Pentax Corp. is considering an improved takeover bid from Hoya Corp. in a gamble that could risk ending the deal if the profitable high-tech glass maker withdraws.
Hoya Chief Executive Hiroshi Suzuki…
Pentax Corp. is considering an improved takeover bid from Hoya Corp. in a gamble that could risk ending the deal if the profitable high-tech glass maker withdraws. Hoya Chief Executive Hiroshi Suzuki, known to global investors for his promise to implement Western-style corporate governance, is waiting to meet with Pentax“s new management, which in the week ending 15 April 2007 rejected without clear explanation a planned share-swap merger the two firms had agreed in December 2006. “You“re playing a game of chicken with Hoya at this point, because they“re trying to work out how essential Pentax is to their business”, a Tokyo-based fund manager said. “If Suzuki decides this is too much of a hassle, he“ll go somewhere else”. Since investors have been buying Pentax on hopes of a merger with Hoya, Pentax“s share price could fall if the firm decides to remain independent, Nomura Securities analyst Tetsuya Wadaki said. Pentax stock has risen about 20% since 20 December 2006, the day before the companies announced the merger plan. Pentax“s new president Takashi Watanuki is facing hard questions from top investors such as Sparx Asset Management and Fidelity Investments on how he aims to increase shareholder returns. “If Pentax management is to tear up the merger plan with Hoya, they have the obligation to present to investors a plan that is worth as much or more in terms of boosting corporate value as speedily as Hoya“s plan”, Sparx, which owns a leading 23.98% stake in Pentax, said in statement on 16 April 2007. The Hoya-Pentax deal has marked the beginning of a new era in corporate Japan, where firms have traditionally been averse to mergers and acquisitions and free from shareholder activism. The improved cash deal proposed by Hoya in April 2007 indeed came as a result of pressure from Pentax investors who felt the swap ratio undervalued the firm. Shares of Pentax closed down 1.6% at JPY 760 on 16 April 2007, while Hoya“s new cash offer values it at JPY 770 a share, up from an initial price of about JPY 650 per share. Hoya stock rose 0.8% to JPY 3,920. The shares have declined 20% over the past three months. Other analysts say abandoning the Pentax deal could be positive for Hoya shares and help increase its valuation, since the market has expected that the merger would put pressure on Hoya“s overall profit margins in the short term. Even without Pentax, Hoya could seek new ways to spend its large cash reserves, which stood at JPY 106 billion at the end of 2007, analysts said. But Hoya is also under pressure to expand into new businesses as profit margins were narrowed in the recent quarter by higher costs to boost production and strong pricing competition on photomasks used to make LCDs. Pentax director Fumio Urano, who was forced to resign as president in the week ending 15 April 2007 for having backed the initial merger plan, said some members of the board had been against an alliance with Hoya because its corporate governance was too strict. Shares in Tokyo-based Hoya are half-owned by foreigners, and five of the eight board seats are occupied by outside directors. In contrast, seven out of eight Pentax board members began their long careers at the company. Since 48-year-old Mr. Suzuki became chief executive in 2000, Hoya has grown into one of Japan“s most profitable technology firms. Hoya“s 27.5% profit margin in the September-December 2006 quarter compares with 5.5% at Pentax, and market leader Canon Inc.“s 16.1 %. While Pentax“s share price has multiplied by almost 3.5 times in the past five years, and Hoya has gained 80% in the same time period, Pentax“s market value of USD 829 million is far below Hoya“s USD 14.2 billion. The tender offer scheme gives Pentax shareholders a chance to negotiate with Hoya on a higher price, while it also could invite other players to the bid who had been looking at Pentax“s assets. While Pentax“s global market share in digital cameras stood at 2.3% in 2006, engineers at rival firms say that Pentax“s lens technology is among the best available, built on its history as a pioneer in professional film cameras. Also, in line with the trend of alliances between consumer electronics makers and traditional camera makers, Pentax has been developing digital single-lens reflex (DSLR) cameras with South Korea“s Samsung Electronics since 2005. Some analysts have speculated Hoya may sell Pentax“s digital camera business, mirroring the sale of Konica Minolta Holdings Inc.“s camera assets to Sony Corp. Tokyo-based Pentax is also a major participant in other profitable industries, such as medical equipment and optical lenses. Pentax is the world“s third-largest maker of small cameras used to examine internal organs called endoscopes, and also makes surgical tools and new ceramics like artificial bone. In December 2006, Mr. Suzuki has said he was particularly attracted to Pentax“s R&D pipeline, stressing his hopes for mid-term growth prospects rather than short-term returns.