Panasonic is defending Blue Yonder for $ 7 billion after questions about the price

Panasonic has a checkered history in purchasing, but the Japanese conglomerate has stressed that a $ 7.1 billion purchase of the Blue Yonder dollar is worth the price, as it will help address its biggest weakness in software capability.

The sense of crisis that drives Panasonic’s deal prevails among Japanese companies, which once advanced in the era of consumer electronics hardware. But they’ve struggled with moving global demand to software and creating big tech companies like Apple and Amazon.

In March, Hitachi he accepted the purchase GlobalLogic, a Silicon Valley software engineering company, with $ 9.5 billion.

“As everything becomes digital, it’s becoming more and more difficult to distinguish it through hardware,” said Yasuyuki Higuchi, a Panasonic executive who heads the connected solutions business. “In itself, we have a sense of crisis and we need to have software.”

The former chief executive of Microsoft’s Japanese business oversaw the talks get Blue Yonder and has been at the helm of the U.S. supply chain software company since Panasonic acquired a 20 percent stake last year.

Following the announcement of the deal on April 23, shares of Tesla’s battery supplier fell to 14 percent. Investors were affected by the high price and questioned whether the management of the Japanese group would be able to handle such a large purchase in another industry.

Panasonic struggled with its two major acquisitions: the acquisition of MCA in 1990, then owned by Universal Pictures, for $ 6.6 billion, and the $ 800 billion acquisition of its smaller rival Sanyo Electric and another subsidiary in 2011.

Analysts have questioned the benefits of recent deals, including the 2015 acquisition of Hussmann, a U.S.-based manufacturer of refrigerated refrigerators, for $ 1.6 billion.

“We believe Panasonic has a weak track record especially when it comes to big deals,” analyst Atul Goyal Jefferies said in a recent report.

Higuchi argues that the Blue Yonder deal is a breach of the past because it is an investment in a software company with projected and stable revenues. The U.S. supply chain specialist, which serves 3,000 companies including Coca-Cola and Walmart, generated $ 1 billion in sales last year, of which 67 percent were recurring revenue.

“With a high-repetition ratio, their revenue is primarily established as a utility,” Higuchi said. “We’ve also managed to maintain management, so the success rate is very high.”

However, analysts are wondering what the two companies can do better with full ownership of Panasonic than what the Japanese company can do with a 20 percent stake.

The value of the Blue Yonder company rose from $ 5.5 billion a year ago to $ 8.5 billion, although its revenue has mostly remained flat. Over the last three years, the operating profit margin has fallen to 1.7 per cent from 10 per cent.

Panasonic executives want to expand Blue Yonder’s customer base in Japan and supply its hardware, such as security cameras and sensors, with software from the U.S. team to improve supply chain management.

Aside from the price, Citigroup analyst Kota Ezawa said the recent acquisition has faced some serious challenges facing Panasonic.

“They need a regular business model, a large active software, and a gateway and distribution channel to do business outside of Japan, so they were all the things needed to survive the competition,” Ezawa said.

“So it fills in some gaps, but obviously this deal isn’t the full answer to how Panasonic is switching to software and subscription services.”