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July 28, 2004 

Tech Elect

 Q&A: CPCP Founder David Baeckelandt on Japanese Disclosure, Due Diligence 7/27/2004
The mission of Going Global is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO – ePrairie international columnist Michael Muth continues his Q&A with David Baeckelandt, the founder of Chicago Pacific Capital Partners (CPCP) and the president of Chicago Pacific Capital Advisors (CPCA), by delving into disclosure, due diligence and M&A activity in Japan.

Michael Muth: Tell us about Japanese disclosure.
David Baeckelandt: The disclosure of a Japanese prospectus is actually more comprehensive than U.S. prospectuses but in different ways that we in the U.S. might find odd.

For example, an IPO will list not only the names of every investor in the private company but also their address. You would not find this degree of detail in a U.S. prospectus.

While some U.S. investors into Japanese equities might disagree about the disclosure issue, it is my sense that if you read and speak the language, the degree of disclosure is at least as high as in the U.S. and I would argue in many ways more honest.

MM commentary: After working for a short while for Deutsche Bank in Germany, my much more limited personal impression is that though we obviously have problems (read: WorldCom, Enron and Andersen), the U.S. has the most transparent financial structure in the world.

That combined with the most open media environment and the most widely held stock ownership in the world keeps U.S. firms on their toes more than any other country. This also reinforces the advantage of knowing the local language.

MM: How about due diligence in Japan?
DB: Due diligence is the responsibility of the investor. Caveat emptor is an ageless and borderless truism.

MM commentary: While I believe this is true, due diligence is more difficult and expensive to do internationally. The risks can be greater if you don’t have access to information you’re usually accustomed to getting.

MM: Japan is viewed as a stagnant/bad/debt/deflated market. Why do you not view the country this way?
DB: Because that view is simplistic. It is the same thing as saying that Chicago is the capital of the rustbelt (a view that many people outside the Midwest still consider a given).

There is a tendency for those unfamiliar with the ins and outs of Japan to concentrate on a feature in Japan. In this case, it would be the bad debt of Japanese banks. In an adult version of the game of telephone relay perceptions, it’s really just a step above hearsay.

One of my good friends (and a fellow investor in several ventures) is actually in the process of publishing a book about the scores of western entrepreneurs who are succeeding in Japan. I personally have a score or more of friends who are successful entrepreneurs in Japan.

There are also a slew of interesting small companies and technologies racing ahead in Japan that have yet to make an appearance in the U.S. press.

For example, a friend of mine who writes for the Wall Street Journal in Tokyo attempted to write a story about a young entrepreneur in Japan who is a household Japanese name (I was a private equity investor in the company). The story was spiked by a New York editor because she had never heard of the fellow.

That under-40 entrepreneur is now in the process of making a very large (greater than $100 million) acquisition in the U.S.

MM commentary: Like Terry Howerton at FastRoot finding great development partners in the Ukraine and Doug Cogswell at ADVIZOR Solutions finding great revenue potential in New Zealand, this is another example of not falling for the negative generalities and digging deeper to find real opportunities.

Each of these examples indicates that if you go beyond the headlines & look under the surface, there is opportunity where we are not led to believe it exists.

MM: True or false: When faced with a new foreign competitor, Japanese firms will often use any tactic available – from severe price cutting to pressuring clients and customers – to keep the foreign competitor from succeeding.
DB: Implicit in your question is one of the unpleasant stereotypes of Japanese competition that was prevalent in the 1980s. My position is that this isn’t a characteristic of Japanese firms.

While there are examples of that behavior among Japanese firms (just as there is among U.S. firms), in my 22 years of living in, working with and among Japanese firms, I would characterize my business contacts in Japan as being highly ethical and honest to a fault.

Naturally, there are always some people who cut corners. Sharp business practices occur in all countries. I don’t see price cutting and high levels of service as being unfair competition. Pure and simple, that is competition. Americans are in no position to lecture the world on ethics.

MM commentary: Implicit in my question is also the issue of fairness, which is a somewhat subjective term. Do Japanese companies compete fairly?

In the 1980s when Japan had very clear competitive advantages, the country took advantage of them when they were in positions of power in the marketplace. Now that they’re no longer in the same position of power, they can’t abuse it. With their building of manufacturing facilities in China, they could return to prominence.

It’s also a question of how much government and other international organizations 20 years ago (as well as the WTO now) are willing to defend free and fair trade versus “coerced” trade.

MM: Is M&A viable in Japan? Stock market-based takeovers of listed firms via tender offer remain rare in Japan. Of the roughly 400 foreign investment M&A transactions in Japan since 1991 (including divestitures of overseas firms held by Japanese), only five cases involved tender offers for companies listed in Japan.
DB: Firms like Ripplewood, Ceberus and WL Ross & Co. have all demonstrated that M&A is not only possible but very profitable.

MM: Protection of intellectual property rights can be time consuming and costly. While a U.S. patent or trademark attorney can provide informal advice, is it often necessary to hire a Japanese lawyer or patent practitioner (a “benrishi”) who’s registered in Japan to prosecute the patent or trademark application?
DB: Absolutely do you want to protect your trademarks and IP before even setting foot in Japan.

MM: Is it worthwhile to participate in trade shows in Japan?
DB: Trade shows in Japan are definitely worthwhile. Make sure you do it right and spend the money. All the trade shows listed are heavily attended. Make sure your trademarks and IP are recognized and registered in Japan before going over.

MM: How much has Japan and China changed since you’ve left?
DB: Tokyo and Shanghai are really proxies for the countries. Both places have continued to prosper. My sense, though, is that perceptions of both places here in the U.S. have evolved much more.

When I left Tokyo in May 2001, the perception here was the place was an economic basket case (even though any visitor at the time could see first hand the underlying vibrancy). Shanghai is the equal of any first-world financial city (only more exciting).

That said, it felt unsustainable the last time I was there in 2003 and that perception could be self-fulfilling.

MM commentary: Baeckelandt mirrors Doug Cogswell here in that focusing on major metro areas gives the flavor of the rest of the country.

MM: How do you keep up?
DB: I travel to Tokyo three or four times a year and Shanghai, Honolulu and Vancouver at least once a year. I speak with colleagues, co-investors and partners in all those cities several times a week and sometimes daily. I also have a steady stream of visitors from a variety of points west of California.

MM commentary: The important lesson here is that regardless of how wide your network is, you need to invest the time and effort to keep up with it. While it’s more expensive internationally, with declining telecom prices, it’s far less costly than it used to be.

Tune in next Tuesday for part three of this Q&A where we will explore
Asian mentoring and the importance of being fluent in several languages.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muth’s full biography.

Previous Columns:
Q&A: Chicago Pacific Capital Founder David Baeckelandt on Overseas Funding (7/20/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on the Art of Partnering (7/13/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on BP, AstraZeneca Wins (7/6/2004)
Q&A: ADVIZOR Solutions CEO Doug Cogswell on Global Software (6/29/2004)
Q&A: CEO Terry Howerton on Why Chicago, Ukraine Made FastRoot (6/22/2004)
Q&A: FastRoot CEO Terry Howerton on Blended Chicago Approach (6/15/2004)

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