BY KANA INAGAKI AND ATSUKO FUKASE

TOKYOEarlier this year, when struggling Japanese chipmaker Renesas Electronics Corp. was looking for an investor to bolster its finances, U.S. private-equity giant KKR & Co. stepped up to the plate, say people close to the talks.

Unfortunately, there is still something of a bias against private equity, Shusaku Minoda, the chief executive of KKRs operations in Japan, said at a private-equity forum in October. Of course, governments everywhere turn interventionist when strategic interests are involved.

But when Renesas announces the new investmentas early KKR Japan Chief Executive Shusaku Minoda as this monththe benefactor wont be KKR but Japan has long been a tough a group led by the market for buyout firms, Witness the U.S. bailouts of Innovation Network Corp. of particularly foreign ones, due General Motors Co. and Japan, a government- backed to a historical aversion to job Chrysler Group LLC in fund that bid against KKR at cuts and the perception that 2009. Neither governments the urging of Japans vulture fundsas theyre nor private firms have a powerful industry ministry often dubbed in Japanfocus good turnaround record in notoriously cyclical and Renesas customers such solely on profits, not the the as Toyota Motor Corp., health of the companies they semiconductor industry. people close to the buy. Still, critics say it isnt clear negotiations say. Private-equity buyout deals in Japan which industries or will be The story of how KKR was in Japan so far this year companies off-limits to shouldered aside in the totaled $3.5 billiononly 4% considered Renesas deal underscores of the value in the U.S., private funds. There needs be a reason and the hurdles private-equity according to data tracker to consistency, and a clear firms face in Japan, and how Dealogic. message of why [the the government and big In 2011, the value of governmentsupport] option corporations still wield being taken versus influence over strategic privateequity investment in is economic industries. Even an attempt Japan was 0.2% of the pursuing by KKR to partner with the countrys gross domestic rationality, says Katsuhide INCJ itself fell short, say product, compared with 1% Takahashi, a credit analyst people with direct knowledge in the U.S. and 1.1% in the at Citigroup Inc. in Tokyo. U.K., according to McKinsey Established in 2003, Renesas of the deal. & Co. was formed from successive governmentorchestrated

mergers of the chip units of Hitachi Ltd., Mitsubishi Electric Corp. and NEC Corp. It is now the worlds fifth-largest chipmaker by revenue, with a 30% share in the global market for microcontrollers, yet it has continually lost money amid falling chip prices and competition from overseas rivals. Renesass struggles caught the attention of the INCJ, a fund formed in 2009 by Japans Ministry of Economy, Trade and Industry, or METI, which has $1.7 billion in public money to invest in struggling or nascent industries. Unlike government rescue funds, the INCJ stresses investment returns though it has no specific targets and it isnt supposed to bail out companies or vie with private investors unless the health of some broader industry is at stake, said chief executive Kimikazu Noumi, in an October interview. From the start, the INCJ hired bankers from firms such as Carlyle Group LP and Merrill Lynch & Co., and sent them to figure out how to help Japans ailing semiconductor manufacturers, including Renesas. At one point, it even proposed helping Renesas spin off some of its lossmaking operations, but the firm wasnt interested, said a person with knowledge of the talks. That changed when the massive earthquake and tsunami of March 2011 crippled an important Renesas factory in

northeastern Japan, more than doublingto 115 billion ($1.4 billion)the companys loss compared with the year before, and triggering delays in shipping parts to Japanese auto makers. By January 2012, Renesass lenders were considering a request for more loan collateral, a person with knowledge of the bank deliberations said. Renesas approached the INCJ to discuss aid again, but this time it was the INCJ that declined, saying the company first had to get more money from lenders to restructure its operations, said a person close to the talks.

in bank loans and financial assistance from shareholders, and rolling out plans to cut as much as 18% of its workforce and shut down or merge 11 of 19 plants in Japan. For the New York fund run by Henry Kravis and George Roberts, the invitation to turn around Renesas seemed to offer a much-awaited break. Such a deal would have been KKRs biggest investment in a Japanese company since it opened its Tokyo branch in 2006and only its second major investment in the Japanese market. KKR executives in New York and KKR Japans Mr. Minoda, a veteran banker hired from the Mizuho Financial Group Inc. in 2007, knew the Renesas deal would be politically sensitive and tough to pull off, people involved in talks with KKR said. To smooth the way, KKR proposed a joint investment with the INCJ, with KKR taking a majority stake, one of the people said. In August, KKR proposed to invest a total of 100 billion in Renesas and later met with members of INCJs deal team to discuss details, says a person with direct knowledge of KKRs proposal. KKR envisioned listing Renesas in about five years, but pledged not to sell any of its operations to parties with which Renesas and stakeholders werent comfortable, the person said. KKRs proposal, which was reported the next day by Japanese press, set off

During the first few months of this year, Renesas and officials from METI approached the firms three shareholdersHitachi, Mitsubishi Electric, and NEC as well as numerous customers such as Toyota, asking for money. None of the companies wanted to invest in Renesas on their own, people with knowledge of the talks said. By May, Renesas reached out to private-equity firms for help, including KKR and California-based Silver Lake Partners, according to people informed about the talks. Renesas also took steps to clean up its act, securing nearly 100 billion

alarms at upper levels of the INCJ. INCJ executives wanted control over the company and management decisions, particularly since the fund had considered Renesas a crucial piece in its hoped-for restructuring of Japans semiconductor industry, people with knowledge of the executives thinking said. The semiconductor industry is extremely important, Mr. Noumi said in the October interview, without referring directly to Renesas. How to structure [this industry] has been a theme for us since our launch. KKRs proposal also caused consternation among Renesas customers, which were still highly reliant on the firm for key parts, and feared KKR would raise prices or break up the company and sell it, according to people close to the firms thinking. The customers aired their fears to industry ministry officials, who in turn urged the INCJ in September to explore the possibility of leading a consortium to invest in Renesas, people involved in the process said. One of those customers was industrial robot maker Yaskawa Electric Corp., whose president, Junji Tsuda, says he told METI that Renesas needed to be turned around in a way that doesnt put the interests of one company over those of its customers. Its blatantly obvious that a foreign fund would treat this as the turnaround of a single company, said Mr. Tsuda.

INCJ submitted a proposal to invest about 200 billion in October more than 180 billion from the INCJ for about a two-thirds stake and about 10 billion total from eight Renesas customers, including Toyota, Yaskawa and electronics giant Panasonic Corp., for less than a 5% stake, according to people with knowledge of the talks. Renesas and its shareholders chose the INCJs larger investment over KKRs, the people said.

not for the sake of the auto industry alone but for all of Japans manufacturing. If Panasonic hadnt invested, there may be a high price to pay down the line, said president Kazuhiro Tsuga, at a press reception in November. If new management comes in, its hard to see what kind of prices they may charge or how stable the supply would be. Daisuke Wakabayashi and Yoshio Takahashi contributed to this article.

The eight companies have largely been quiet on their role in the proposed deal, but some executives admit they were concerned Renesas was too important to go to a foreign investor. Speaking as chairman of the Japan Automobile Manufacturers Association at a recent news conference, Toyota President Akio Toyoda said the auto industry could be counted on, if there is any such request to help Renesas