Exclusive: NEC Rejects Private Equity Offers Before Selling Discounted Stake in iPhone Supplier, Insider Sources Reveal

Global private equity funds made several buyout offers to Japan’s NEC for its subsidiary Japan Aviation Electronics Industry (JAE), a key supplier to iPhone, before agreeing to sell back a significant portion of its 51% stake to JAE at a discounted rate, according to five sources familiar with the matter.

These offers, not previously reported, suggested a willingness among the funds to pay substantial premiums to acquire JAE, a maker of electronics components. However, NEC opted for a discounted tender offer, potentially raising concerns about whether they acted in the best interest of shareholders, experts in governance noted.

The pressure for improved governance and better returns on investments from regulatory bodies like the Tokyo Stock Exchange prompted this scrutiny. Critics argue against practices like cross-shareholdings and “parent-child” listings, where companies retain subsidiaries listed, often to the detriment of minority shareholders.

Kazunori Suzuki from Waseda Business School expressed skepticism about the deal’s outcome, suggesting that if higher offers were indeed sidelined, it would likely disappoint investors. JAE, known for producing connectors for iPhones, witnessed a surge in its stock prices following reports of the buyout offers.

The tender offer, priced at 2,605 yen per share, represented a 14% discount to JAE’s previous closing price. Such discounts are common in share unwinding scenarios. The timing of the private equity offers varied, with some extending back to 2022 or within the past year.

While specific details about the offers remain undisclosed, at least one proposal was formalized in writing, with a detailed strategy post-buyout, meeting the criteria of a “bona fide offer” under new corporate takeover guidelines.

Despite this, it’s unclear whether the NEC and JAE boards discussed these proposals. Travis Lundy from Quiddity Advisors emphasized the significance of considering private equity offers seriously, highlighting the fiduciary duty of companies towards their shareholders.

The aftermath of the discounted tender offer announcement saw a nearly 20% decline in JAE shares, resulting in a substantial loss in market value. There was widespread anticipation of NEC eventually divesting JAE to simplify its corporate structure, similar to actions taken by other electronics conglomerates like Hitachi.

Suzuki suggested the need for additional disclosure rules in cases involving changes in corporate control, lamenting the missed opportunity for NEC shareholders to benefit from potentially higher bids, contrasting with the disappointing outcome for JAE shareholders.

In summary, while the NEC-JAE deal raises questions about governance and shareholder interests, it also underscores the complexities and challenges in corporate decision-making amid changing regulatory landscapes and market dynamics.