Yokohama Electron (1)
Song Gazuki, chairman of Softbox Group.
He was a legendary figure, not only in Japan but on the global stage as well.
In his younger years, he had made his fortune in software distribution, then gone on to acquire Japan’s largest portal site and a major telecommunications company, pushing the group into breathtaking growth.
But crises came one after another.
First, the property bubble collapsed in 1990, and Japan fell into a long stagnation. Then, in the early 2000s, the dot-com bubble burst and the IT slump began.
Even so, Chairman Song Gazuki regarded crisis as opportunity, and each time, he threw himself into aggressive investment.
Even after the bubble collapsed, Japan was still the world’s second-largest economy, with a population of 120 million.
Most companies were content to coast on the domestic market, but his judgment was different.
Japan’s growth is over. If we want to grow big, we have to go out into the world.
Fortunately, he had an eye for companies that would succeed.
There were investment opportunities scattered all over the world. The only problem was a lack of capital. So he launched the Insight Fund and set out to attract investment from corporations and pension funds alike.
Originally, the Saudi sovereign wealth fund had been expected to come in as a major investor in the Insight Fund. But contrary to expectations, the Saudi fund partnered with Continue Capital instead and shifted its capital into the Rush Fund.
With the Saudi fund out of the picture, the launch scale of the Insight Fund was cut in half from what had been planned.
The real problem came after that.
For reasons I couldn’t explain, every company he wanted to invest in had already been picked off first by the Rush Fund. And the companies he did manage to invest in without competition? Their performance was mediocre at best.
While the Insight Fund’s returns plunged, the Rush Fund went from strength to strength.
It felt as though the Rush Fund had quietly taken all the prize assets he had painstakingly selected and left him with the dregs.
H-how in the world could this happen?
Startup investing always carried risk.
He had failed plenty of times before. But this situation was unlike anything he had ever expected.
If it hadn’t been for Continue Capital, the Saudi sovereign wealth fund would have joined the Insight Fund, and the investments would have succeeded as well.
Then another serious misfortune struck.
He had predicted that the future lay in the cloud.
In the past, cloud computing had simply been a place to store data. But now, the cloud was indispensable infrastructure for corporate activity.
Machine learning, artificial intelligence, big data—everything he had talked about all these years lived in the cloud.
Personalized recommendations, sales-demand forecasting, product search, simplified payments, and more. Without the cloud, companies could no longer function.
So he concentrated his investments on software as a service, or SaaS.
The largest position in the Insight Fund’s portfolio was Rex. He had invested an astounding 25 billion dollars there.
His prediction wasn’t wrong.
As companies rushed to move into the cloud, Rex grew at a staggering pace.
The problem was that after the Blackwood International incident, Snow Crash surged into the market as a major player.
It held an overwhelming advantage in both efficiency and stability, and naturally, the other companies were pushed out of the race.
He poured enormous sums into supporting Rex.
There had even been talks of selling it to SalesPower, the leader in the SaaS space, but Snow Crash was struggling too, and SalesPower was hardly in a position to help.
In the end, the sale fell through, and the company failed to go public as well.
Customers and employees left, losses ballooned like a snowball rolling downhill, and eventually Rex went bankrupt.
It’s all because of Continue Capital!
If Continue Capital hadn’t acquired Snow Crash, Snow Crash would never have dominated the SaaS market so quickly.
In any case, Rex’s collapse dealt a serious blow to Softbox Group as well.
Just last quarter, the group posted a loss of 300 billion yen.
That was the largest among all Japanese companies. Its debt ratio also rose sharply, forcing the group into a position where it had to raise cash in a hurry.
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“So you decided to sell Yokohama Electron.”
At my words, Chairman Yoo Jae-ho nodded.
“There is also the view that its corporate value has reached a peak. Now that semiconductor fab expansion is largely complete, equipment demand is likely to fall for a time.”
Since I showed interest, Chairman Yoo Jae-ho gave me a detailed explanation of Yokohama Electron.
Softbox Group first invested in Yokohama Electron after the global financial crisis.
Back then, even semiconductor companies were collapsing one after another, and existing factories were grinding to a halt. Naturally, there was no reason for equipment to sell.
As rumors spread that the company would go bankrupt, its stock price crashed without mercy. At that point, Chairman Song Gazuki began buying the major shareholder’s stake and steadily accumulating shares.
Everyone called him crazy, but he bet with conviction.
As expected, the internet boom gathered force after the dot-com crash, and the semiconductor market exploded in growth.
He didn’t stop there. He also pushed aggressively into the Chinese market.
“Yokohama Electron has grown rapidly over the past three years. That’s because it climbed aboard China’s semiconductor rise.”
I nodded.
“Looking at that, it’s clear Chairman Song Gazuki has real insight.”
Semiconductors were the rice of advanced industry.
Since every machine powered by electricity contained semiconductors, China had thrown itself into semiconductor self-sufficiency.
Semiconductors weren’t something you could conjure with money alone. But if you poured enough money in, results would eventually follow.
And China certainly wasn’t short on money, only on technology.
As the state was pouring capital into building semiconductor fabs, demand for semiconductor equipment naturally exploded.
To keep up with that surging demand, Yokohama Electron built an overseas plant in Shanghai, China.
Thanks to that, Yokohama Electron’s market cap jumped from 5 trillion yen to 10 trillion yen. China accounted for an astonishing 52 percent of total revenue, and the production scale of the Yokohama and Shanghai plants was nearly neck and neck.
“As I mentioned, Yokohama Electron is the third-largest semiconductor equipment company. Number one is ATAM in the United States, and number two is ESML in the Netherlands. Japanese companies tend to shorten every word, so people usually call it Yoko-Elec.”
When people thought of semiconductor equipment companies, the name most familiar to the public was ESML in the Netherlands.
That company made EUV machines, each costing two or three hundred million dollars.
But U.S. sanctions had blocked those machines from being exported to China.
By contrast, Yokohama Electron produced a wide range of machines and equipment used across the entire semiconductor process—oxidation, photolithography, etching, deposition, and more.
“It wouldn’t be an exaggeration to say that every semiconductor fab in the world uses Yokohama Electron equipment. Yuseong Electronics buys trillions of won’ worth every year as well.”
“I’ve heard the company culture is quite closed off.”
“Yes. It’s famous for extreme security. They don’t even file patents out of concern that their technology will be exposed, and the company information they disclose to the stock exchange is kept to a bare minimum.”
“Who’s likely to acquire Yokohama Electron?”
Its current market cap was about 10 trillion yen.
Softbox Group held 36 percent of that. By simple calculation, that was 3.6 trillion yen, and once a management-control premium was added, the figure would likely rise above 4 trillion.
“China would probably want it most.”
China was pouring money into its semiconductor rise. Yokohama Electron’s biggest customer was also China’s CMIC.
But...
“Chinese companies probably won’t be an option.”
Mergers and acquisitions involving semiconductor-related companies had to pass government review in each country.
The same went for Japan and the United States. No country would approve an acquisition or merger with China. So Chinese companies were out.
“Other semiconductor equipment companies are also impossible. There’s the antitrust issue.”
The companies most likely to know the business well and operate it best after an acquisition were, naturally, those in the same industry.
That was why NS bought game companies, and Disney bought up film companies wherever it could.
But with semiconductor companies, antitrust concerns made mergers and acquisitions difficult.
If you excluded Chinese companies and existing semiconductor equipment makers, there were only a handful of potential buyers left for Yokohama Electron.
I thought it over carefully.
The situation now was very different from the first round.
So many things had changed because of me.
Under the original course of events, Yuseong Electronics and Snow Crash would never have been subjected to this level of pressure, and Yokohama Electron would never have come onto the market this quickly.
Right now, the whole world was waging a semiconductor war.
Yuseong Electronics and PSMC were locked in competition over 7-nanometer and below foundry technology, while Antel had announced, with the backing of the U.S. government, that it would enter the foundry market.
And then there was China’s semiconductor rise.
If Yokohama Electron were to appear on the market in the middle of all that, it would shake the delicate balance.
“Who’s the CEO now?”
“Nakazato Yoshiharu.”
“And in China?”
“Rupert Liu.”
“Is he Chinese?”
“Chinese-American. He’s been running Yoko-Elec China ever since the joint venture was first established.”
I spent a moment running through what would happen next in my head.
At this point, there probably wasn’t anyone who knew as much about Yokohama Electron’s future as I did. In the years ahead, this company would become indispensable to the semiconductor market, and especially to China’s semiconductor rise.
There was a proverb in Japan: if you want to swallow poison, you may as well take the bowl with it.
Since things had come to this, wouldn’t it be better to make the board even bigger?
“How about we buy this company ourselves?”
Chairman Yoo Jae-ho looked at me in surprise.
“You mean to acquire Yokohama Electron?”
“Yes.”
He said nothing for a while.
He looked as though he had fallen into deep thought. I sipped my cold coffee and waited until he finished thinking.
After a long silence, Chairman Yoo Jae-ho finally spoke.
“An acquisition of Yokohama Electron would carry considerable risk. Just because it’s doing well now doesn’t mean it will keep doing well forever.”
The semiconductor market moved in cycles of boom and bust. Naturally, semiconductor equipment followed the same pattern.
It was making enormous profits now by riding China’s semiconductor rise, but if the cycle turned downward even a little in the future, revenue and profit would fall off a cliff.
“Besides, at the moment, we don’t have the breathing room to go after Yokohama Electron.”
Yuseong Electronics was famous for sitting on a mountain of cash.
There had been a time when its retained earnings exceeded 150 trillion won. But after recent investments in semiconductor design, fab expansion, and data center facilities, that had fallen to 40 trillion won.
More money would have to keep going out the door, so taking on another project now would naturally be a burden.
“Don’t worry about that. We’ll form a consortium with Continue Capital, Yuseong Electronics, and the Saudi sovereign wealth fund. We’ll raise the money. Yuseong Electronics only needs to contribute a portion and help with the acquisition.”
“And what would that portion be?”
“How does 10 percent sound? That should also let us avoid any antitrust problems.”
Chairman Yoo Jae-ho looked at my expression and said,
“You’re serious.”
“Yes.”
“Does this company happen to be the nail on the horseshoe?”
In truth, from Yuseong Electronics’ perspective, there was no real reason to acquire Yokohama Electron.
Yuseong Electronics was the undisputed heavyweight in semiconductor production. No matter who bought it, the transaction itself would likely pose no problem.
But that didn’t mean he could dismiss my suggestion outright.
Dongwoo Precision, NP Semi, RDQuanet, and ADM as well.
Thanks to following my advice on acquisitions and investments, they had made enormous profits.
I spoke with confidence.
“Trust me. If we move on this acquisition, it will definitely benefit Yuseong Electronics.”