Japanese IT company NEC seemed to have given up on Europe these past few years, preferring to focus on developing countries, but it has come back with a bang, acquiring UK’s Northgate Public Services and Denmark’s KMD Holdings in 2018. This total spend of Y200bn ($1.8bn) is the largest investment NEC has made since it acquired Packard Bell in the 1990s.
On the face of it, NEC’s focus on what it calls “safety” businesses seems a good strategy: “creating safer and more secure urban communities” as they put it. It sounds better in Japanese: 安心安全な町 (anshin anzen na machi) but as is so often the case, it’s rather difficult to translate into snappy English. “Anshin” means a sense of being able to relax or relief, so “secure” is near enough and is also alliterative with “safe”. “Machi” can mean town as well as city, hence “urban communities” as the translation.
NEC’s safety businesses are already 5% of its turnover and reaching an EBITDA of over 20%. KMD will add to this business as it provides IT solutions for the Danish government, central bank and local authorities for security, tax etc. Northgate Public Services also has customers such as the London Metropolitan Police for crime prevention IT systems.
Up until now NEC’s overseas businesses have been loss making. As the Nikkei points out, NEC stands for Nippon Denki (Japan Electric) (NOT the National Exhibition Centre in Birmingham, stop sniggering at the back there, Brits) underlining its very domestic focus, and the domestic Japanese market is where most of its profits are made.
It was not able to expand upon its acquisition of Packard Bell. It made some other large acquisitions like the Netcracker of the US but nothing replaced the dent that the loss of the semiconductor business made on earnings and instead NEC found itself shrinking down.
The problem it now faces is that KMD itself has been making losses. NEC executives claim they can return to profit and would not have acquired KMD if that was not the case.
NEC is cash rich and was able to buy both companies without borrowing. Toyo Keizai says KMD was relatively cheap, and there was no bidding war either. KMD was owned by the public sector, privatized in 2009 and by 2012 was owned by an American private equity company Advent, loaded down with debt. Advent had acquired 7 further companies in order to revitalize KMD and move away from legacy business. It was expecting to IPO but a series of law suits were brought against KMD’s subsidiaries.
NEC had listed up 50,000 companies in the safety business globally, started negotiations with KMD in September 2018, asked the Dutch operations of KPMG to conduct due diligence and after only a month announced they would acquire it. NEC says the losses in the past 5 years were due to the law suits and that the first phase of restructuring is finished and phase 2 60% complete.
There is a similar picture at Northgate Public Services – a lot of debt and losses. The world undoubtedly increasingly needs IT security solutions, but this does not automatically lead to profits it would seem. NEC executives say they want to become a “normal” company, by which they mean it can grow, slowly if necessary, and be sure of a reasonable profit. Large overseas acquisitions were “traumatic” but show that NEC has a sense of crisis, says the Nikkei, and an imperative to change. NEC might know how to make money out of public sector clients in Japan, but I wonder if this will translate well into Europe.
For more content like this, subscribe to the free Rudlin Consulting Newsletter.Read More