022, Fujisoft established a corporate value improvement committee composed of members of the board of directors to consider measures to maximize corporate value. It began discussions with several companies, including major private equity fund KKR. This was because Fujisoft’s margins were around half that of its competitors, and it was believed that an outside audit could ignite growth and improve Fujisoft. The audit led the company’s board and shareholders to favour the acquisition of Fujisoft, with privatisation being the preferred takeover method.
Fast forward to August of 2024 and KKR and Fujisoft agreed to a tender offer to acquire shares at 8,800¥ per share and take the company private. The tender offer began on September 4, 2024. KKR’s tender offer was scheduled to end on October 21, 2024, but on October 11, 2024, private equity fund Bain Capital announced that it would begin a tender offer at 9,450 yen per share. Bain Capital’s bid was an unexpected start to a bidding war over Fujisoft. Later in the week, the Fujisoft board spoke out and endorsed KKR’s privatisation bid over Bain Capital’s proposition because they felt that the structure and terms of their bid were more favourable despite the offer price being 7% lower. This sparked controversy as the founder of Fujisoft and large shareholder (18.6%) Hiroshi Nozawa was very outspoken in his support for Bain’s takeover bid. He said that Bain Capital’s proposal “is clearly in the common interest of shareholders,” and that it should withdraw its support for KKR’s tender offer. At the same time, Nozawa also released a letter addressed to general shareholders. He acknowledged that the privatization was triggered by an activist-led process, and pointed out that “I have a strong sense of discomfort with the approach that seeks to lead to a privatization using the logic of activist capital.” Mr Nozawa also called Bain Capital a ‘white knight’ in his letter to shareholders. This is certainly a far more brash start to a takeover than the Japanese M&A market is used to.
On November 15th 2024 KKR improved their bid to 9,451¥ per share, just one yen higher than Bain Capital’s bid. Tensions ran on between the board and founder Mr Nozawa until early December when Bain then raised their offer to 9600¥ per share. By this point, KKR had already bought up 34% of Fujisoft shares by tendering them from a large shareholder, 3D investment partners. It was at this point that an ‘independent’ and ‘unbiased’ committee was set up to evaluate the takeover deals and aid the board’s decision-making on which company should take the reins. The special committee Fujisoft set up to examine the deal said Bain should not make a higher offer and should dispose of all the confidential information it collected during due diligence. Bain then questioned the independence of the special committee, noting that 5 of 6 members were appointed at an extraordinary general shareholder meeting convened by 3D, which tendered its shares to KKR.
So, the board decided to reject Bain’s improved offer of 9600¥ claiming that since KKR already owned such a large share of the company (34%), having two large shareholders would hinder management’s decision-making ability. It added that the tender would take at least three months to conclude and said the additional 1.6% Bain has offered was not worth the loss of time in reaching a conclusion on ownership. Meanwhile, Fujisoft’s share price finished 1.3% higher at 9,771 yen, indicating that investors were speculating about the prospects of a more heated bidding war.
Bain said it has “strong concerns and distrust” over Fujisoft’s response to its proposal, adding that there was no reason for its higher offer to be rejected and the rejection harmed the interests of minority shareholders. Bain said its aim to acquire a controlling interest eliminated the risk of governance deadlock. Then in a shock moment, Bain refused to accede to the board’s demand that it disposes of the confidential information it had compiled in the due diligence for its bid. So then even more shockingly, KKR asked Fujisoft to take legal action against Bain. Additionally, KKR claimed that Bain Capital may not even have the cash to support their bid and that Bain may just be acting as an inflator in the deal.
Early February 2025 KKR raised its offer price to 9,850¥ per share from 9,451¥, above Bain’s most recent offer of 9,600¥ per share in December. On February 17th Bain said that it would withdraw its takeover proposal but only on February 20th did it become clear that KKR had gained a stake of more than 53.2% – the minimum needed to squeeze out other investors. KKR ended up with a 57.92% stake in Fujisoft and ultimately won the gritty, 6-month-long takeover war.
So, this leaves questions unanswered- why did the Fujisoft board favour KKR so heavily throughout this whole process even when Bain had come in with a higher offer prices? The board liked KKR’s offer structure. KKR proposed an offer in two parts; the first phase of the offer was accelerated and immediately acquired the stakes held by 3D and Farallon, while the second phase remained open for all other shareholders. With around one-third of outstanding shares under its control, KKR’s first phase ensured Bain would be unable to build a stake large enough to push through its own deal.
Private equity (PE) investment has soared in Japan recently. What has prompted PE’s thirst for Japanese companies? It has been said that Japan is reaching a ‘golden age’ of PE for many reasons. One of which is that Japanese companies have amazing technology but have struggled to globalise and PE believes it can get them there. A second reason is that Japan currently has very low interest rates which means money can be borrowed cheaply, leaving the door open for various opportunities to boost growth.
KKR have said they intend to go ahead with the privatisation of Fujisoft. KKR aims to acquire the remaining shares of Fujisoft through a squeeze-out process, which will result in KKR owning 100% of the shares of Fujisoft. The Extraordinary General Meeting for the squeeze-out process is scheduled for late April 2025. It will be very interesting to see how this enormous PE deal ends up for KKR and if they will manage to realise more value from Fujisoft as a private company as opposed to being publicly listed.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Photo by Daryan Shamkhali on Unsplash