Panasonic defends $ 7 billion deal with Blue Yonder after pricing questions

Panasonic has a checkered history of acquisitions, but the Japanese conglomerate insists its $ 7.1 billion purchase of Blue Yonder is worth the hefty price tag because it will help address its biggest weakness in capacity. software.

The sense of crisis behind the Panasonic deal is pervasive in Japanese companies, which once thrived in the era of consumer electronics. But they have struggled as global demand shifted to software and with the creation of huge tech companies like Apple and Amazon.

In March, Hitachi agreed to buy GlobalLogic, a Silicon Valley software engineering company, for $ 9.5 billion.

“As everything goes digital, it becomes more and more difficult to differentiate by hardware,” said Yasuyuki Higuchi, a Panasonic executive who runs its connected solutions business, in an interview. “Of course we have a real sense of crisis and we need software. ”

The former chief executive of the Japanese company Microsoft oversaw the talks with acquire Blue Yonder and has served on the board of directors of the US supply chain software company since Panasonic acquired a 20 percent stake last year.

After the deal was announced on April 23, shares of Tesla’s battery supplier fell 14%. Investors backed down from the high price and wondered if the management of the Japanese group would be able to handle such a large acquisition in a different industry.

Panasonic struggled with its two big acquisitions: the 1990 purchase of MCA, then owner of Universal Pictures, for $ 6.6 billion and the 800 billion yen buyout of its small rival Sanyo Electric and another subsidiary in 2011.

Analysts have also questioned the benefits of more recent deals, including its $ 1.6 billion acquisition in 2015 of Hussmann, a US manufacturer of refrigerated display cases.

“We believe Panasonic has a weak track record, especially when it comes to large transactions,” Jefferies analyst Atul Goyal said in a recent report.

Higuchi argues that the Blue Yonder deal breaks with the past as it is an investment in a software company with predictable and stable revenues. The US supply chain specialist, which serves 3,000 companies including Coca-Cola and Walmart, generated $ 1 billion in sales last year, 67% of which was recurring revenue.

“With such a high recurring ratio, their revenue is primarily defined as a utility,” Higuchi said. “We also managed to keep the leadership, so the success rate is very high. ”

Still, analysts wonder what the two companies can do better with full ownership of Panasonic that the Japanese company could not do with a 20 percent stake.

The value of Blue Yonder’s business has grown from $ 5.5 billion a year ago to $ 8.5 billion, although its revenues have remained broadly stable. The operating profit margin fell to 1.7 percent from 10 percent in the past three years.

Panasonic executives want to expand Blue Yonder’s customer base in Japan and combine its hardware, such as security cameras and sensors, with the US group’s software to improve supply chain management.

Aside from the price, Citigroup analyst Kota Ezawa said the latest acquisition addresses some of the serious challenges Panasonic faces.

“They needed a recurring business model, a significant software asset, a gateway and a distribution channel to do business outside of Japan, so those were all things that were needed to survive. competition, ”Ezawa said.

“So that fills a few of the gaps, but obviously this deal isn’t the complete answer to how Panasonic is shifting to software and subscription services. “

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