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Panasonic has a checkered history in acquisitions, but the Japanese conglomerate insists the $ 7.1 billion purchase of Blue Yonder is worth a high price, as it will help address its biggest weakness in software capability.
The sense of crisis that drives the Panasonic deal is widespread in Japanese companies, which once thrived in the era of consumer electronics hardware. But they have struggled as global demand shifted to software and with the creation of huge technology companies like Apple and Amazon.
In March, Hitachi agreed to buy GlobalLogic, a Silicon Valley software engineering company, for $ 9.5 billion.
“As everything becomes digital, it’s getting harder and harder to differentiate it through hardware,” Yasuyuki Higuchi, a Panasonic executive who runs the connected solutions business, said in an interview. “Naturally, we have a real sense of crisis and we need to have software.”
The former CEO of the Japanese company Microsoft oversaw the talks acquires Blue Yonder and has been a member of the board of directors of the American supply chain software company since Panasonic acquired a 20% stake last year.
After announcing the deal on April 23, shares of Tesla’s battery supplier fell to 14%. Investors were baffled by 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 major acquisitions: the 1990 purchase of MCA, then owned by Universal Pictures, for $ 6.6 billion, and the acquisition of smaller rival Sanyo Electric and another subsidiary in 2011.
Analysts have also questioned the benefits of more recent bids, including the $ 1.6 billion acquisition in 2015 of Hussmann, a U.S. manufacturer of refrigerated display cases.
“We believe Panasonic has a weak track record, especially when it comes to big deals,” 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 revenue. The U.S. 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 set up primarily as a utility,” Higuchi said. “We’ve also managed to retain management, so the success rate is very high.”
Still, analysts wonder what the two companies can do better with full ownership of Panasonic than the Japanese company could not do with a 20% stake.
Blue Yonder’s business value has gone from $ 5.5 billion a year ago to $ 8.5 billion, although its revenue has remained mostly flat. The operating profit margin has fallen to 1.7% from 10% in the last 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 US group software to improve supply chain management.
Leaving aside the price, Citigroup analyst Kota Ezawa said the latest acquisition addressed some of the serious challenges facing Panasonic.
“They need a recurring business model, a big software asset and a gateway and a distribution channel to do business outside of Japan, so all of these things were necessary to survive the competition,” Ezawa said.
“So it fills in some gaps, but obviously this deal isn’t the full answer to how Panasonic goes about software and subscription services.”
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