Japan’s “sogo sosha” – or commercial companies that do business in many fields, possess a distinct culture, a period of fierce competition and an obsession with being compared to competitors. One of them is an endangered bluefin tuna fishing company. Meanwhile, a company has just installed swings in the garden to help executives … relax to think; Others have faced one of the worst trade scandals in history. The other company placed Botticelli’s La Bella Simonetta painting outside the conference room.
Strange and different, but this week, the five biggest companies – Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo, all have one thing in common: “get” Warren Buffett as a shareholder. .
The world’s most famous investors’ investments in these companies have questioned the exact nature of their business models – the “crossover” between private equity funds, profit margins, venture capitalization and asset management.
As investors in Tokyo scouted for the $ 6 billion bet, some wondered if billionaire Warren Buffett had seen any positives in a market in which he so far is heavily involved. limited or not. “Berkshire Hathaway is really like a trading house,” said Tatsuya Kikkawa, an analyst at JPMorgan.
Meanwhile, others suspect that Warren Buffett may regret his choice and have poured money into a group of companies where he has no business and that they have weaknesses. which he cannot point out.
Pillar of the Japanese economy
Japan’s trading companies – partly venture capital firms, are at the forefront of the country’s globalization trend. Their products span the world, from skateboards, silk towels, banana cakes to super hydro projects, chemical plants and oil and gas exploration.
Through their “coverage” in all sectors – across thousands of subsidiaries and branches, as well as their choice of countries to operate, these businesses are the backbone of the economy. Japan. Some of them – especially Mitsubishi and Mitsui, have been active in many different fields since the 19th century.
Their role – from securing a commodity to a resource-poor country to project financing, venture capital, has grown quite strong over a long period of time. However, there is one salient feature that has existed for a long time: they are companies that do not stop trading.
Over the past five years, these five companies have spent more than $ 50 billion on cross-border deals, according to Dealogic. For the large financial sector companies, both in Japan and other countries, they are important customers for consecutive business deals and need constant attention.
Not all of those deals were successful, though, and some commodity deals led them to cut back on massive assets. But it is clear that they differ in their approach from the rest of Japanese firms.
Ken Lebrun, a board member at the law firm Davis Polk, said: “It’s their job to make deals. They always adjust their portfolios and can do it without being dependent on them. Selling a business isn’t about failure, it’s only part of what they do. ”
For fund managers who have spent years advising clients that Japanese companies should be reassessed at a higher level, Warren Buffett’s move has helped them “vindicate.” The country’s stock market – with about half of all listed companies trading below their book value, has for many years been regarded by brokers as a “paradise” for value investors.
However, there are other opinions – including those who work at these commercial companies, the billionaire’s bet was a big surprise.
Based on some metrics, this is a very attractive deal. With the exception of Itochu, four companies that Warren Buffett invests in are trading below their book values after a strong sell-off when the pandemic peaked. And despite the disruption caused by Covid-19, both Mitsubishi and Sumitomo forecast dividend payouts to remain high and four out of five are expected to remain profitable.
John Vail, chief strategist at Nikko Asset Management, said: “Warren Buffett’s choice of these companies shows his confidence in their management abilities and business acumen.”
Warren Buffett has access to a wide range of quality assets
In addition to pricing and betting on a rebound in global commodity prices, Berkshire’s investment is a gamble, analysts say. Warren Buffett is betting that being a shareholder of these five businesses will give Berkshire access to a range of quality assets these corporations have acquired – sometimes at the highest prices. It also incorporates Berkshire’s own diversified portfolio that has recently expanded into the energy sector.
Instead of pouring money into the profitable businesses of these conglomerates, which generate a fifth of all commodity revenue, investing in this sector gives Berkshire more options for other types of assets. each other they own.
Itochu is the most active in expanding non-resource businesses – food and apparel, for example. They own Dole Foods and Asian fresh produce businesses, while Marubeni has recently focused on selling auto parts in the US.
Mitsui’s bet on the healthcare industry has been made possible through investments in Malaysia’s IHH Healthcare and Singapore’s DaVita Care, a subsidiary of Berkshire-backed DaVita dialysis clinic operator. America.
Many of these assets have some “crossover” points and opportunities combined with Berkshire’s broad portfolio, from Apple, auto insurer Geico, producer Occidental Petroleum, producer Exporting Kraft Heinz foods to Dairy Queen ice cream chains.
Kikkawa from JPMorgan said investing in five big companies is a smart move, consistent with the nature of Japanese corporations, although they have different potentials, but fierce competition when pursuing trade similar service. When each company says it has no prior contact with Berkshire, top executives will rush to build relationships with the billionaire’s corporation and compete to impress by selling them. export investment cooperation.
Meanwhile, Jeremy White – the executive board of the law firm Baker McKenzie, who has worked with these companies, said that while billionaire Buffett’s latest investment does not seem to have the inherent consistency about By backing simple business models, Japanese conglomerates attracted Berkshire’s attention thanks to their numerous business deals.
However, former directors of these companies say the toughest challenge will be to gain potential collaborations between them and with other areas of Berkshire’s portfolio. The hindering factor here is the rigid corporate culture, conservative management and the complex political relationship between them and the thousands of operating subsidiaries.
A former Mitsubishi executive said these companies are being equipped with ample resources, intelligence and talent to create the value of investments. However, CEOs need to make use of those intangible assets more efficiently, likely to get positive pressure from Berkshire.
Jason Ollison, president of Asialantic Global Advisors and former senior director of Sumitomo, said its corporate cultures need to drastically change to meet promises of operating as merged corporations. . “The Warren Buffett mantra is that the companies he invests in must be simple, transparent and efficient, while these five businesses will have a lot of challenges operating that way,” he said. ”
Consult the Financial Times