May 10, 2014 5:52 am JST

Takeovers the Rakuten way: making bangs with fewer bucks

SHINNOSUKE IIYAMA, Nikkei staff writer

TOKYO -- Parties at the Silicon Valley summer home of Rakuten chief Hiroshi Mikitani draw crowds of entrepreneurs hoping that their startups will be the next targets of his acquisitive e-commerce group.

     An encounter at Mikitani's California retreat helped connect Rakuten with Viki, a video-sharing website it bought last September.

     Tokyo-based Rakuten has racked up at least 10 such deals since last year, most recently for Viber Media, the developer of a free messaging app. Earlier acquisitions included Canadian e-reader manufacturer Kobo and Spanish video-streaming service

     SoftBank, another Japanese technology company led by a charismatic deal-maker, is also on a buying spree. But Rakuten is taking a different approach. M&A watchers say its targets tend to be small and in the red. In this way, Rakuten has assembled a team of underdogs for relatively small sums.

     Rakuten shelled out $905 million, or one-fifth of its annual sales, for Viber. Meanwhile, Facebook paid $19 billion for WhatsApp, which boasts the messaging application with the most users worldwide. Viber may be third-rate by comparison, but it cost a 20th as much. Rakuten appears confident that its kiss can turn frogs into princes.

     Whenever Rakuten makes an acquisition, Mikitani talks about expanding its "economic sphere." At the core is e-commerce -- the formidable Rakuten Ichiba virtual mall. The group picks up money-losing operations as it goes and, at least in Japan, has enjoyed repeated successes in making them profitable.

     Take eBank, which was losing billions of yen when Rakuten bought it in 2009. The following year, it turned a profit thanks to an infusion of customers from Rakuten Ichiba. Now called Rakuten Bank, it has joined forces with the group's credit card and brokerage units, generating 7 billion yen ($68.7 million) in profit a year.

     Rakuten's financial services businesses earned 44.1 billion yen last fiscal year, half of the group's operating profit. And they achieve far greater margins than the three Japanese megabanks do.

     Rakuten insists on paying for acquisitions itself.

     "Basically, we make do with cash earnings from e-commerce," Chief Financial Officer Yoshihisa Yamada says.

     "We don't gamble with big sums of borrowed money," Yamada adds.

     That makes Rakuten different from SoftBank. If Masayoshi Son's telecommunications group is like a king borrowing as much as he can to move into ever-bigger castles, Mikitani's company prefers building outward from its keep.

New frontiers, new strategy

But can Mikitani's Midas touch work overseas? Investors clearly have doubts. Rakuten shares tumbled nearly 10% in the trading session after the company announced the Viber buyout.

     While the group can pile acquisitions onto a solid base in Internet retailing at home, it lacks strong e-commerce foundations abroad. Establishing distribution networks has proved troublesome, as has trying to duplicate its virtual mall business model.

     So Rakuten is focusing its foreign acquisitions on content delivery. From there, it will seek inroads into e-commerce. The company turned its domestic strategy on its head. Here, it has no track record to go on.

     This is bound to raise uncomfortable questions, as it did in an earnings conference Thursday. Someone brought up the matter of money-losing new and overseas operations. The red ink added up to 13.2 billion yen in the January-March quarter.

     Mikitani once showed a hand-drawn chart to investors. Four pencil lines, representing e-commerce, financial services and various new businesses, curved upward toward the right, i.e., the future. But investors naturally worry about the time and cost involved in getting there.

     How they judge Rakuten will depend on its ability to make successful acquisitions -- ones that steepen its growth curve -- with ever-greater accuracy.