Topic 7: The Long - Term Objectives and Strategies Case Study Shiseido to buy US-based Bare Escentuals for US1.7bil TOKYO: Shiseido Co Ltd, Japan's largest cosmetics company, has agreed to buy US-based Bare Escentuals for USS1.7bil, as it looks to speed up its expansion and break into a new part of the North American market. Shiseido, which began as far back as 1872 as Japan's first Westem-style pharmacy, has been focusing on growth in China to offset a US\$24bil home market that is shrinking as Japan's population ages. Shiseido said adding Bare Escentuals, a San Francisco-based cosmetics and skincare firm, would help it move into the fast-growing natural-ingredient cosmetics market. Bare Escentuals would have lifted revenues at Shiseido last year by 8% and operating income by 36% Kao Corp, a rival toiletries and cosmetics firm that bought Kancbo in 2006 and British luxury skincare brand Molton Brown in 2005, is also looking for beauty-care product brands in the United States and Europe. Japan's third-ranked Kose Corp has also said it would consider an overseas acquisition if the right deal came along. A woman walks pass a Shiseido counter at a department store in Tokyo, Shiseido plans to acquire Bare Escentuals in a bid to revamp its global brand and expand in North America, - Reuters The acquisition may strengthen Shiscido's presence in a competitive North American market and help it expand in Central and South America, said Ryosuke Okazaki, chief investment officer and senior vice president at ITC Investment Partners, an asset management arm of Itochu Corp. "But investors are still trying to see if these two strong brands can help one another grow, without competing, " he said. Shiseido is offering USS 18.20 per share in the cash deal, a 43% premium to Bare Escentuals' last Nasdaq closing price. Bare Escentuals' 2008 operating profit margin of 31.5% was more than quadruple Shiseido's 7.2% in the year to last Mareh, according to Shiseido. The California-based firm, which markets natural-looking cosmetics and runs 800 retail outlets in the United States, will operate as a separate division of Shiseido, and its brands will continue to be run by CEO Leslie Blodgett. Shiseido, which earns 62% of its sales in Japan, has been selling US\$1,000 anti-ageing face creams along with rivals Kao and Kose in the fast-maturing Japanese market. "Shiseido is not a global player on natural-ingredient products, for which demand is growing," Shiseido president Shinzo Maeda told a news conference. "By capitalising on Bare Escentuals" strength in this area, we can expand our clientele," He said Shiseido can also capitalise on Bare Escentuals' TV and Internet-based marketing expertise. Cosmetics sales via these channels are growing in Japan, but Shiseido has been a small player. Shiseido will consider more overseas acquisitions, but is not in any other talks now, Maeda said. Some analysts cautioned that Shiseido may be paying too much for a brand that is little known in Asia and has limited room for further growth in the United States. "Shiseido needs to target Asian countries for its sales and profits to grow, but it's not clear how Shiseido will expand its Bare Escentuals business in Asia, " said Toshihiko Matsuno, senior strategist at SMBC Friend Securities. "I don't think I can justify a USS1.7bil acquisition price." Maeda said the deal was not over-priced given the US firm's high profitability and potential. Shiseido will fund the acquisition with 30 billion yen (US 529mil ) in cash and cash equivalent and a 150 billion yen bank bridge loan. - Reuters 3. Briefly describe two main challenges that faced by Shiseido in its operation in Japan