Extending a two-year shopping binge that has already made it one of the most influential companies in the computer industry, Softbank Corp. of Japan said Thursday that it has agreed to acquire an 80% stake in Fountain Valley-based computer memory giant Kingston Technology Corp. for $1.5 billion.
The deal thrusts Softbank and its maverick chairman, Masayoshi Son, into a volatile business that appears to have little relationship to its core operations, which include the Ziff-Davis computer publishing empire, the Comdex trade show business and Japan's dominant software distribution organization.
But executives at the two companies said the combination would enable Kingston to build new markets in Japan for its computer memory boards and other products while preserving the business practices that have made it one of Southern California's great high-tech successes.
Under the terms of the deal, Kingston founders John Tu and David Sun would continue to run the company, "retaining all of its current management, its current personnel and its operating philosophies," according to a Softbank news release.
The two Chinese immigrants started Kingston in 1987 and built it into a $1.5-billion powerhouse while garnering a reputation for going to great lengths to take care of their employees.
Softbank, which Son founded in 1981 with $1 million he made selling a pocket translator he invented at Sharp Corp., made its first big splash in the U.S. computer industry last year when it acquired the Comdex trade show business for $800 million. It quickly followed up with the February 1996 acquisition of the Ziff-Davis publishing operations--which include PC Magazine, Computer Shopper and PC Week--for a stunning $2.1 billion.
The company has also made dozens of investments in Internet software companies, including the search engine firm Yahoo and the electronic payment pioneer Cybercash, with the aim of becoming a comprehensive source for the marketing and distribution of computer products and information. Son, whose Korean heritage and business style are unheard of among the Japanese business elite, is often called Japan's Bill Gates.
But all that buying, and the borrowing that has gone along with it, has led to concern that Softbank is dangerously over-extended. The company already sports $2.4 billion in debt and will borrow an additional $750 million and issue $475 million in stock to pay for Kingston.
The Nihon Keizai Shimbun, Japan's leading financial daily newspaper, ran an article in today's editions concluding that Son's seemingly reckless buying spree is based on a carefully considered strategy. But the newspaper questioned whether the Kingston purchase would push the debt-laden Softbank into a precarious position if market conditions change.
Son's gambit is possible in large part because Japanese interest rates are at record lows, whereas stock prices are relatively high. He has used low-interest loans to buy profitable U.S. companies that have a technological jump on Japan but are relatively inexpensive because of the strong yen.
Quinn Riordan, an analyst at BZW Securities in Tokyo, said Son has been "very savvy" about the way he has issued his debt.
"He's got long-term fixed debt and low rates, so he's a little bit protected against a rise in interest rates, which is usually the big risk," Riordan said.
"In essence, you can buy a revenue stream in America for 20 times earnings, which is about what they paid this time, and the Japanese market will pay you 50 times," Riordan said. "It makes a lot of sense."
Softbank's shares rose 4.3% Thursday in Tokyo on word that the company would make an announcement, but fell this morning as traders digested the news.
Ron Fisher, vice chairman of Softbank's U.S. holding company, brushed aside concerns about the company's debt level.
"Despite our aggressiveness in acquisitions, we manage our company conservatively on a fiscal basis," Fisher said. "Softbank's companies have very strong cash flow, which allows us to expand our business as rapidly as we have."
He also pointed out that Kingston is virtually debt-free because the company's founders didn't rely on venture capital, never sold any stock in the company and financed its expansion by plowing profits back into the company.
Analysts also questioned the strategic fit of the Kingston acquisition. "It does seem like this is a step outside their core competency," said Ron Bohn, an analyst at Dataquest in San Jose. "With the pricing in the [memory] market at this time, does Softbank know what they're getting into?"
Fisher dismissed these concerns as well, noting that Kingston's profit margins are healthy and that the deal came together because both companies saw an opportunity to take Kingston's success and try to duplicate it in Asia.