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GCA Savvian Group Corporation : Shared Research issued GCA Savvain Group report.

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01/16/2013 | 07:51am CEST
Highlights Trends & Outlook

Quarterly Trends

Q3 FY12/12 Results (Announced on October 30, 2012; please refer to the table above)

Later, on November 27, 2012, the company raised its full-year forecasts.

For Q3 FY12/12, year-to-date revenue was 7.8 billion yen (-31.5% YoY), operating profit was 2.1 billion yen (-19.1% YoY), recurring profit was 2.2 billion yen (-17.7% YoY), and net income was 652 million yen (+50.7% YoY).

By segment (before eliminations), the company's advisory business generated year-to-date revenue of 6.2 billion yen (+15.4% YoY); the asset-management business generated 583 million yen (+26.3% YoY); and the fund business generated 1.6 billion yen (-73.6% YoY). Japan advisory revenue was 3.2 billion yen (+17.5% YoY). A key factor in the revenue rise was a greater number of deals YoY, especially large ones worth 100 million yen or more. The U.S. advisory segment posted year-to-date revenue of 3.0 billion yen (+13.4% YoY). Its revenue of $21 million in Q3 FY12/12 was the second-highest on record (following Q4 FY12/10).

Decreases in YoY revenue, operating profit, and recurring profit were due to subpar performance of preferred shares held by the investment business's limited partnerships. However, external investors hold 99% of these funds. Net income, a better measure of the underlying business, rose sharply YoY due to a rise in asset-management revenue.

Excluding the three funds (GSG has a 1% stake in each), year-to-date revenue was 6.8 billion yen (+16.3% YoY), operating profit was 1.2 billion yen (+54.4% YoY), recurring profit was 1.2 billion yen (+60.1% YoY), and net income was 642 million yen (+55.5% YoY).

GSG's shares transferred to the First Section of the Tokyo Stock Exchange on September, 6, 2012. To mark the occasion, the company paid a commemorative dividend of 1,500 yen per share on October 31, 2012. On October 15, 2012, GSG cancelled 64,831 treasury shares, or 18.45% of issued shares. Also, on December 5, 2012, the company repurchased 20,000 shares (6.98% of all outstanding shares).

Q2 FY12/12 Results (Announced on July 27, 2012; please refer to the table above)

For 1H FY12/12, revenue was 4.6 billion yen (-48.7% YoY), operating profit was 1.2 billion yen (-40.4% YoY), recurring profit was 1.2 billion yen (-39.1% YoY), and net income was 401 million yen (+45.7% YoY).

By segment, the advisory business had revenue of 3.7 billion yen (+10.4% YoY); the asset-management business had revenue of 376 million yen (+29.2% YoY), and the fund business recorded 842 million yen of revenue (-84.8% YoY).

On a fund unconsolidated basis, revenue was 4.1 billion yen (+11.8% YoY), operating profit was 728 million yen (+64.9% YoY), recurring profit was 768 million yen (+66.6% YoY), and net income was 397 million yen (+53.0% YoY).

Q1 FY12/12 Results (Announced on April 26, 2012; please refer to the table above)

In Q1 FY12/12, revenue was 2.4 billion yen (-66.5% YoY), operating profit was 734 million yen (-59.9% YoY), recurring profit was 790 million yen (-57.2% YoY), and net income was 302 million yen (-18.4% YoY).

By segment, the advisory business had revenue of 2.0 billion yen (-8.9% YoY); the asset-management business had revenue of 184 million yen (+40.4% YoY), and the fund business recorded 440 million yen (-91.2% YoY).

On a fund unconsolidated basis, revenue was 2.1 billion yen (-6.1% YoY), operating profit was 488 million yen (-23.9% YoY), recurring profit was 543 million yen (-16.9% YoY), and net income was 300 million yen (-16.1% YoY).

Full-Year (FY12/12) Outlook

GSG projects decreases in FY12/12 YoY revenue and operating profit on a fund consolidated basis due to lower performance of underlying assets within the fund business. However, on a fund unconsolidated basis, which better reflects performance, the company expects revenue to rise 16.3% YoY and operating profit to rise 36.8% YoY. FY12/12 performance to date is steady, and on November 27, 2012, the company raised its full-year forecasts after posting earnings related to several deals in the M&A advisory segment. On a fund unconsolidated basis, the company projects a significant 106.0% YoY increase in net income for FY12/12, largely due to deferred tax assets in connection with subsidiary mergers.

Future Outlook

GSG does not disclose mid- and long-term quantitative targets. SR Inc. believes that two important factors influence GSG's outlook: developments in the M&A market, and how many profitable opportunities the company will seize as the market expands.

Economic trends tend to influence M&A activity heavily. SR Inc. believes the stagnant Japanese economy and relatively small M&A market will likely drive up M&A transactions over the long-term (see for details).

GSG's ability to capitalize on opportunities depends on four unique characteristics: its ability to offer competitive pricing, customer loyalty, and its ability to conduct cross-border M&A transactions. As many of its competitors lack such abilities, SR Inc. believes that GSG will likely benefit from market expansion in Japan.

Business Description

GCA Savvian Group Corporation (GSG) is an independent M&A advisory firm.


The company's primary business is M&A advisory and ancillary services. It has three reportable segments: advisory, asset-management, and funds.

The main entities in the advisory business are GCA Savvian Group Corporation (formerly GCA Savvian Corporation); GCA Savvian Advisors, LLC; and Due Diligence Corporation (see Note below). Mezzanine Corporation, another important entity, operates the company's asset-management business; the company records earnings from its investment business limited partnerships (funds) in this segment. GSG has only a 1% stake in each of its funds but consolidates them as they are under the company's control.

Note:The above chart and discussions reflect GCA Holdings Corporation's absorption of GCA Savvian Corporation, and GCA Savvian Group Corporation's absorption of GCA Holdings Corporation, both effective on December 31, 2012.

Advisory Business

  • GCA Savvian Group Corporation (Advisory Segment, Japan)

GSG offers comprehensive advisory services to public and private companies, including divestitures, acquisitions, going-private transactions, takeover defense, restructurings, and turnarounds. The company provides expertise not only in deal execution, but also the entire process from upstream operations (e.g., strategic and M&A planning to maximize corporate value) to downstream post-merger integration.

Advisory Business Coverage

(Source: Company data)

In M&A transactions, when a seller sells a business to a buyer that can strengthen it, the buyer adds corporate value. In theory, the seller and the buyer divide this value fairly, resulting in a win-win M&A deal. In reality, the buyer and seller are usually at odds, and must negotiate the terms and conditions of the deal.

To ensure post-purchase value accretion, the buyer must manage a prudent acquisition process (pre-deal research and adequate purchase contracts). The seller, meanwhile, wants to maximize the sale price. Ideally, and this is particularly relevant in the Japanese business environment, the seller also wants to ensure that employees of the divested business can enjoy continued employment and prosper. GSG serves as an advisor to either buyers or sellers. Because the company is focused on sustaining what it calls a "repeat-client model," it tends to advise buyers more frequently (satisfied buyers will come for more business).

Note:GSG does not act as a business broker that introduces buyer and seller and receives a fee from each.

Unlike some investment banks, the company does not have separate teams of bankers who compete against each other. Instead all deals are done by a single team with project members assigned as needed. While many an M&A advisory firm are reputed to rely on a few star players, GSG says that it managed to develop a system that allows most of its experienced staff to contribute actively and that in turn lowers its dependence on star performers (as of December 2012).

M&A Strategy Support Team (MAST) Involvement

In 2010, the company has formed MAST, M&A Strategy Support Team, to provide consulting both pre-deal and in post-merger integration. Prior to creating MAST, GSG was focused primarily on deal execution. However, many of its clients asked for help with both forming their M&A strategy and integrating their acquisitions. Successful post-merger integration in most cases determines deal success for a buyer. This is especially true for cross-border transactions. The company explains that by consulting in these areas, a time-consuming and involved task that many of its competitors (e.g., bulge-bracket investment banks) would prefer not to touch, it can earn client trust, leading to repeat business.

  • Due Diligence Corporation (Advisory Segment)

Due Diligence Corp. provides services concerning accounting, finance, and tax due diligence in M&A deals.

  • GCA Savvian Advisors LLC (Advisory Segment, U.S.)

Formed in 2003 with personnel from Morgan Stanley, Robertson Stephens, and other U.S. investment banks, this independent M&A advisory firm works with high-tech growth companies on the West Coast of the United States from its San Francisco headquarters. The segment's ability to support execution of cross-border deals between Japan and the U.S. make it a compelling proposition.

GCA Savvian Advisors employs sector specialists. It is strong in the high-tech sector and claims deep relationships with over 200 private equity funds in Silicon Valley. Considering the difficulty of becoming a Silicon Valley insider, being able to offer Japanese clients the latest information from U.S. tech companies is useful for promoting Japan-U.S. cross-border deals. The firm is also broadening its coverage into healthcare and industrials.

Asset Management Business

In this segment, the company offers mezzanine financing through specialized funds, usually in the form of convertible debt, senior subordinated debt, or securities involving non-voting preferred shares. Examples of situation when firm clients would find mezzanine useful include:

  • Subordinated debt if an acquisition is too large to be funded through bank loans alone
  • Non-voting shares to raise capital without diluting existing shareholders
  • Preferred shares to fund a management buyout or management-employee buyout
  • Balance sheet restructuring

Mezzanine Corp. ("MCo" in the chart below) creates limited partnerships with institutional investors and manages the funds. The segment limits its stake in each fund to 1%; therefore, its main sources of income are management fees and performance-linked fees.

Asset-Management and Fund Businesses

One challenge in the asset-management business is its conflict of interest with the advisory business. Specifically, advisory work involving mezzanine financing may jeopardize the company's neutrality, even if the advice benefits clients. According to the company, its target areas for advisory and asset management work do not overlap, substantially lowering risk of a conflict of interest (as of December 2012).

Fund Business

The company makes money by earning interest on subordinated loans, as well as dividends from and redemptions of preferred shares. None of the company's three funds (MCo 1-MCo 3) has ever incurred loss to principal since their inception.

What Makes GSG Different?

Akihiro Watanabe, the company's founder and managing director, has extensively researched the U.S. and European advisory boutiques prior to starting GSG and formed strong views about what he wants his firm to be. These views continue to form the basis of what the company stands for to this day.

  • Independent M&A Specialist

This is the biggest factor differentiating GSG from its competitors (in Japan, mostly large banks and securities firms). The company believes that being independent allows it to give better, more impartial advice to its clients, as well as develop truly long-term relationships.

GSG's policy is to pursue deals, even small ones, if they help clients maximize long-term growth opportunities. In that, SR Inc. believes that GSG differs from larger rivals, particularly bulge bracket investment banks who do exclusively very large deals. In 1H FY12/12, about 75% of the company's business came from repeat clients, likely a testament to the focus on putting the clients' interest first. GSG says that it would often advise its clients not to pursue a deal if it believes it does not maximize value.

In order to reinforce this culture throughout the company, GSG does not set individual sales quotas for any employees. This avoids the tendency to put numerical targets ahead of truly working for the customer. Instead, the company evaluates staff based on customer satisfaction and 360-degree assessments. Unusual in the industry, GSG conducts a customer satisfaction survey after each deal. The 360-degree evaluation process involves executives and employees assessing individual contributions to the company's business philosophy and goals. Employees may choose his or her assessors, but other directors and employees may participate. Employees receive bonuses based on these assessments.

Personnel turnover at the company is low. Other than the immediate aftermath of Lehman Brothers' collapse, the rate has been around 1%-2% per annum.

GSG, which anticipated a rise in globalization of Japanese firms since its founding, created a cross-border transaction platform when it merged with the former Savvian Advisors.

The firm has offices in Tokyo, Osaka, San Francisco, New York, Menlo Park (Silicon Valley), London, Mumbai, and Shanghai. These overseas offices are key because they provide deep knowledge of local firms and business environments in cross-border transactions. They also provide post-deal decision support. This approach creates repeat business.

In FY12/11, cross-border deal revenues accounted for 34% of GSG Tokyo team's revenues. In 2011, GSG topped the league table as the top advisor for Japan-U.S. cross-border M&A by number of deals.

As of December 2011, the company had 100 M&A specialists in Japan, 68 in the U.S., four in China, two in India, and one in each of Europe and Thailand.

On top of these overseas offices, GSG cooperates with 40-50 M&A firms overseas to gather information on potential M&A projects.

  • GCA Savvian Advisors LLC's Business Model

GCA Savvian Advisors revolves around advising emerging-growth firms (sellers) that choose M&A as an exit strategy. It also advises buyers of emerging-growth firms. The founders of the firm were previously with Robertson Stephens and TMT (Telecommunications, Media and Technology) team of Morgan Stanley, bringing respectively strong ties to the Silicon Valley venture community and strong connections with the major traditional buyers of emerging businesses.

Impact of Including the Funds into Consolidated Accounts

The company consolidates fund performance in its financial statements. However, because GSG only has a 1% stake in these funds, the company's consolidated numbers do not necessarily accurately reflect its performance. Investors may therefore be advised to look at the non-consolidated (ex-fund) accounts to better grasp the true performance picture of GSG.

On the balance sheet, the company records fund investments as operational investment securities and operational investment loans. The company records the portion attributable to fund investors in minority interests. This accounting treatment artificially inflates total assets.

On the income statement, revenue, operating profit, recurring profit, and pretax profit also reflect fund consolidation. However, 99% of these consolidated earnings are attributable to external investors, and the company thus adjusts for these earnings or losses in the minority interest line. Therefore, net income is an accurate reflection of performance while other profit metrics are not. For other profit lines, the figures before fund consolidation give a more accurate picture of the underlying business.

Consolidated revenue also does not include the recovery of mezzanine fund investments in subordinated debt (although interest income is recognized). The company records redeemed preferred stock as revenue.

The following chart shows revenue under three different calculations: (1) fund-consolidated basis; (2) fund-consolidated, including recovery of investments in subordinated debt; and (3) fund-unconsolidated basis.

Impact of Mezzanine Fund Consolidation on Revenue
Profitability Snapshot, Financial Ratios
Structure of M&A Advisory Revenue Revenue and Operating Profit (Fund Unconsolidated Basis)
(Source: Company data)

Revenue from Japanese advisory business is primarily fees associated with new engagements, remuneration for time spent on a project, and retainers. Compensation is typically based on contractual agreements to provide M&A-related preliminary advice and information over a set period. The company also earns success fees payable at deal completion. The company uses the industry-standard Lehman method to calculate remuneration and success fees based on deal size. Although the percentage fee falls as deal size grows, the monetary value of the overall success fee rises.

For example, for the portion of the deal under 500 million yen, the fee is 5%; from 500 million to 1 billion yen, the fee is 4%; for 1 billion yen to 5 billion yen, the fee is 3%; for 5 billion yen to 10 billion yen, the fee is 2%; and the fee is 1% for the portion above 10 billion yen. For a 12 billion yen deal, the fee would be 500 million yen x 5% + (10-5) hundred million yen x 4% + (5-1) billion yen x 3% + (10-5) billion yen x 2% + (12-10) billion yen x 1% = 285 million yen.

In contrast, in the U.S. advisory business, the main sources of income are retainer fees and success fees. Success fees account for the majority of revenue.

Revenue is highly dependent on the number of M&A deals and the size of success fees. The bulk of the company's costs are labor-related expenses. SR Inc. believes that bonuses fluctuate with operating profit margins versus estimates but less so than at other investment banks. Personnel costs thus have a strong fixed-cost element.

Looking at revenue and operating profit since FY12/08 (fund unconsolidated basis), the business's breakeven point appears to be around 7.0 billion yen. Assuming no major changes to cost structure (such as a merger with another firm), the breakeven point is likely to remain near this point.

Strengths, Weaknesses


  • Independent advisory specialist with unique features: An independent M&A advisory strong in cross-border transactions-a unique and superior differentiation factor in the Japanese market, and the strength in the clubby Silicon Valley market.
  • Strongly positioned in Japan-an M&A growth market: SR Inc. believes that the stagnant Japanese economy and still-fragmented nature of many of its industries, set against the backdrop of cash-rich and technology-rich local companies, create a fertile ground for consolidation and acquisitions both "by" and "of" Japanese corporations. GSG is uniquely positioned to take advantage of the secular growth trend in Japanese domestic and cross-border M&A.
  • Low risk business model: The company is focused on providing advisory services. This means low overhead. GSG relies on repeat clients, reducing need for expensive marketing and sales. It invests but a tiny fraction of its own money in risk assets and employs little or no direct leverage.


  • Earnings volatility in sync with M&A market trends: The level of general M&A activity has direct impact on the company's advisory business. The M&A market tends, in turn, to wax and wane with economic climate and monetary conditions.
  • Limited ability to provide financing: While large banks and securities firms often have conflicts in trying to marry the advisory business with the financing (merchant banking) business, it is true that many clients choose their M&A advisors based on advisors' ability to arrange financing for the deal. While GSG does have a mezzanine finance function in-house, it is at a relative disadvantage compared to large banking rivals.
  • Small size means few people pitching for business: Having few staff compared to large rivals means that the company would have harder time allocating people to pitch for new deals. While relying on repeat clients is very efficient, it also means foregone potential opportunities and potentially slower growth.
Market and Value Chain

Market Overview

M&A in Japan (Number of Deals) M&A in Japan (Value)
(Source: RECOF Corp. data processed by SR Inc.)

Since 1998, following a wave of deregulation in Japan (including reform of the Companies Act, Tax Act, and accounting standards), Japanese M&A activity rose substantially. However, after peaking in 2006, the number of deals declined and has been stagnant. In the more developed and, arguably, more sophisticated U.S. M&A market, deal activity tends to be sensitive to economic and monetary conditions and thus follows a continuous boom-and-slowdown cycle. Japan may be experiencing a similar phenomenon.

However, from a longer-term perspective, it is clear that Japan's M&A market is extremely small versus the size of its economy. M&A in the U.S. is equivalent to 8% of GDP, but M&A in Japan is equivalent to a paltry 2% (2011), leaving plenty of room for growth. In fact, cross-border M&A, aimed at accessing overseas markets and strengthening overseas production sites, has been accelerating.

Barriers to Entry

Barriers to entry are relatively low in the M&A advisory business; it is easy to start a new firm if one has established trust with clients. However, competition is fierce among current players in the market, and it is hard not to rely on founders and other star players, making growth problematic.


Competition is fierce, with domestic securities firms, megabank groups, global investment banks, and accounting practices all vying for clients. GSG consistently ranks among the top advisory firms (based on number of announced deals). SR Inc. understands that this is a result of GSG's positioning as an independent player and its repeat-client model.

GSG has been building its global network. In 2011, it ranked top for both Japan-U.S. cross-border transactions and Japan-India cross-border transactions (based on number of announced deals).

GCA Savvian Advisors LLC ranked first in U.S. Internet advisory in 2011, highlighting its strength in M&A deals for technology companies. An insider in a club-like Silicon Valley community, the firm has built a differentiated position in the space and is working on strengthening its industry coverage outside technology field.

For many Japanese corporations, the management principles (and every Japanese company has a set of those) remain just a motto that does not translate into what the company does on everyday basis, particularly the strategy it implements. GSG claims to be different-espousing it's "Trusted Advisor for Client's Best Interest" philosophy and making it a basis for all client interactions. According to the company, the approach is not only used to think about business but also permeates the staff evaluation and incentives routines.

That it is independent is an issue with respect to scale and ability to link deals with financing. However, independence is also a strength. After all, in the world of M&A, it is hard to move without running into conflicts of interest. Even if a major investment bank spins out a division that becomes a new advisory, it would be difficult to grow. They must expand their talent pools beyond the founders, and introducing sales quotas would not adequately meet customer needs. The cohesiveness of the organization might falter. SR Inc. thus thinks that it would be hard to replicate GSG, (i.e., its independence, high weight of repeat business, top-tier position in the M&A league table involving Japanese firms).

The company might be physically unable to deliver on its promise of "Client's Best Interest" in some instances, especially when a Japanese corporation wants to shift overseas through M&A. The company has prepared itself for increasing cross-border M&A by Japanese firms and has delivered cross-border Japan-U.S. M&A advisory services through GCA Savvian Group. However, Japanese companies are moving abroad at a pace the company didn't anticipate, and not just to the United States. To keep up, the company is tying up with strong partners in local markets, and this is likely to be an ongoing theme.

At the time of the merger with Savvian, the company had in mind a "merger of equals." A straight-out purchase would leave the target company's employees with little incentive; as personnel are the one and only asset of an M&A advisory firm, this would damage the company. Post-merger, GSG's board has had a balance of founding directors from the old firms, and the management team at GCA Savvian Advisors LLC is virtually unchanged.

If its aim is to strengthen its organization through another merger of equals, bolstering its financial position would provide a wider range of potential partners. It will be vital for the company to maintain its unique characteristics mentioned above and seize emerging profit opportunities.

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