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The private equity tango: Case Study 1 Kito maker of hoists and cranes

TOKYO -- You have probably never heard of Kito. That is because you have probably never been shopping for a hoist or construction crane. This is not exactly a small enterprise. It recently took over an Indian company and is now targeting three manufacturers in the U.S. and China.

Kito CEO Yoshio Kito, right, talks with Nguyen Thuy Nhung, an employee from Vietnam, at Kito's Tokyo office.

     The Yamanashi Prefecture-based company remains low-profile despite being listed on the first section of the Tokyo Stock Exchange -- expanding globally at an accelerating rate.

     Its hoists are used by automakers and consumer electronics producers around the world. In 2012, the company built new factories in South Korea and Thailand. Last year, it opened sales bases in Vietnam and Australia. Overseas sales now account for 70% of total sales.

No more top-down

Kito operates on a global scale. But a decade ago that was not the case.

     It began to transform in 2003 when it took an investment from Carlyle Japan and delisted from the Tokyo Stock Exchange. Back then, it was known for having top-notch product-development capabilities. A series of failed property investments, however, plunged it into the red.

     That's when The Carlyle Group made a surprise offer. Current CEO Yoshio Kito was vice president at the time. "I initially had a negative impression," Yoshio said. "Foreign funds are often described as vulture funds. Our president at the time, though, decided to partner with the U.S. buyout fund, so I prepared myself for the deal."

     Then-CEO Shinjiro Kito, Yoshio's uncle, accepted Carlyle's pitch because he knew his company needed the money. After Kito was delisted, Shinjiro admitted that he didn't really know what an equity fund is all about.

     The globally operating Carlyle is headquartered in Washington, D.C. The fund was became famous in 2003 when it gave its chairmanship to Louis Gerstner, who the previous year had stepped down as CEO of IBM.

     Carlyle Japan has two goals, according to Tamotsu Adachi, who has led the branch since its opening, and Takaomi Tomioka, the branch's managing director. They are to improve day-to-day operations and gradually change a company's management structure.

     Tomioka says the important thing is for the acquired company's management not to rely on the fund's financial muscle but to try to optimize corporate value by working and sweating with its new partner.

     At Kito, four big moves had to be made. One was selling the company's logistics subsidiary. This would allow Kito to focus on its core hoist- and crane-making business.

     Kito also revised a companywide social insurance system and dissolved an employee pension fund. These two steps were necessary to solidify Kito's financial base.

     Kito also hired consultants and asked them how best to implement Japan's renowned kaizen continuous-improvement production system. Kito followed the recommendations, like adjusting the speed of production lines, finding better storage facilities and re-examining its inventory-control methods.

     When it began expanding abroad, it leaned on Carlyle in recruiting foreign managerial talent. For a factory in China, it tapped into Carlyle's global human resources networks.

     Elsewhere, Kito has recently delivered cranes to U.S. tech giant Apple's facility, which will use the construction machinery to build a factory. Kito sees the deal as vindication of its decision to focus its marketing on the country.

     It has found knock-on benefits to setting up operating bases abroad; in China and Vietnam, the company's presence has allowed it to polish its brand image and attract investors in those countries.

     Kito is likely to see its sales reach 42 billion yen ($412 million) in the year through March, or double the figure for the fiscal year before Carlyle bought in.

     As far as case studies go, this one depicts how equity capital partners brought not only money but clear thinking to a company that had dug itself a deep financial hole.

     The case also has a lesson for private equity funds trying to win over Japanese targets. Adachi sums it up: "In terms of size and characteristics, midsize firms and business owners have greater leeway to change dramatically once they embark on reforms." 

     And from the other perspective: "Our partnership with Carlyle," Yoshio said, "has enabled us to see business matters from objective eyes, which has helped us broaden our perspective."

     Carlyle has cashed out, having sold its remaining stake after Kito relisted on the TSE in 2007. It is believed Carlyle earned an internal rate of return of around 20%. A Carlyle executive still serves as an outside director on Kito's board.

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