The rise of Eizo Kobayashi: and how investing is becoming Itochu's new business line

Japan, Inc., Jan, 2005 by Jessie Wilson

DECEMBER 14, 1999, is a date that Eizo Kobayashi will not easily forget. It was the day that one of the world's largest trading companies, Itochu Corporation, pinned its hopes on an entirely new form of financing, the listing of a technology crown jewel called CTC--or Itochu Techno-Science as it was called then.

[ILLUSTRATION OMITTED]

The listing was handled by newly formed securities house Nikko Salomon Smith Barney, and it turned out to be the largest IPO of 1999, raising around [yen] 110 billion (approximately $1 billion). On the day it was listed, CTC had a higher market cap than its parent. It was a feather in the cap for Kobayashi, who as COO for the IT and telecom division of the massive trading firm had fathered the IPO. It was also a welcome injection of funds and assets to the balance sheet of Itochu at a time when the company was undergoing massive restructuring.

Perhaps typical of Kobayashi's style, after the many intensive months of preparation and herding CTC's management towards rapid growth with profits, instead of having a wild party in a swank restaurant in Aoyama after the stock markets closed, he finished off at the office as usual and took a group of employees to a local restaurant for an evening pep session. For Kobayashi it was business as usual, and another step in an extraordinary career that has seen him rise from an ordinary Bucho to CEO in just ten short years.

The CTC listing marked the beginning of ascendancy for Kobayashi. Not only did it prove him in the eyes of the senior management of the trading firm, but it also provided a key event for the President of Itochu in 1999, Uichiro Niwa, to pull the talented Kobayashi in closer (eventually making him a Managing Director in 2002) and take him on as his right-hand man to execute some difficult strategies for 2000 and beyond. The two became very close and indeed, Niwa became a mentor to Kobayashi. He not only coached him in the rough and tumble of the boardroom politics of a $100-billion company, but also inculcated him in the art of radical shake-ups, starting with Itochu itself.

Niwa: the Mentor

To understand Kobayashi, you need to look at his boss, whom he still speaks of in reverential tones. Niwa was a bit of a maverick, installed as president of an ailing Itochu in April of 1998, in order to bring about change. He didn't waste any time, appearing in frequent interviews and speeches with his signature message of pushing Itochu full steam ahead while the rest of Japan was mired in a deep funk. Remember, this was a time when Japan had lost the plot and was wallowing in self-recrimination and spiraling deficits. His message wasn't always well received. At Itochu headquarters, Niwa reportedly spent many weekend management sessions berating his colleagues for their meek acceptance of the status quo and their lack of resolve to fix things. "Where is your sense of crisis?!" he would ask them.

Well, if there wasn't a sense of crisis in 1998, there certainly was one the following year, when Niwa announced in October of 1999 that the company would write off over JPY400 billion of bad assets from the company's books. This was a major shock both to the company and to the stock market--Itochu's stock fell almost 12% on the day of the announcement--and at one point Niwa was accused of betting the farm on his risky strategy. It was during this time that Niwa tasked his CFO Sumitaka Fujita to find a way to bring some urgently needed funds into the company. They would need the money to overcome an anticipated FY1999 deficit that eventually did hit JPY88 billion ($800 million).

Kobayashi was tasked along with a group of other managers to bring about the listings of CTC and broadcasting subsidiary J-SAT, while others worked on a scheme created with Mizuho (then Daichi Kangyo Bank) to securitize the billions of yen of promissory notes the company was holding, and general corporate streamlining and cost-cutting. These actions, coupled with Niwa's determination to slice away over 350 money-losing subsidiaries between 1998 and 2001, meant that Itochu enjoyed several billion dollars of extra cash and securities at a critical time in the restructuring process. The real cash cow was of course CTC, and between December 14th 1999 and March 2001, Itochu was able to sell on 50% of CTC in five different discrete transactions for a massive JPY200bn ($1.8 billion) in capital gains.

As luck would have it, the strategy coincided with a peaking of the technology markets, and in FY2000, ending March 31, 2001, the company declared a massive JPY70 billion profit. Although the following three years' results were rather more tame as the remaining bad assets were worked out, nevertheless the Niwa legend had been established, and Kobayashi was along for the ride.

The Handover

While Niwa capitalized on his cachet as the man who did in fact save the farm, by going on a public relations campaign in 2002 and 2003, he left the competent Kobayashi and other managers to look after daily operations. In July of 2003, Niwa, in characteristic style, published an article in the monthly Bungei-Shunju, a magazine widely read by business executives. The article very directly criticized PM Koizumi's economic policy--possibly a first in the current generation of Japanese business leaders. He asserted that Koizumi was doing the exact opposite of what was needed to achieve a recovery in the economy, and that rather than claw back funds in the form of taxes and pushing the banks to the edge, consumer spending was the key to recovery and that this would only come about with at least a temporary tax reduction.