UPDATE 1-Tokyo Electron takeover could be a mold-breaker for Japan

Thu Sep 26, 2013 1:47am EDT

By Nathan Layne

TOKYO, Sept 26 (Reuters) - Applied Materials Inc's $10 billion acquisition of Tokyo Electron Ltd is more than just a milestone foreign takeover in Japan - it's a rare forward-looking deal in a country where selling to an overseas rival is usually a last resort.

U.S.-based Applied Materials, the world's largest maker of chipmaking equipment, and third-ranked Tokyo Electron announced the all-stock deal late on Tuesday. On completion, it would be the biggest foreign takeover of a Japanese manufacturer. While board representation is to be split evenly, Applied Materials shareholders will own 68 percent of the new company, keeping them firmly in control.

Analysts were surprised by the move in part because Tokyo Electron has a solid balance sheet and didn't need a deal to survive. That makes the deal stand out against other big inbound transactions, many of which involved a struggling target - such as Citigroup Inc's $16 billion acquisition of broker Nikko Cordial in 2007-08 and Renault SA's $5 billion injection into Nissan Motor Co almost a decade earlier.

Edward Johnson, a partner at law firm Orrick, Herrington & Sutcliffe, said the willingness of a blue-chip Japanese company like Tokyo Electron to cede control to a foreign rival could encourage other Japanese firms to consider similar moves.

"I don't think it's a one-off. I think it has broader implications," said Johnson, whose practice includes advising foreign companies on investments in Japan.

While Japanese companies spent a record $83 billion on overseas acquisitions in 2012, inbound deals totalled just $15 billion. Over the past 10 years, there have been far fewer foreign acquisitions in Japan than anywhere else in Asia. Foreign deals accounted for just 5.85 percent of acquisitions in Japan compared to Asia ex-Japan's 26.48 percent, Datastream data show.

HOLDING OFF

Many international companies have refrained from making major investments in Japan due to a general perception the country is not open to foreign capital and a belief they would have trouble cutting costs.

In a development last year that seemed to confirm those concerns, a state-backed fund emerged to lead a bailout of struggling chipmaker Renesas Electronics Corp, beating off a rival bid by U.S. private equity firm KKR & Co.

Prime Minister Shinzo Abe has made inviting foreign investment one of the components of his strategy to revive the world's third-largest economy, and investment bankers hope the Tokyo Electron deal will provide a spark.

An executive at a European investment bank said his firm was helping foreign clients scout possible targets among Japanese electronics and auto parts makers, although the size of those transactions would be much smaller than the Tokyo Electron deal.

Ken Siegel, managing partner at law firm Morrison & Foerster in Tokyo, said private equity funds continue to seek opportunities in Japan, but it could take time before corporate buyers follow Applied Materials' lead.

"You would expect this would lead to some strategic transactions as well," Siegel said, referring to the Tokyo Electron deal. "This is probably the first one. I don't see a tonne of other strategic inbound deals lined up right this minute."

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