On October 24, Funai Electric Co., Ltd., a traditional electronics appliance manufacturer, received approval from the Tokyo District Court to begin bankruptcy proceedings. The company established a significant presence as an OEM (Original Equipment Manufacturer) in the 1990s and 2000s. However, increasing competition from Chinese manufacturers in the LCD TV (liquid crystal display television) market, combined with shifting consumer demand for AV (audio and visual) equipment, led to a sharp decline in sales—from over 350 billion yen in fiscal 2004 to approximately 130 billion yen in fiscal 2017. To break the slump in business, the company began exclusive supply of Funai-branded LCD televisions to Yamada Denki Co., Ltd. in the same year. Despite the strategic efforts, performance failed to recover, and sales dropped further to 69.6 billion yen by fiscal 2021.

Funai Electric formed a corporate partnership with Yamada Denki in 2017 as a solution to the reconstruction of its business. Coincidentally, that same year, Funai’s founder passed away. The founding family’s heirs inherited his corporate shares and entrusted business management to Mr. Tomokazu Ueda of Shuwa System Holdings Co., Ltd. Later, in 2021, the Shuwa Group acquired management rights through a tender offer bid (TOB), leading to Funai Electric being delisted in August of that year. Then, in March 2023, the capital structure was reorganized, and Funai Electric Co., Ltd. was relaunched as an operating company under Funai Electric Holdings Co., Ltd.

After transitioning to a new holding company structure, Funai Electric Holding acquired the hair removal salon chain Musee Platinum Co., Ltd., using Funai Electric's assets as collateral. However, within a year, Musee was transferred to another finance-related company. Here lies the problem: During the acquisition process, it was discovered that Funai Electric had provided a joint guarantee for 2.2 billion yen in unpaid advertising fees that Musee owed. This revelation triggered repeated changes in Funai’s representative directors. This past September, Mr. Tomokazu Ueda resigned as President and CEO, ending in the company's bankruptcy. Furthermore, it was disclosed that Musee had provided off-balance-sheet guarantees for bank loans. It is reported over 30 billion yen in cash and deposits had flowed out from Funai Electric with other loans extended to affiliated companies.

The true details surrounding Musee-related failures remain unclear. Nevertheless, there is no argument that Funai Electric's credibility and assets were exploited in the process. Recently, the M&A market for small and medium-sized enterprises (SMEs) has been booming, driven by the social issue of difficulties in finding business successors. At the same time, instances of M&A transactions aimed primarily at seizing the assets of acquired companies are starting to surface. In response, the Small and Medium Enterprise Agency has begun taking action, introducing the “Guideline on M&A for SMEs” and establishing a registration system for organizations that support M&A activities. Besides, associations of M&A advisory firms and brokers have started implementing measures to preempt malicious M&A practices. We still recall the time around the bursting of the information technology bubble, when funds from market manipulators and other dubious sources flowed into capital markets, creating a social problem by inappropriate M&A targeting vulnerable newly listed companies in speculative money games. That said, there is no doubt that SME-focused M&A serves effectively to maintain local employment and revitalize regional industries. It is hoped that public and private sectors will take swift and robust measures to prevent the entry of predatory buyers.

This Week’s Focus, 10.27 – 10.31

Takashi Mizukoshi, the President