Sanyo Deal Could Drain Panasonic

By JAMES SIMMS
Panasonic could short-circuit its ambitious profit goals if it buys Sanyo Electric.

Excitement over a mooted deal between the companies drove shares of both higher Tuesday. The combination could create Japan's biggest electronics maker by sales.

But unless Panasonic makes some aggressive moves to dump or fix Sanyo's many underperforming business lines, a deal could damage its ability to maintain and expand profits, just as demand for electronics wanes along with the U.S. economy.

Both have denied reports -- in The Wall Street Journal and the Japanese press -- that Panasonic may buy Sanyo's preferred stock. Worth about $6.4 billion, that stock would give Panasonic control of 70% of Sanyo's voting rights.

The drain to Panasonic would come from Sanyo's operations that overlap its own, the biggest being commercial and home appliances and electronics.

In the year ended in March, Sanyo's white-goods and consumer-electronics unit, which accounted for over a third of its revenue, showed an operating margin of only 2.3% against 5.8% and 6.6% at the two Panasonic groups that make similar products.

Panasonic has an ambitious plan that targets a 10% companywide operating margin through the fiscal year ending in March 2010. Even what Sanyo calls a "challenging target" -- a margin of 4.2% in fiscal 2010 -- falls far short of that.

Where Sanyo does offer Panasonic something unique is in areas like lithium-ion batteries -- being developed with Volkswagen for hybrid cars -- and solar panels. The unit that includes these high-margin products accounted for almost half of Sanyo's sales last fiscal year.

Still, investors cheering the takeover talks today might want to start pressing Panasonic on how it plans to address the other problems. If they don't, they could be in for a high-voltage shock.

Write to James Simms at james.simms@dowjones.com