Vaio near deal with Toshiba, Fujitsu to form Japan PC giant

[TOKYO] Vaio Corp, the personal computer maker spun off from Sony Corp in 2014, is closing in on a three-way merger with rivals to create a producer that can dominate Japan and weather a shrinking global PC market.

Vaio expects to strike an agreement to combine with Toshiba Corp's and Fujitsu Ltd's PC divisions by the end of March, said Hidemi Moue, chief executive officer of Japan Industrial Partners Inc, the buyout fund that now controls the former arm of Sony. Vaio expects to own the biggest stake in the merged company, which can help the trio save on research and development and scale production, he said.

The proposed merger mirrors the consolidation of Japanese display makers and semiconductor firms, after decades of stagnation and a loss of competitiveness relegated former household names to the industry's sidelines. The prevalence of smartphones and tablets in particular have squeezed PC makers, with 2015 global shipments at their lowest since the financial crisis.

"The PC market is shrinking, which means there are merits in working together to make the most of research, production volumes and marketing channels," said Mr Moue, whose fund specializes in corporate turnarounds.

"We can do it with minimal cannibalization."

Gloomy Times

Toshiba's shares jumped as much as 8.9 per cent to 175.8 yen (S$2.15), headed for the biggest gain in five years. The stock was 7.9 per cent higher as of 10:48 am in Tokyo. Fujitsu gained as much as 4.2 per cent. Vaio is not listed.

The potential venture would focus on the domestic market and stick to its core business of making PCs at the outset, Mr Moue said. Targeting overseas markets with other forms of hardware remains a possibility, considering Vaio's recent release of a Windows 10 smartphone and plans for a robot companion product, he said.

The tie-up "makes sense if you want to build a niche consumer base in Japan," said Damian Thong, an analyst at Macquarie Group Ltd. in Tokyo.

"This approach of merging three Japanese PC makers will probably have little chance of success outside of the country."

Vaio, Toshiba and Fujitsu have seen their global market share plummet as Lenovo Group Ltd, HP Inc and Dell Inc increasingly hold sway. Yet even the leaders are struggling: PC shipments shrank 10 per cent last year, falling below 300 million units for the first time since 2008, according to researcher IDC. The market is expected to decline through 2016.

Retaking Japan

Vaio, Toshiba and Fujitsu PCs have been upstaged even back home. Their combined operation would command about a third of the Japanese market, putting it in contention for the No 1 spot with a joint venture between Lenovo and Japan's NEC Corp.

NEC Lenovo controlled about 29 per cent of PC shipments in Japan from July to September, according to IDC. Fujitsu and Toshiba followed with 17 per cent and 12 per cent, respectively, while Vaio doesn't disclose sales numbers.

A deal would also further Toshiba's effort to spin off non-core assets, to pay for the fallout from an accounting scandal that's led to the biggest crisis in its 140-year history. As for Fujitsu, it saw shipments of its PCs and tablets peak in 2007 as the company shifted away from chips and hardware to software services.

The Contrarian

"In the PC business, all options are on the table for restructuring and partnerships, but nothing has been decided at this moment," Toshiba's spokesman Hirokazu Tsukimoto said.

In contrast to the gloom, Vaio is set to report its first monthly profit in March and Moue expects the company to be profitable in the year ending May 2017. Japan Industrial Partners has slashed the workforce to 240 from about 1,000, slimmed its product line-up and focused on premium business users, he said.

Mr Moue, a former banker at Mizuho Securities Co, has made a career of carving out languishing businesses considered peripheral by their parents and turning them around.

Since its founding in 2002, his fund had taken on more than a dozen companies before its Vaio investment in 2014 thrust it into a market where the three biggest players - Lenovo, HP and Dell - control more than half annual sales.

"As a private equity fund, we have to be a contrarian and I've never once been told: 'That was a nice investment.'," Mr Moue said.

"When people say there is something wrong, that's how I know we are on the right track."

BLOOMBERG