A shrewd battle of wit and cunning is going on over the sale of Sanyo Electric Co.'s semiconductor subsidiary.

Negotiations with the Investment Fund Alliance led by the LongReach Group, which was expected to gain priority negotiation rights, suddenly came to a halt, Advantage Partners, which was supposed to have lost out to the Alliance in the second bidding, came into the limelight.

Appearing on and off behind the turbulent struggle is Sumitomo-Mitsui Bank's perplexity over Sanyo Electric's revival plan.

"I've never seen such a late showing in janken (children's game of "rock-paper-scissors"). It's like cheating," an executive of a foreign financial institution that took part in the deal said when information that "Advantage has come up again" reached him on Sept. 7.

Inscrutable price

It seems certain that this deal is following a procedure quite different from that of ordinary M&As. Detailing the process will show how strange the whole affair is.

Surviving the initial bidding in which the highest offer was said to have reached 200 billion yen were four groups: (1) LongReach (Japan, Hong Kong), CCMP Capital Asia (Singapore), and MKS Partners (Japan); (2) Advantage (Japan), Bain Capital (U.S.), Japan Industrial Partners (Japan); (3) Cerberus Capital Management (U.S.); and (4) Black Stone (U.S.), Vestar Capital Partners (U.S.) .

Backed by surplus funds, investment fund alliances engaged in an aerial dogfight to cause bidding prices to skyrocket, and manufacturers such as Rohm and Fujitsu dropped out in no time.

But things changed altogether at the second bidding at the end of August. As the sub-prime loan issue came up in the United States, investment funds suddenly became extremely cautious. According to sources related to the deal, the average offering price by the four groups plunged to the 70 billion yen level.

Coming up with an exceptional price of over 100 billion yen was the LongReach Alliance. It was assumed, therefore, that the priority negotiating rights that were scheduled to be confirmed on Sept. 14 would be granted to Alliance, whose price overwhelmed the other bidding groups.

At the beginning of the week of Sept. 3, the decision was suddenly postponed until the end of the month, and on Sept. 7, the name Advantage came to the fore. "We want to raise the bidding price to 130 billion yen," they said.

Allowing the tricky "late dealing in janken" by Advantage, which had lost out to LongReach with the bidding price of 60 billion yen or so, would make the whole bidding meaningless. But even more mysterious is the fact that Advantage, which attended the second bidding after going through a strict asset evaluation, raised its bidding price to about double the amount.

An executive of a semiconductor maker said the following about Sanyo Electric's semiconductor subsidiary: "Considering technological ability, customer classes and production facilities, the subsidiary is worth about 40 billion yen. But it would cost about 50 billion to 60 billion yen to take care of a bad stock, excess personnel and old ramshackle facilities. It's hard to find any reason to pay money for it."

From the makers' point of view, even 60 billion yen would be "too much." But looking at it from another angle, the outrageous amount of over 100 billion yen has a different meaning. For example, how would it look from the standpoints of Sumitomo-Mitsui Bank, U.S. Goldman Sachs group, and Daiwa Securities SMBC Principal Investments, all of which have invested in Sanyo Electric?

Guesses spreading over "bank's view"

The book value of Sanyo Semiconductor is said to be about 100 billion yen. If its selling price turns out to be far below the book value, the business world is likely to assume that Sanyo Electric over-evaluated its semiconductor subsidiary's real worth.

The semiconductor business was the biggest factor that led Sanyo Electric into dismal business performance. As a natural result, the attitude of the Financial Services Agency toward Sumitomo-Mitsui Bank, Sanyo's main bank, could turn rigid.

A fund-related agent said, "The Financial Services Agency may begin to have doubts about the substance of Sanyo Electric's reconstruction plan and demand Sumitomo-Mitsui Bank lower Sanyo's borrower classification." If that becomes a reality, Sanyo Electric's creditworthiness would deteriorate further.

Moreover, buyers would take advantage of its weakness when it comes to selling other businesses. If investment funds at home and abroad, having difficulties in procuring funds due to the sub-prime shock, should begin to shun the Sanyo Electric-related M&A issues, the expectations for investment recovery by Goldman Sachs and Daiwa Securities SMBC with funds invested in Sanyo Electric would be largely betrayed.

In other words, from the standpoint of the three financial institutions that made the investment, the supreme requirement would be to sell the semiconductor company at or over book value at more than 100 billion yen no matter how much the real corporate value may be.

These circumstances are creating conjecture among investment fund businesses.

It is a view that "LongReach may have agreed to bid over 100 billion yen at the request of Sumitomo-Mitsui Bank." LongReach's representative directors Masamichi Yoshizawa and Yasuyuki Miyoshi both are formerly from Sumitomo Bank. Although LongReach has no capital relations with Sumitomo-Mitsui Bank, personnel relations do exist.

Phoenix Capital played the leading role at the time of the first capital increase by Mitsubishi Motors Corp. and was rumored to be "Tokyo Mitsubishi Bank's detached force." Similarly, LongReach challenged the bidding, reflecting the bank's intentions.

But its partners CCMP and MKS came to have doubts at the last minute over what they considered loose asset evaluation and the deal came to a deadlock immediately before gaining priority negotiating rights--.

This is the story of the slapstick play, according to an individual connected with an investment fund.

The true intentions of Advantage, which suddenly emerged to fill LongReach's vacancy, are not certain at this stage.

The only sure thing is that the reconstruction of the semiconductor subsidiary won't be easy after suffering damage from two earthquakes, losing large customers due to the parent company's sluggish business performance and having had many of its core engineers picked out by rival companies.

If Advantage really wants to buy the subsidiary, it will have to explain to its own investors the reason for paying the enormous amount of 130 billion yen to take over the firm with annual sales of 180 billion yen and operating profit of 4 billion yen (fiscal year 2006), plus all the problems. Neither LongReach nor Advantage would comment on the negotiations.

Sanyo Electric needs to sell the semiconductor subsidiary no matter what. If this deal suffers a setback, the sale of its cell phone business, which is said to be "under negotiation with Sharp and Kyocera," might come to a halt in a chain reaction.

Sanyo Electric had redeemed 80 billion yen of corporate bonds by the end of August, and without the capital gains made through the sale of the semiconductor subsidiary, it is highly likely to fall into a major deficit in the March 2008 term.

The three financial firms that wiped the founder family out of Sanyo Electric have finally come to make the sale of the business itself the centerpiece of their reconstruction scheme.

But now that the M&A bubbles created by surplus funds have disappeared, selling businesses at high prices is no easy task. While dissolution of the business is difficult, not to speak of reformation, the reconstruction of Sanyo Electric will come to a crucial point toward the end of this fiscal year.

(Yasuyuki Onishi = Senior Writer, Tsuyoshi Otake, Satoshi Ebitani = Staff Writers, Nikkei Business)