The long and messy poker game between KKR and Bain Capital over Fuji Soft now appears to be at an end, with Bain folding after KKR’s most recent bid of ¥9,850 per share.
Looking at the big picture, there is no question Fuji Soft’s shareholders have hugely benefited from the process. In early 2022, when 3D Investment Partners first began accumulating what became a 23% percent stake, Fuji Soft shares were trading at ¥3,400 per share. During 2023, as the company began to respond to 3D’s demands for restructuring, the stock price rose from ¥3,800 per share to over ¥6,000. Then, in 2024, 3D persuaded the company to put itself up for auction to private equity bidders including KKR and Bain.
In August 2024 KKR launched a tender offer at ¥8,800 with Fuji Soft’s endorsement following a private pre-TOB auction process organized by the company. KKR thought it had won the private auction fair and square and that its tender offer would close unopposed. That was a miscalculation that set off a protracted six-month struggle between KKR and Bain that saw the stock price rise an additional ¥1,000 or so based on bids and counterbids by the rivals.
The stand-off between KKR and Bain squeezed out an extra ¥1,000 for Fuji Soft shareholders. No doubt Fuji Soft shareholders like the result. But the market and shareholders in general should be wary. In the long run, auctions without clear rules or deadlines do not maximize price. That is why professional auction houses follow clear rules that culminate with the auctioneer’s gavel coming down to declare a winner. Without clear rules, potential bidders will refuse to participate, or at least discount their bids for fear of having to counter new bids after the gavel has come down. Reluctant bidders who do not trust the auction process will not maximize price.
The ugly spat between KKR and Bain could have been avoided if Fuji Soft had better managed its private pre-TOB auction. The facts are in dispute, but Bain says that it was denied a chance to offer a final and binding bid in the private auction that, at ¥9,250, would have been higher than KKR’s ¥8,800. This then led to Bain going public with the accusation that the private auction process had been unfair and announcing that it was prepared to offer a higher price. If Bain was in fact treated unfairly in the private auction as it claims, its decision to counter KKR’s tender offer was understandable.
On the other hand, it is easy to see why KKR was outraged by Bain’s late-breaking intervention. In its own mind, KKR had submitted its best and final offer in the private auction and the auctioneer’s gavel had come down. If KKR had suspected that Bain or other bidders would surface with their own bids after the final gavel, KKR very likely would not have offered ¥8,800 per share in the first place. KKR understandably felt sucker-punched.
KKR’s grew even more frustrated when Bain dragged out the process over months with non-binding counterbids. Bain issued a series of press releases stating that it intended to launch a formal tender offer at a higher price at some future date, but in fact commenced only one binding tender offer in October 2024 at ¥9,450. After KKR topped Bain’s bid by a nominal ¥1 (¥9,451) with the Fuji Soft board’s endorsement in November 2024, Bain issued press releases saying that it would launch a formal counter-offer at ¥9,600 sometime in late January or early February 2025. KKR correctly pointed out that nothing was preventing Bain from making a binding counter-offer immediately and accused Bain of dragging out the process in bad faith to damage KKR without any real intention of acquiring Fuji Soft for itself. No doubt KKR will see Bain’s withdrawal without making a binding topping bid as evidence of bad faith.
It is nothing to cheer that Fuji Soft’s stock price for the last six months has been a function, not of intrinsic corporate value, but of bets on a game of chicken between KKR and Bain. The downside risk in the bet would seem to outweigh the limited upside potential, given that Fuji Soft’s stock price had already more than doubled before KKR’s initial tender offer. In any event betting in the final stages of the endgame was not for amateurs or the faint of heart.
Bain’s late-breaking intervention after the gavel had seemingly come down in Fuji Soft’s private auction process will affect the future behavior of bidders for corporate control, in ways that will not necessarily be good for shareholders or the market. Taking a lesson from the sucker punch KKR received, bidders will be more cautious if private auctions for control are not final and binding. Some bidders may choose to stay on the sidelines, others may low ball their bids, to the disappointment of shareholders seeking the highest exit price. One anticipates that there will be pressure for private auctions going forward to be conducted more transparently with a set of rules to produce a clear winner.
The possibility of a counter-tender offer by a non-participant in the private auction process is of course healthy and necessary to keep the private auction honest. The most dramatic recent illustration of this was Yoshiaki Murakami’s intervention in Carlyle’s lowball bid to take Japan Asia Group private in an MBO in 2020. Murakami called out the low ball bid, prompting Carlyle to double its initial bid and inadvertently destroy its own credibility after having presented its original low ball bid as fair.
Unfortunately, there are no obvious regulatory cures that are not worse than the underlying disease. Some have called for Japan to adopt the UK’s Takeover Code’s “put up or shut up” rule that requires bidders to make a binding offer or withdraw within 28 days after publicly announcing an intention to make a possible bid for a target. The supposed benefit of the rule is that it reduces bad faith announcements intended to scare away competing bids. At the same time it puts pressure on both the bidder and target to complete a deal within 28 days, failing which the bidder must permanently withdraw. “Put up or shut up” may have the perverse effects of inhibiting possible bids from the outset, or pressuring target management into choosing between a lower price and the bidder’s permanent withdrawal.
In the aftermath, there will be speculation about the motives and conduct of KKR and Bain. If Fuji Soft’s private auction process was transparent and fair, Bain’s subsequent intervention looks like sour grapes. On the other hand, if one accepts Bain’s claim that the process was one-sidedly favorable to KKR, then Bain’s intervention was justified and served the interests of Fuji Soft’s shareholders.
In either event, the messy six-month struggle between KKR and Bain imposed stress on the market that could have been avoided by a better managed private auction. With luck, future participants in similar transactions will learn from Fuji Soft’s mistakes.
Stephen Givens
Note regarding the author: Stephen Givens is a US corporate lawyer based in Tokyo. He was nominated by 3D Investment Partners in 2024 to serve as independent outside auditor of Fuji Soft but was not elected. He is not privy to any material non-public information related to Fuji Soft.