Late last month, Canon (NYSE:CAJ), the Japanese multinational corporation specializing in the manufacture of imaging and optical products, including cameras, camcorders, photocopiers, steppers, computer printers and medical equipment, came upon my radar when Toshiba (OTCPK:TOSBF) announced that it had agreed to sell its medical equipment unit to the company. Toshiba, the electronics conglomerate, has been looking for ways to restructure and streamline a business which, as U.S. authorities discovered, was inflated by years of false accounting practices, particularly related to its Westinghouse nuclear power unit. As for Canon, it represented an opportunity to fulfill its current Phase V - Section 5, strategic business initiative that "promote(s) the acquisition of promising businesses through active M&A and complete the Three Regional Headquarter management system, under which Japan, the U.S. and Europe will each roll out businesses globally." I contend that by examining Canon's acquisition of Toshiba's medical equipment unit closer, potential investors can embrace what the company is all about today and where it could possibly lead to in the future.
I admit that Canon is the type of company where I, and perhaps others, tend to lag behind its evolving branding curve. On the surface, a one word association regarding the brand yields the word: quality. In two words: quality cameras. Since its humble beginnings during a time of great uncertainty in the early 1930s - a time when Adolf Hitler gave his "Proclamation to the German People" in Berlin, President Franklin D. Roosevelt declared a "Bank holiday" to close all United States banks and freeze all financial transactions, and Japan's Emperor Hirohito withdrew from the League of Nations - an unknown optical instruments laboratory in Tokyo would go on to produce Japan's first 35mm focal-plane-shutter camera prototype.
Fast forward nearly two tumultuous decades for that nation later, and they would unveil the world's first speed-light synchronized 35mm flash-and-shutter cameras. Most of the baby boomer generation, including the Generation X to follow, would fondly recall these wonderful devises and the relationships we created with our local camera shop owners who developed the selective images from our special occasions. It wasn't until the 60s when Canon truly expanded and diversified towards meaningful, connected shifts and began developing optical fibers, X-ray mirror cameras, sophisticated calculators and, of course, the copying machine.
Nevertheless, the name Canon and the quality of excellence associated with its name will always find its roots as the great camera maker for the general global consumer at large. It is an imperceptible common trap for those who remain disconnected as non-competitors or non-investors in this particular sector to make the assumption that newer, seemingly edgier companies like GoPro (NASDAQ:GPRO), or the popularity, convenience and increasing quality of smartphone cameras have gained an unstoppable market share over Canon as a whole.
This is clearly illustrated by a snapshot of today's most recent threats for Canon, as reported on Seeking Alpha:
Startup Light's L16 camera is the first salvo in the company's attempt to upend a digital SLR market dominated by Canon and Nikon (OTCPK:NINOY). The L16 contains 16 different sets of lenses and sensors - five shoot at 35mm, and the other 11 at 75-150mm - in a form factor resembling that of point-and-shoot cameras. Up to ten of the lenses/sensors simultaneously fire when a picture is taken.
As a result, only zoom and shutter speed are determined at the time of shooting. Unlike with conventional cameras, qualities such as focus and depth-of-field can be adjusted afterwards thanks to the L16's use of computational imaging. Meanwhile, having up to ten lenses/sensors fire at once allows the L16 to create images as large as 52MP, and helps a lot with low-light photography...
Again, on the surface, from this competitive perspective, it is understandable to assume that the "camera maker's" deal with Toshiba's medical equipment unit might appear out of place. However, as noted previously, Canon is currently in Phase V of an ambitious, multi-decade business plan "seeking to become a truly excellent company that is admired and respected around the world." It had launched this medium- to long-term "Excellent Global Corporation Plan in 1996;" and, according to the company, it has successfully completed the first four phases. With the initiation of Phase V in 2016, abiding with "the aim of embracing the challenge of new growth through a grand strategic transformation," it has begun executing seven key strategies, of which the most recent Toshiba unit purchase signifies a prime strategic example.
In order to get up to speed on its multi-leveled initiatives, the following is a summation of what Canon has accomplished so far:
Canon's Road to Phase V
Phase I - 1996-2000
To strengthen its financial base, Canon transformed its mindset to total optimization and a focus on profit. The company instituted various business innovations, including selection and consolidation of business areas, and reform activities in such areas as production and development.
Phase II - 2001-2005
Aiming to become No.1 in all major business areas, Canon focused on strengthening product competitiveness along with the changing times, stepping up efforts to digitize its products. The company also conducted structural reforms across all Canon Group companies around the world.
Phase III - 2006-2010
Canon moved ahead with such growth strategies as enhancing existing businesses and expanding into new areas. Through the thorough implementation of supply chain management and IT reforms, the company targeted the realization of "real-time management" to respond quickly to changes.
Phase IV - 2011-2015
Due to weakness in the global economy, Canon revised its management policy from a strategy targeting expansion of scale to a strategy aimed at further strengthening the financial structure. While undertaking M&A activities, the company aimed to restructure its business at a foundational level to introduce new growth engines for future expansion.
The Next Phase - Capturing World Dynamism
By definition, dynamism is a provocative, highly charged word to express expansionism powered by the desire to exert energy or force to make something happen. Canon is actively achieving that aim on a global scale. So, as Canon embarks upon its Phase V, I question whether its recent acquisition should be considered capturing world dynamism via calculated, strategic baiting or is it just casting an immense global net and hoping for the best?
When comparing Canon's medical unit to that of Toshiba's, we discover that the former has made some headway into Digital Radiography-Fluoroscopy, Medical Imaging and Healthcare IT software solutions. Toshiba, on the other hand, is far more vast with subsidiaries at 13 locations outside of Japan, including overseas group companies and distribution centers in more than 135 countries from Canada to Western Somoa to the African Congo. Its products include Computed Tomography, MRI (Magnetic Resonance Imaging), Ultrasound, and X-ray devices from Angiography to Mobile Machines. And, when we look closer at Canon's business units, we discover that its "medical equipment field" sales are included in the same category along with other technologies, such as semiconductor lithography equipment as well as flat panel display (FPD) lithography equipment, adding up to only 13.18% of the company's total sales. Therefore, it would seem that this Japanese company's $6.5 billion investment represents an aggressive global net to transform its medical equipment field into one of its next generation core businesses.
It's worthy to mention that Canon has played the role of a billion dollar player in the sphere of acquisitions as recently as February 2015 when it had made a $2.8 billion cash bid to capture Sweden's Axis Communications AB. This move also represented its capability, via these large purchases, to cast an immediate net, just like the Toshiba deal. In the Axis scenario, the purchase was its bid to quickly expand into the video surveillance industry as its digital camera sales become increasingly diminished by smartphone competition. Time will tell how well the Toshiba deal progresses; however, while a different business segment altogether, the Axis deal had significantly boosted Canon's network camera market by 31.6% within about a year's time.
According to Canon's fiscal year 2015 earnings report, its FY15 EPS was $1.67, missing by $0.06. Its revenue of $31.41B missed by $1.09B. Compared with its projections, net sales and operating profit were below target by approximately ¥20 billion and ¥10 billion, respectively.
As a result of the Toshiba Medical Systems Corporation acquisition, it expects free cash flow to be negative ¥415 billion for the full year. Canon's camera sales declined mainly due to lower sales of entry cross models. Sales of office equipment also declined, reflecting the impacts of economic slowdown in the emerging market on sales of monochrome models. Looking forward, Canon expects the global economies to remain on a path of modest growth - not exactly the kind of incentive to motivate new investors to jump on board quickly. Adding to that sentiment, it admits that it expects the situation to remain "churning for some time," thanks in part to the impact of degrading natural resources in the emerging market economies, as well as China's economic slowdown.
For now, based on its self-professed modest outlook, a rising yen and increasing competition, particularly from smartphones, I am content to remain on the sidelines - for now. I do intend to keep a very close watch on its share price, as well as updates from the company moving forward, with the intention of making an investment entry in the near future. It is evident that Canon is an immense, yet highly organized and efficient company with a rich history of progress and success. Its M&A activities to restructure its business at a foundational level, while highly calculated, requires time to observe, especially from highly cautious, ultra-conservative investors requiring substantial proof that such moves pay off by truly introducing new growth mechanisms for ongoing expansion.
Disclosure: I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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