This case study concerns the failed sale of a substantial Japanese property portfolio. The study exemplifies how American businessmen unknowingly repeat the same mistakes that result in the failure of their intended Japanese-American transactions. The cast consists of the seller, it's brokerage firm, and five world-class investors bidding to purchase the portfolio.
The seller borrowed $2.2 billion in full-recourse loans to acquire the portfolio. The $2.2 billion remains unpaid. The loans are current; however, the seller is in technical default of its mortgage agreement because the portfolio's market value is estimated to have decreased to about two-thirds of its cost. The portfolio has a positive cash flow, i.e., the seller was motivated to sell only for it's own investment reasons. The seller selected a well-known and respected brokerage to sell the portfolio.
The broker thought it had developed a brilliant selling strategy for a quick sale and commission. It knew the seller paid $2.2 billion, but that the portfolio was worth approximately $1.5 billion. The broker, knowing the seller was Japanese, assumed it was in dire need of cash, desperate to sell, and would ultimately take the hit and sell the portfolio at market value. To capture the listing, the broker assured the seller it would sell the portfolio for $1.8-$2 billion. The seller took the bait, but insisted the sale be secret.
Shortly after the broker was engaged, several news stories appeared in the local and national press reporting that the portfolio was for sale. The underlying theme of every story was that the market value of the cash-strapped seller's portfolio was worth only two-thirds of its purchase price. Several articles suggested that the seller had accepted that the portfolio's value had decayed to $1.5 billion. One article had the owner agreeing to a $300 million loss on two buildings alone. Five qualified investors came to the bidding table. They were inappropriately instructed by the broker to bid $1.4-$1.5 billion, the current market value.
When the bids were delivered, the broker apologetically explained that it had been wrong. The portfolio apparently was not worth $2 billion. The five offers were all approximately $1.5 billion--market value. Obviously this must be the value as five expert investors couldn't all be wrong. Several recent newspaper articles supported the values bid. Other recent news stories reported that the Japanese were dumping their U.S. properties into the market, and suggested that the property glut would further drive down prices. In other words, Mr. Japanese Seller, you had better act now, before it's too late. The broker's strategy was working brilliantly--or so it thought. Aside from the broker's questionable ethics, to an American businessman, nothing in this strategy appeared extraordinary or in error.
What the Japanese seller did next surprised everyone, especially the broker. Instead of acquiescing to the offering prices, or attempting to conduct a private auction, or even indicating a willingness to negotiate, the seller terminated the bidding process and removed the portfolio from the market!
An immense sale was suddenly terminated! Was this just yet another one of those mysteriously failed Japanese transactions? Five world-class investors spent substantial time, effort, and a small fortune only to fail. What went wrong? How could this failure have been prevented?
AES sees this failure as completely predictable. It could have easily been prevented, and a scenario leading to a consummated transaction could have been established. If the broker and investors had only known and understood the Japanese issues, this deal could have moved forward.
