Three Pillars of Competitive Advantage Underpinning Our Asset Assembler Model
Our platform, built upon Asset Assembler model, has the following three pillars of competitive advantage.
1. Our Ability to Harness the Low-Funding Cost
First, our low funding cost is the vital component in our M&A strategy. We being based in Japan, the stable currency and a consistent low interest rate environment set us apart from European and U.S. companies who face higher interest rates.
Our low-risk asset portfolio provides for higher leverage opportunity, which normally enables EPS accretion as we prioritize debt financing at favorable interest rates for acquisitions. However, debt capacity limits will eventually limit our acquisitions. To mitigate this risk, we hold the option of equity financing. Using high PER shares to acquire a company with relatively low PER generally results in EPS accretion, even if the acquisition is all-share funded. Adding an optimized level of low cost debt to such equity funding will lead to the "maximization" of EPS. This approach enables us to continuously assemble assets without being constrained by debt capacity limitations. Target assets are entities of low risk and stable profitability, of which we have found many.
The success of our acquisition model relies on (1) valuation (PER) of acquisition targets and (2) an optimal combination of debt and equity financing. The chart below demonstrates that a well-executed acquisition of a low PER company, funded through an optimal combination of debt and equity, will result in a substantial EPS accretion. The advantage we enjoy in funding stems from our ability to leverage our balance sheet with the portfolio of low-risk, stable income assets while ensuring the fulfillment of our obligations to financial institutions, which forms one of the premises of MSV.
Low funding cost is common within numerous Japanese companies and any of them could potential be an "asset assembler." However, what truly distinguish us are our two unique capabilities, as explained below.
Illustration of continued growth based on Asset Assembler model
Requirements for acquisition targets
- Stable earnings capacity
- Outstanding management team
Analysis of value creation components
- Valuation of acquisition targets
- Our funding mix (debt or equity financing)
- Low-cost yen-based financing is a prerequisite
- Debt financing is prioritized but equity financing remains an option
assuming EPS accretive
- EPS accretion in Year 1 feasible even for large-scale acquisitions with combination of low interest debt and high PER shares
- Acquisition of stable and low risk assets at reasonable valuation funded by optimal debt and equity mix allows for unlimited continuation of climb in EPS
- An asset is an earning streamーAsset Assembler model strives to acquire assets that are EPS-accretive immediately and sustainably, even if of low growth. This implies the asset must have a long enough record of stable earnings
2. Our Ability to Maintain and Boost the EPS Contribution from Assets Companies without Intervention
Our second pillar of competitive advantage as stated above is our ability to maintain and boost EPS contribution from assets companies without intervention. This is manifested through our proficiency in recognizing companies with compelling appeal and effective leadership, particularly discovering management-class talents with just the right qualities.
Furthermore, we maintain our respect for the brands and heritage of target companies, while motivating their talented personnel post-acquisition. This approach enables the acquired companies to sustain and even boost their contribution to EPS accretion without headquarters' control or intervention, enjoying only advantages of scale and other benefits provided by headquarters.
The fundamental idea is that the parent company does not claim superiority in terms of information and decision-making abilities; rather, it encourages autonomous decision-making by local subsidiaries. This approach helps to circumvent slow decision-making processes and ensures agile and appropriate actions to outperform competitors. Attempting to oversee all our global operations from the headquarters in Japan would be unfeasible and counterproductive.
Of course, we do maintain certain aspects of control. Co-Presidents oversee the governance of our key subsidiaries. The holding company retains its say in certain level of capital expenditures, as well as compensation and appointment/dismissal of management-class senior executives at subsidiaries.
One of our strengths lies in our ability to strike the right balance between autonomy and accountability, thereby unlocking the growth potential of our subsidiaries. This approach gives us the capability to assemble a large number of outstanding companies.
3. Our Unique Appeal to Management-Class Talents Who Empathize with Our Modus Operandi
Our third competitive advantage lies in our prowess in attracting management-class talents. Our platform allows acquired companies that resonate with the concept of MSV to accelerate their contribution to EPS accretion through autonomy and accountability within our Group. This appeal enables us to draw in numerous outstanding talents.
CEOs who have become part of our Group have been effectively proselytizing the benefits of our platform after experiencing them, fostering a similar sense of empathy among newly acquired companies.
As a result, this will facilitate a seamless engagement post-acquisition and make further contribution to MSV possible. Notably, our approach has already garnered resonance among numerous management-class talents around the globe at this stage.
While taking pride in such competitive advantages, and remaining steadfast in our pursuit of EPS accretion, we make sure we keep a vigilant mindset. Our Asset Assembler model stands as a distinctive notion, granting us the ability to (1) assemble top-notch companies with appropriate valuations using optimal funding structures, (2) unlock the growth potential of these acquired firms, and (3) attract outstanding talents to expand our "federation" approach. Coupled with our unwavering sense of the MSV mission, we believe that we have the potential to exceed investors' expectations.