Japan's Electronic Sector Ripe for Mega Mergers     

• The snap-back in global commodities like copper, in emerging market stocks and in the global PMI numbers is suggestive more of a "V"-shaped recovery than the "U" or "L" scenarios. Work done by Danske Research and others shows a close correlation between the YoY change in G3 (US, Euro and Japan) PMI survey orders and G3 GDP growth, and suggests a rebound from minus 5% to plus 3% by the early months of 2010.
• If this is the case, stocks were right and investors were wrong, i.e., the stock market wasn’t getting ahead of itself but merely discounting a stronger than generally expected recovery. "Big Money" fund flows, i.e., pension funds and mutual funds, indicate the big money is now more afraid of missing the rally than any renewed sell-off in stocks.  Even hedge funds are apparently less bearish than a month ago.
• While the higher cyclicality of Japan's economy virtually ensures than Japan leads on the way down and lags on the way up, a recent survey by the Nikkei of domestic economists suggests that Q2 (April~June) GDP growth for Japan on an annualized basis could be more than 4%, which would present investors with a very pleasant surprise.
• Longer-term, Japan is slowly moving to consolidate over-crowded industry segments. The Heisei Malaise resulted in substantial consolidation in the banking sector, leaving essentially four mega-banks, while the same is occurring in the insurance sector, pharmaceuticals and steel leaving a handful of firms in mature domestic markets that ostensibly can compete on a global scale. More recently, Kirin Holdings and Suntory have announced a mega-merger in beverages.
• While this still sounds like blasphemy to those in the industry, we believe Japan's electronic majors are overdue for extensive consolidation that could reduce the top seven to the top three or four.  So far, the only consolidation among the majors has been Panasonic's planned merger/rescue of Sanyo Electric. 
• Shareholders of the firm being taken over usually immediately benefit more than shareholders in the acquirer, as was seen so far in the Panasonic-Sanyo merger as well as other mega mergers in Japan.

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