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Canon pivots into health field with Toshiba Medical purchase

Electronics maker pressed to branch out as core segments peak

Canon CEO Fujio Mitarai (left) opened up about the motivation and vision behind his company's purchase of Toshiba Medical.

TOKYO --Canon will make medical equipment a central part of its operations through its purchase of Toshiba Medical Systems -- hoping to foster growth in the field as its core digital camera and office equipment businesses slow.

The 665.5 billion yen ($54.7 billion) purchase was finalized Monday. Canon, a Japanese electronics manufacturer, hopes to wring enough synergy from its new subsidiary to justify the price tag, with its own optics and imaging technology and production technology as the key.

Behind the purchase

"The fact that sales of digital cameras and office equipment aren't growing, despite our high market share, is a sign of the market's maturity," Canon CEO Fujio Mitarai said at a press conference, revealing a sense of urgency behind the purchase. "We'd been considering where to base our next pivot for some time," Mitarai said.

Canon, which has already begun working on X-ray imaging devices, had long eyed the medical technology field as a priority, in which it could bring its specialty optics and imaging technology to bear. Mitarai had said in the past that the company wanted to make 100 billion yen-level purchases in the field, but until now, Canon's achievements have been only around the 8 billion yen acquisition of a Polish ophthalmology equipment company in 2010.

The bid for the medical unit of Toshiba, which is digging itself out of an accounting scandal, was thus a once-in-a-lifetime chance for Canon. Fujifilm Holdings also made a bid for Toshiba Medical, but Toshiba raced ahead of antitrust and accounting regulations to sell the subsidiary by way of a third-party special purpose company. Authorities publicly warned Toshiba that the move may have violated antitrust laws, but approved the deal, saying it would not hurt fair competition in the medical equipment market.

Mitarai told The Nikkei Monday in an exclusive interview that Canon was "placing the highest priority" on the medical field, and that it was inclined to be patient in its treatment of the subsidiary. "We're not a fund," he said, "so we're not looking for short-term gains." He confirmed that he was considering more purchases in the field, though he would let Toshiba Medical choose the candidates.

Asked about basic research Canon had been conducting, Mitarai reflected that "the company couldn't see it through to the product stage." He expressed his hopes for Canon's future with its new subsidiary.

Minimally invasive management

Canon is still an outsider in the medical imaging field. It will "manage Toshiba Medical in a way that preserves its independence," Mitarai said. The parent company will consider changing its subsidiary's name, but will leave management to current staff, and will make no personnel reductions. Mitarai went so far as to tell The Nikkei that "if Toshiba Medical Systems wanted it, we could transfer control of Canon's medical business to them."

This hands-off policy would entail not interfering with operations beyond what was necessary, supporting Toshiba Medical with capital and technology.

This raises the question: how will management make use of the companies' new synergy on the business front?

Canon has put forth three goals. First, it will move deeper into the new field. Strong candidates for this approach include medical services that use in-vitro diagnostic devices and information technology to analyze, for instance, blood or stool.

Next, Canon will streamline production using its cost-saving technology. At present, the manufacture of medical machines -- such as computed topography (CT) scanners -- requires a good deal of manual labor, and the company sees lots of room to improve efficiency. It will also continue shifting components currently bought from outside providers toward internal production.

Lastly, the electronics manufacturer will attempt to work its "seeds" or basic technology ideas into fully realized products, such as blood vessel imaging devices that combine optical and ultrasound technology.

How will laissez-faire fare?

Canon has experience with large-scale acquisitions, including a Dutch copier maker and a Swedish network communications company, but it has come to treat its purchases as independent entities under its wing. In this structure, however, Canon does risk its satellites spinning away from their center.

Toshiba Medical earned roughly 417 billion yen ($3.57 billion) in group sales in the fiscal year ended March, from which it took about 18 billion yen as operating profit. This is still a far cry from the trillion-yen health care businesses of companies like General Electric in the U.S. or Germany's Siemens. Some see this purchase as a case of buying a rising star in hopes that it will keep rising, and the purchase faces expectations to show swift results. For Canon, taking on Toshiba Medical is also a challenge that will force it to continue evolving how it handles its subsidiaries and affiliates.

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