The Longreach Group said on Wednesday it is buying a unit of Hitachi and will help the precision drilling company expand in Asia.
The deal is a rare case of one of Japan’s sprawling conglomerates trusting a private equity firm enough to sell them a subsidiary.
Large global private equity firms such as KKR have opened in Japan in the hopes that they could buy such businesses, which are in many cases inefficient and starved of resources by the respective umbrella company. Many of them trade below book value.
“Japan is the largest restructuring opportunity that our industry is ever likely to contemplate,” said KKR partner Sir Deryck Maughan in 2007. KKR opened an office in Tokyo during 2006.
However, Japanese managers often see themselves as caretakers of companies to pass onto their successors. Many worry that a fund might lay off staff that they are expected to protect or embarrass them by flipping a company and making quick profits. It can take years’ of talks to overcome these fears and agree on a sale.
US private equity firms Silver Lake and KKR tried to buy Hitachi’s hard disk business, but talks broke down. In another instance, KKR offered to invest in Japanese chip maker Renesas Electronics Corp., but again negotiations came to nothing.
Hitachi Chemical sold its housing equipment unit Hitachi Housetec to Japanese private equity firm New Horizon Capital, but it was a small deal.
Often these Japanese subsidiaries own valuable technology but their costs are bloated and the companies are inefficient. Japanese electronics makers are also facing fierce competition from Korean and Taiwanese rivals.
Hitachi Via Mechanics makes micro-drilling machines for printed circuit boards and sells products including spindle-drilling machines, laser drilling machines and pattern edging lithography equipment.
The firm’s precision drilling technology is used to make smart phones.
Many fund managers have retreated from Japan after failing to source enough deals. Private equity deal volume has fallen off in recent years. The value of private equity purchases so far this year has dropped to $1.68 billion, from $11.43 billion at the peak of the private equity boom in 2007.
Longreach said in a statement that it is looking to help Hitachi Via Mechanics grow in Japan, Asia and globally. The deal is expected to close on October 31.