A Privately Held, Owner-Run Company Launches a Tender Offer for a Listed Company: fonfun President Tsubasa Mizuguchi's Management Philosophy

Mizuguchi founded the company in 2002. The trigger was a student marriage: with a child on the way, Mizuguchi needed to earn enough to cover tuition for both themself and their wife, as well as the costs of raising the child. Mizuguchi began working as a sole proprietor while still at university and has run Cybridge as an owner-managed company ever since. About two years ago, Mizuguchi used Cybridge to carry out a tender offer for the listed company fonfun, and now runs both the private Cybridge and fonfun, which is listed on the TSE Standard Market.

Cybridge started with website production that Mizuguchi took on as an individual. From there it expanded into its own internet media business and a software development business, and today it operates a diverse range of businesses, including ones acquired through M&A. fonfun, for its part, went public in 2002. It originally listed on the strength of "Remote Mail," a service that let users read email on feature phones, and as that business shrank, it became a company with several products, including a short message delivery service. Both are internet companies.

Mizuguchi says that because the company was founded to support a family, there was never an initial ambition, as an entrepreneur, to grow it dramatically or make an impact on society. What Mizuguchi focused on was "how to build a company that won't go under," earning steadily and building up profits bit by bit. As a result, the company grew to a scale where it had accumulated enough capital to carry out a tender offer.

Cybridge has multiple group companies and does not disclose its revenue or headcount. As a rough indication of scale, however, Mizuguchi said the tender offer cost just under 800 million yen, funded entirely from the company's own capital. Since Cybridge already held about 200 million yen worth of fonfun shares beforehand, the total cost at the point of the tender offer came to roughly 1 billion yen. In other words, the business operates at a scale where it holds that much cash.

Explaining how the idea of buying a listed company came about, Mizuguchi points to experience with venture investing. While running Cybridge, Mizuguchi also made venture investments, but exits through an IPO or an M&A sale took a long time, and in many cases the investments ended without ever producing a return.

Looking at listed companies against that backdrop, Mizuguchi found quite a few with market capitalizations lower than those of venture companies. Perhaps listed companies were more interesting investments than ventures. With that thought, Mizuguchi began investing in low-market-cap listed companies.

Many of those companies, however, saw no rise in corporate value, and their performance remained sluggish. Drawing on experience in the internet field, Mizuguchi made shareholder proposals and suggested working on businesses together, but nothing came of it. In that case, it would be better to acquire a listed company directly and raise its corporate value personally. That decision led to the tender offer for fonfun.

From the outside, a private company buying a listed one may look unconventional. When Iijima asked about this, Mizuguchi first went back to the reason for choosing entrepreneurship. At the time of the student marriage, there were plenty of options besides starting a business. Mizuguchi chose entrepreneurship anyway, wanting to live life by their own decisions. Even if the family ended up destitute, Mizuguchi felt that a failure resulting from taking risks and acting responsibly on their own terms would be one they could accept.

Mizuguchi also feels no reluctance about the tender offer method itself. In Mizuguchi's view, a joint-stock company is the owner's private property if the owner holds 100% of it. A listed company, on the other hand, has many shareholders and is expected to raise its share price while being managed soundly. A listed company is a public entity, and anyone can buy its shares. So shareholders who have bought shares on the market and taken on risk are entitled to have a say in that company. Mizuguchi's position is that one should simply follow the proper procedures to acquire a listed company.

At Cybridge, Mizuguchi has handled more than 50 M&A deals, ranging from small affiliate sites to deals worth hundreds of millions of yen. Some were akin to corporate turnarounds, while others resembled real estate investments, where a business that generates a certain level of income without any intervention is presented with a request to "buy it for this price."

Building on that experience, Mizuguchi emphasizes the leverage unique to listed companies. When a private company acquires a business, the return is limited to the value of the cash flow that business generates. At Cybridge, the money that comes in simply becomes Cybridge's. At a listed company, cash flow and business value are given a price in the form of the share price, and they are valued with a multiple applied. That makes it possible to push corporate value even higher.

If you merely invest in other listed companies, there is only so much you can do after investing. That is precisely why Mizuguchi believes the investment with the greatest return is to put the know-how gained from M&A and years of running businesses to use, and to raise value by managing a listed company directly as a principal. That is the thinking behind Mizuguchi's approach.

What path to success did Mizuguchi envision at the time of the tender offer? The answer was that "it's not that difficult." Whether at a listed company or a small or midsize business, running a company ultimately comes down to increasing sales, bringing in money, and managing people.

At listed companies, however, there are many cases where going public has become an end in itself or where the organization is fragmented, so that management's steering emphasizes things that aren't essential. Mizuguchi says they actually felt this way often. If you put the basics into practice properly, you will at least turn a profit. And if you keep making sound growth investments while profitable, corporate value will rise naturally. By doing the obvious things properly, Mizuguchi expected to take a company with a market capitalization of 1 billion yen to at least a higher level than that, and set to work on that basis.

Mizuguchi admits that their own company also has plenty of things it does well and plenty it doesn't. Even so, Mizuguchi says management needs to approach the work with real commitment. At a listed company, directors are elected at the general shareholders' meeting, so they are pressed for short-term results and risk dismissal if they don't deliver. Holding a large stake to stabilize management and pursuing reform over a long period: that, Mizuguchi says, is also why they invested a large sum in the tender offer.

Since becoming president of fonfun, Mizuguchi has taken zero yen in executive compensation. The reason is simple: if the share price rises, Mizuguchi will get a sufficient return in terms of assets, so there's no need to force fonfun to pay a salary. Mizuguchi is aware of the argument that one should be paid in order to do good work. Still, Mizuguchi explains, the owner's greatest mission is to maximize corporate value, and there is no need to make fonfun bear the extra cost of their own compensation.

As an incentive, Mizuguchi has received stock options that can be exercised if fonfun reaches the 10-billion-yen market capitalization set out in its medium-term management plan. Exercising them, however, requires paying in hundreds of millions of yen. As has been disclosed, if the 10-billion-yen target is reached, Mizuguchi will pay about 200 million yen into the company. Because Mizuguchi believes corporate value can keep rising as long as the company remains owner-managed, Mizuguchi will take the shares and, if anything, buy more personally. Since the time to sell is a long way off, Mizuguchi does not expect any cash return for a while, but said that this is their job right now.

Mizuguchi has transferred shares from Cybridge, the entity that carried out the tender offer, to fonfun's employees and their children. When a company transfers or grants shares to its employees, this is treated as equivalent to monetary compensation and taxed as employment income. Since having to pay tax just for receiving shares would be undesirable for employees, Mizuguchi arranged for the shares to be given as gifts from Cybridge, which has no employment relationship with them.

The idea of giving shares to employees' children as well is connected to the fact that Mizuguchi has eight children. At a large company, children are aware of their parents' company, but at other companies, children rarely give much thought to where their parents work. So Mizuguchi created a situation where a company president named Mizuguchi, for reasons the children may not fully understand, gave them shares, and their brokerage accounts now hold stock in the company where their parent works. In the future, if corporate value rises dramatically and the share price goes up 100 or 200 times, those shares will be worth a large sum. Surely a moment will come when the children realize this is the result of their parents' hard work in making it a good company. Mizuguchi thinks it would be wonderful to make that happen.

When Iijima expressed admiration for this approach of aligning the incentives of shareholders, management, and employees, Mizuguchi also revealed a contrasting view. Mizuguchi has no intention of giving even a single Cybridge share to employees, running it as a 100% owner. There's no reason to distribute them.

Listed companies, on the other hand, operate from the outset on a system in which anyone can buy and sell. In Mizuguchi's words, a listed company is itself a sharing economy. In that case, it's better for employees to hold a stake too. Ordinary employees tend to have little interest in stocks or don't really understand them. At an owner-run private company, employees can't hold shares, but at fonfun they can. They can work not merely as laborers but as shareholders, with incentives beyond their salary, so why not do it? Since they have the opportunity, Mizuguchi wants them to hold shares and develop the habit of thinking about corporate value. That was the thinking behind putting it into practice.

Mizuguchi says that management is fundamentally quite unsentimental in many respects, and that's how capitalism works. At the same time, Mizuguchi sees listed companies as having an aspect like a fan community. Mizuguchi said they would hate for the company's own employees not to be its biggest fans, and wants to build that kind of relationship.

At the time of the tender offer, fonfun had sales of 600 million yen and almost no profit. Its business model was originally based on subscription-style recurring revenue, but its feature phone services had been running for many years and were shrinking.

Listed companies disclose earnings every quarter, are judged on growth rates, and are expected to manage budgets with a high degree of accuracy. So in the medium-term management plan, Mizuguchi set a policy of expanding through M&A with businesses that are profitable and have little volatility in performance, so that investors can buy the stock with confidence as a financial product. Simply continuing the existing business had earned the company a valuation of only 1 billion yen in market capitalization. Without growth, the share price won't rise. But not just any kind of expansion would do. Focusing on its original internet domain, the company selected businesses with high recurring revenue and stability, and it now operates on two pillars: a product business and an engineer staffing business.

Both businesses are relatively stable, and so far there have been no major failures.

At the same time, Mizuguchi acknowledges the limits that come with this conservative approach. Having chosen businesses with highly accurate forecasts, growth also stays within the range of expectations. For that reason, Mizuguchi believes the company needs to add businesses that generate discontinuous growth and revenue as well.

As one example, Mizuguchi noted that an M&A-related company (rendered as "M&ADX" in the subtitles) has been made an equity-method affiliate, with Mizuguchi personally joining as its representative. M&A advisory deals can close on a one-off basis, and Mizuguchi hopes these will show up in the group's figures.

Mizuguchi also touched on overseas expansion. In its partnership and medium-term management plan, the company has stated that it wants to capture demand not only in Japan but abroad as well. However, given the current organization's capabilities and the systems needed to manage operations while properly undergoing audits, distant locations outside Japan are difficult. Although there were many overseas M&A deals and candidate companies, the company has yet to complete an acquisition abroad. Mizuguchi wants to move forward on this in cooperation with a partner (whose name in the subtitles sounds like "Hybrid-san").

For the existing business, the company handles M&A from sourcing to execution in-house, quite conservatively. But there are no surprises there. Mizuguchi candidly admits that, as a still-small listed company with a narrow range of investable amounts, there is limited room for bold moves. Even so, Mizuguchi said they want to keep taking whatever steps are possible within that range.

Judging by the track record at Cybridge, Mizuguchi can already be said to have achieved success, both in terms of assets and social recognition. Asked what drives them to keep taking risks and pursuing new challenges, Mizuguchi replied, "I have a strong desire to do new things and gain new knowledge."

Once people accumulate a certain amount of success, they can run reproducible businesses with the knowledge and colleagues they already have, without needing new knowledge, and they tend to gravitate toward that. But that gets boring. Having been born into this world, Mizuguchi wants to take on unfamiliar industries and things they've never done, and to learn how the world works. With more advisory firms, the number of people with M&A experience has grown considerably. But few people have experience carrying out a tender offer for a listed company through the procedures of the Financial Instruments and Exchange Act. Mizuguchi says even a narrow field like that has its own specific know-how and required knowledge. While noting that this was a small-scale tender offer that gave them experience in only part of that field, Mizuguchi said it is precisely by doing what you've never done that you gain new knowledge.

Mizuguchi wants to keep pursuing M&A and broaden the range of what they can do. As corporate value rises and creditworthiness builds, it becomes easier to raise funds through either debt or equity, making it possible to acquire larger companies. So far, Mizuguchi has only experienced running small and midsize businesses, so if fonfun grows, Mizuguchi will be able to take on M&A, turnarounds, and expansion of larger companies. "I want to go see sights I've never seen before," Mizuguchi says.

Finally, as a message to viewers, Mizuguchi described fonfun's current situation. Its securities code is 2323. At the time of filming, its market capitalization was just under 5 billion yen; the medium-term management plan targets 10 billion yen, but the company hasn't reached that yet. While noting that their position doesn't allow them to recommend buying the stock, Mizuguchi said that anyone who likes the company should become a shareholder and come to the general shareholders' meeting, which Mizuguchi wants to make something like a fan meeting. Those who think the company should be trying harder can also apply pressure as shareholders. Mizuguchi described fonfun as "a listed company like an idol you can go meet," and closed the conversation by asking for viewers' support.