As we aim to become the world’s No. 1 entertainment company, our M&A targets are not limited to the amusement arcade industry, which has a market size of 540 billion yen, but rather target the whole entertainment industry. As individual companies of the entertainment industry formed a group of companies, countless cross-selling synergies have been actually generated, resulting in significant growth in business performance after joining in the group even outside of amusement arcades.

Fukuya and Shin Corporation are specific examples of non-amusement arcade companies that have had a significant impact on consolidation. In this fiscal year, which is the first one after M&A, it is already ensure that they will achieve a record profit in their corporate history, 71 years of Fukuya and 35 years of Shin Corporation. We believe that it is difficult to explain this without synergies.

On that condition, synergies and PMI are only means, not goals, in M&A. In order to make M&A succeed, the goal should be that “the total amount ofcash flow acquired through M&A exceeds the consideration for M&A paid.” On the other hand, we think that having synergies and PMI as their goal, which means “having means as the goal,” is a typical example of failure in M&A. The details are explained below.

・Our definition of failure in M&A is a reduction in capital as a result of M&A

First, let me explain our definition of failure in M&A. Our definition of failure in M&A is that “the total amount of cash flow acquired through M&A is less than the consideration for M&A paid,” which means that we have decreased our capital as a result of M&A. The reasons for this are as follows.

As a stock company, it is required to maximize its stock value. Maximizing stock value requires maximizing corporate value. Maximizing corporate value requires maximizing cash flow. Nevertheless, if “the amount paid for M&A > the total amount of cash flow acquired through M&A,” the stock value will be damaged because cash flow is lost as a result of the M&A.

We define a M&A which damages stock value, which means “the total amount of cash flow acquired through M&A is less than the consideration for M&A paid,” as “a failure in M&A.” In other words, the definition of success in M&A is that “the total cash flow acquired through M&A exceeds the consideration for M&A paid (on a present value basis),” and we have this as our goal.

・A typical example of failure in M&A is “having means as the goal,” which means having synergies and PMI as the goal.

The goal of M&A is as stated above, and synergies and PMI are just means to increase cash flow. However, we believe that having “synergies and PMI” which are means as a goal, which means “having means as the goal,” is a typical example of failure in M&A. Specifically, this means “to conduct M&A (regardless of the acquisition price) because synergies are likely to be generated with the existing business and increase by PMI.”

When a company has been conducting M&A aggressively in a particular field, if it continues to conduct M&A without caring the acquisition price only because it is likely to generate synergies, even if synergies are actually generated, the acquisition price may be higher than the synergies and it could fail to recover the investment. We should have cash flow as our goal, and having synergies or PMI as the goal is a typical example of failure in M&A.

・Background factors behind the likelihood of failure in M&A by having synergies as a goal.

We believe that the following characteristics of M&A are behind the likelihood of such failures.

・ It is easy to conduct M&A just by paying a high price and we can increase PL immediately afterwards.

・On the other hand, it takes some years to find out if the acquisition price was right.

・In M&A, the sunk cost is high because it has a lot of person-hours. People on the line want to complete the M&A if possible.

・To solve this issue, the function to check the acquisition price deteriorates in the cause of synergies.

These are the characteristics of M&A. We have analyzed that the cause of typical failure is having means as the goal, which means that “Let’s carry out M&A because it looks like we can generate synergies (even at a slightly higher price).”

・The premise of the doubt that synergies and PMI are all right is a thought that “M&A = overpriced.”

When it comes to M&A, there is a common doubt that “synergies and PMI are all right.” A cause underlying this doubt is a mind that “basically, the acquisition price in M&A is relatively high compared to the cash flow of the target company on its own, and M&A will fail if the cash flow of the target company does not increase through synergies and PMI because we cannot recover the investment in the first place.”

However, the premise that M&A = relatively expensive is not correct. In the entertainment industry, which is our target, there are structures which are suitable for M&A, such as stable business conditions with a long business history, balance sheets of net cash and needs for business succession etc. For more information, please see the following sponsored research report.

(For reference: “Capital Growth Strategies (Initial Report)” dated October 18, 2024)

・GENDA is an operating company which conducts M&A specializing in the entertainment field by using an investment firm’s perspective of M&A.

We firmly emphasize M&A at the right price, not conducting M&A based on synergies or PMI. M&A will fail if the goal is not to increase cash flow, and the axis of investment decisions is whether this can be secured or not. Acknowledging the aforementioned temptation, we avoid having means as the goal and make investments which are faithful to the theory of stock value.

On that basis, countless cross-selling synergies have been generated. Let me explain specific examples of the synergies that have actually occurred in Q2, that is why GENDA is an operating company, not an investment firm in Q3, the rationality of conglomerate in Q4 and the connection between GENDA’s strategy and its Aspiration “More fun for your days” in Q5.