Editing The Pen Addict 417/transcript (section)

== Tokyo Inklings Podcast ==


'''Myke Hurley:''' Straight up. We are not going to do as good a job discussing this as the guys over at the Tokyo Inklings podcast did. Which is where we're not only getting this information, but taking all of their information and talking about it ourselves. So, I actually really, really thoroughly recommend that people go and listen to emergency episode number one, Sailor Plus. Is the name. And I'll put a link in the show notes.

'''Brad Dowdy:''' So, we're obviously going to talk about the possibility of a new ownership group for Sailor Penco out of Japan. And as Myke said, our good friends CY and Jacob over at Tokyo Inklings, CY started texting me. When he started messaging me when they were about to release this show. And he's like, hey, did you see all this? We got an episode coming out. And I was like, no, I hadn't heard of that. So, he really hooked me up with some links and stuff to read more about it. And I implore you, like, you can, if you want to know more about what Myke and I are about to discuss, stop right now. Go listen to their show. It's about 20, low 20 minutes, 22 minutes long. Where they just take this topic and being in the Japanese market and able to read all of Sailor's press releases. And all of the goings on of all the financial implications. Which Jacob did a fantastic job breaking down. Like, he has a financial background. I think works in finance. So, he was able to break some of this down. Listen to them. And then we'll kind of talk about it in our own way. And how we feel about what is happening here. So, the short version. And then we can elaborate on all the ins and outs of this, Myke. Is that a company called Plus out of Japan.

'''Brad Dowdy:''' Was already a 14% shareholder. Of Sailor.

'''Myke Hurley:''' Plus is a big stationery and office supply company. Yeah. So, they remind. I don't think has a massive foothold outside of Japan. Or at least is not a, like, a name brand that I was familiar with. They do have an outside of Japan presence. But I don't think that we're really that familiar. You know, honestly, you could have bought stuff from them if you've bought from the, like, quote unquote, Japanese stationery aisle. Or, like, the Japanese stationery on JetPens, for example. Maybe this. I don't know. But maybe Plus do some supply for that kind of stuff. But it's those kinds of ideas, right? The nice little gadgets. The cute little paper clips. That kind of idea.

'''Brad Dowdy:''' But their main business, which is kind of like when we talked about Kukuyo buying Pentel, is really the office as a whole, right? They're an office supply company, not an office supplies company, right? And that's big business. So, plus, their annual sales in 2019 was 186.6 billion yen. That translates to 1.7 billion US dollars. So, that was Plus as a company. Saylor's 2019 annual sales was 5.3 billion yen, or $49 million. So, you can see the size difference. And Plus owned a 14% stake of Saylor previous to this.

'''Myke Hurley:''' And they did the Cherry Blossom Pro Gear that we spoke about a number of weeks ago. That was a Plus limited edition with Saylor.

'''Brad Dowdy:''' Exactly. Exactly. So, what Saylor did, and Saylor's had other financial troubles in the past. It was a few years ago. I want to say 2016, 2017. I couldn't find my article links that I saved. But they were close to having to sell back in several years ago or do something drastic to continue the company going. So, this is not a new thing for Saylor as far as, you know, kind of being on the edge of sustainability. So, what they did was issued convertible bonds. And as Jacob explained, what these convertible bonds do are a way to pay down some of their debt by issuing these bonds and having another party purchase these bonds, which is what Plus did. And these bonds are able to be converted into stock of the Saylor company. If Plus, the amount of bonds that Plus purchased, if executed, would give them a 57% ownership stake in Saylor, which would give them control of the company. So, that's what's interesting about this whole thing is Saylor could essentially have a new owner if these convertible bonds get executed. So, almost certainly, this is going to happen, I would think. Plus, already has a stake in the company.

'''Brad Dowdy:''' Plus, invested more in Saylor to buy out some of their debt with an option to have a bigger ownership stake. And they already have an agreement with Saylor in place before this.

'''Brad Dowdy:''' To use Plus's new sales subsidiary, which is called Chorus, for all of Saylor's sales work in Japan. So, all of the, I don't know, sales, promotion, distribution, logistics in Japan for Saylor company will now be going through one of Plus's subsidiaries. So, Plus is essentially kind of like a conglomerate. They have 17 different subsidiaries. One of them is a stationary company that makes Apica notebooks. You know, the Apica notebooks that I love. It's called Nippon Notebook Corporation.

'''Brad Dowdy:''' You know, and they have, Plus also has, like you mentioned a second ago, they have offices all over the world, right? They have a presence in the U.S. They have a presence in Europe. You know, they're in Germany. They're in Portland, Beaverton, Oregon, home of Nike. So, they're here in the U.S. They're all over the world. They're highly invested in a lot of different manufacturing, distribution, and logistics areas. So, why do they want to buy Saylor? I think that's the biggest question. Or why do they want to take ownership control of Saylor? Or do you have any thoughts on this before I kind of give my thoughts?

'''Myke Hurley:''' I want to underscore a point and make it super clear. So, at the moment, they've just bought a higher percentage of the company, right? They've invested to acquire, like, a higher percentage of the company in these bonds. But they have the ability and the way that Jacob kind of explained it, and I'm going to try and explain his explanation, which I'm sure won't go well for anybody, is effectively, like, the way that they can convert these bonds into an ownership. So, they pump them with money, and then they can just say, like, oh, now we want to turn it into our ownership percentage. And if they then do that, they own the majority share, which effectively means they control the company. This is, like, a friendly takeover rather than a hostile takeover. Like a hostile takeover, right? You just buy as much of the company until you own enough of it that you can make the rules, right?

'''Brad Dowdy:''' And usually in a secondary way, this being a direct way.

'''Myke Hurley:''' But this is, like, a similar idea where it's, like, they are not, quote, unquote, acquiring the company, right? Which is where you say to a company, how much, right? Like, they would effectively just be buying some, or, like, they have put in enough money, which they can choose to switch over to, like, they can convert these bonds into ownership shares. And they will, if they do that, which is, I wouldn't understand why they wouldn't do that, as Jacob explained, like, the way that the bonds are written, it is written to do this. Like, to not do this would be a very peculiar move, right? Like, to put the money into this type of convertible bonds without converting them would be almost like a waste of the money in the first place. Right, right. If you do this, you would do this to take it to the full step, but maybe they just can't, or want to slow it down, or whatever. There's a reason that they would do it this way. But by that point, if you own 57% of the company, you can effectively control the company, because you get to approve or deny any vote.

'''Brad Dowdy:''' Yeah, your votes now outweigh any other ownership group.

'''Myke Hurley:''' So it's not an acquisition of Sailor. It is a takeover of Sailor, effectively. But as I say, not in a hostile way, as these things tend to go. Like, if another company's muscling in and buying up, like, a large percentage of a company, usually they're doing it against the will of the, or very frequently doing it against the will of the originating company. But that doesn't seem to be what's happening here at all.

'''Brad Dowdy:''' Yeah, that was the Kukuyo-Pintel relationship. It was a hostile takeover. Like, Kukuyo was just trying to suck up as many shares to meet the voting percentage that they needed to take over the company.

'''Myke Hurley:''' And, like, let's be real, right? Like, I would expect that most hostile takeovers start with a conversation like this one, which relates in what's happened here, where a company's like, we would like to buy enough shares in you to own you. Company A says, we will not allow you to do that. So, company B says, okay. Right? And then just starts... We'll find another way. Yeah. Like, well, now we're going to overpay, so you will be stupid to say no, or we're going to, like, just buy these up from people that are willing to sell them, et cetera, et cetera. But I've tried to give my layman's understanding and explanation of what is going on here, because I just think it's important to set the stage of, like, this seems to be all parties want this to occur for some reason. Right. So...

'''Brad Dowdy:''' And Plus was already the number... the top investor ownership of Sailor. They had 14% of Sailor stock. That was most of any ownership group. Yeah.

'''Myke Hurley:''' They were, like, majority shareholder, but did not own the majority of the shares, but they were the single largest shareholder.

'''Brad Dowdy:''' Mm-hmm. So, I was looking at this on why Plus would want to do this, and it seems to just kind of fit their portfolio in the grand scheme of things. They really... It's mostly office furniture type of a situation more than office supplies type of a situation. Like, one of their main products, if you look at the U.S. subsidiaries, are those security stamps. You know what I'm talking about, where you have, like, the roll stamp that, like, marks out documents and things like that. And they have the APICA subsidiary, you know, that I mentioned before, but they don't really have any stationary subsidiary. And CY brought up a good point in the podcast that Sailor is kind of getting middled by Pilot and Platinum as, you know, one of the Japanese big three, where Pilot is a behemoth in the non-fountain pin category, right, with the Pilot G2 and every other, you know, stationary aisle pin that they make, where Sailor has very, very little of that. They have a few things here and there. And then Platinum is so small that they can just kind of do whatever they want. You know, they make all these special edition pins and just do kind of fun stuff and are able to sustain it that way, where Sailor's kind of in the middle. Now, one of the things that Sailor has in its favor that I think Plus is probably seeing is Sailor has a robotics division, which I had heard of in the past, but never looked into it. I didn't know it existed. Yeah, so they make, their robotics division makes medical devices and food equipment, but they also just recently designed, you'll start seeing some of this pop up, a new style of ink cartridge for their pins, right? They made the machine that makes these, makes the fountain pen ink cartridges and things like that. And their robotics division is profitable, where their fountain pen division has not been profitable over the past several years. So, you know.

'''Myke Hurley:''' And you may think to yourself, how, right?

'''Brad Dowdy:''' How did I get here?

'''Myke Hurley:''' Well, like, nice. But like, we talk about Sailor pens every single episode, there's always a new Sailor pen, right? And everyone's buying them and they're always selling out. Something that I had not considered, which was fascinating to me, was CY, CY made a bunch of interesting points. There's one that I want to come back to about the Rialo production. Yeah, definitely. Yeah. But saying about how the small run that they do, like all these limited editions, whilst it makes them seem cool and people love it, it cannot be a cost-efficient way of doing business. Because they make bespoke 200, 300 versions of a pen for ABC, Pen Store, Japan Co., right? Right. There is no... The margins on those can't be enough. And they also mentioned the idea of like having... You know, having suppliers in other countries, right? Like they don't get the good margins there either because Sailor do not have their own subsidiary in America that is their supplier. So when they sell outside of Japan, they don't make as much money as they could if they had like Sailor of America, which they did have, right? But they don't anymore. So they have to lose to the supplier that they work with or change the pricing structure. So like there are a couple of things going on for them that whilst on the outside, like these limited editions, like seem cool because they always sell out, but that's not... So you mentioned like Platinum's special editions. Platinum's special editions are typically for general sale, which means they likely make way more of them. And we do see, right, like you get like the Sailor North American edition, right? Right. Like we, you know, the... Yeah, those are different. ...which are the West. They're going to make a large order of those. They're all going to sell out and that's going to be great for them. But where they are probably losing money is on these really small batch plans that they do for like Bung Box.

'''Brad Dowdy:''' Yeah, I think that's marketing, right? Yes. Those limited edition projects fall under the category of marketing in my mind because there's no way that they're impactful to Sailor's bottom line. And maybe Sailor's gone too far in setting expectations for the market on what they will do for these smaller companies when the margin was never there to begin with. It was really just more of a marketing say, hey, you know, we're Sailor, we're cool, we're getting out, here's all the cool stuff we can do, buy our regular products. And everyone's like, no, we'll just wait for the next limited one. You know? So maybe that's one of the reasons why that group hasn't been profitable. Who knows? Like I generally don't know, but I agree with you that I look at those types of products that we love so much and talk about constantly as pure marketing expense as opposed to anything that's profitable for Sailor. And I definitely agree with the distribution conversation. Like I think that's really where this is headed in the long term. The only thing I don't know if that is how this is going to go and they use Plus's, you know, extensive worldwide operations to distribute pins differently. How does that affect us as a consumer? That's the part I haven't been able to solidify in my head. Does it help us? Does it hurt us? I don't know. I really don't know. Part number one

'''Myke Hurley:''' is I want this company to exist. Yes. So if this helps them do that, awesome. If it means they stop making as many limited editions, I'm fine with that too. I have lots of them. I always want more of them, but I really, I just want them to keep making some pens, you know, like and they will continue to do limited editions, but not small batch, I would expect, or they will significantly scale back the small batch. You know, like again, they were saying on the show about like a lot of these pens are just made because like an executive is friends with another executive or is friends with a store owner. So they make them a pen. Traditional Japanese business. Yeah. So they make a pen as a favor. But these large companies like Plus typically don't work in these traditional Japanese ways anymore. Where like you get to a certain point where you keep a lot of the respect and stuff like that, but that you maybe lose some of this like doing some favors for a friend because the company has just become too large to continue to scale that effort, you know? Yeah. But I would thoroughly expect to see them change that. or maybe the other problem that they have is like they could keep doing all of these but maybe they fix the Rialo problem and that is the kind of idea that fixes things. So apparently Sailor's manufacturing is not that good and for every Rialo that they make they throw one away. That's astonishing to me. Because, which is a 50% yield? Stop making the pens! Right. Stop it! Like, you know, I would assume they don't have these problems across all of their lines but if they have a pen line where they have a 50% yield on it like, after having made it for many years,

'''Brad Dowdy:''' Yeah.

'''Myke Hurley:''' you should probably stop doing that.

'''Brad Dowdy:''' That's beyond unsustainable. Like, I look back at some of the the Nock stuff that we've done when we switched manufacturers and we let them on their own with our designs and they made a bunch of products and we had like 20% waste. That was so outrageous. Jeff and I got on a plane and went to the factory until we could get it down to like 1% or 2% waste.

'''Myke Hurley:''' Yeah. Because nobody builds 50% waste into their margins because no one would buy your products if you did that, right? Yeah. So, potentially there is a manufacturing issue across the entire lines. Who knows?

'''Brad Dowdy:''' Who knows? Yeah. So, up next for Sailor, like in the beginning of August and this is through like their PR pages on their site and I did a bunch of Google translating trying to figure out some of this stuff. So, their chorus relationship begins on August 3rd in Japan. So, I don't know if we'll see anything impacting like some of the stores in Japan around that time. I don't know. Something to just kind of keep in the back of your head. But, they wrote that they're going to move their entire sales operation in Japan under the chorus umbrella which is under plus to strengthen sales, expand sales channels, improve efficiency, integrate logistics, anticipate growth and that's going to be their move going forward and I guess they're going to see how it goes from there.

'''Myke Hurley:''' This sounds like an end to previous supplier relationships, right? Right. That's what that sounds like to me. Like, they are no longer going to be using whatever sales logistics partners that they had and they will just be carried in the catalog that plus gives to its stores that it works with.

'''Brad Dowdy:''' Yes, so the chorus catalog will contain all of plus's subsidiaries so it'll be Sailor alongside Apica alongside whatever they call these, you know, security rollers.

'''Myke Hurley:''' So if you want to sell Sailor products you need to be a plus supplier or store

'''Brad Dowdy:''' or whatever.

'''Myke Hurley:''' You have to have a relationship with them now. In Japan.

'''Brad Dowdy:''' In Japan, yes, this is only in Japan right now. So it's certainly interesting to talk about. Like, it's not really what our show's about and, you know, figuring all this stuff out, but we're such Sailor fans and, you know, it doesn't affect us directly. If Sailor went away tomorrow, like, I would hate it and I don't think it is by any stretch of the imagination. But I at least do wonder, like, the business sides of things is always interesting to me.

'''Myke Hurley:''' This is why I was going to put out a call on this episode for the Tokyo Inklings podcast to continue doing stuff like this because I do have a genuine personal interest in the machinations of big companies. Like, I've always enjoyed that. It's one of the things that I love about covering technology is it's just what do big companies do. I find that stuff fascinating and I would love a consistent source of what are the Japanese pen companies up to, right? So, like, you have my vote to continue making content like that because I thoroughly enjoyed it. Like, I wanted twice the content that that episode was. Like, I just wanted them to keep going.

'''Brad Dowdy:''' Yeah, so CY was funny and Jacob at the end they were like, go leave us a message but I want you to leave it on the website. And I was halfway through writing a tweet to CY and I deleted it and I was like, fine, I'll go post a message on their message board. I heard that too, but my thinking was,

'''Myke Hurley:''' it's got to be more useful for me to say it on the Pen Addict podcast than to put it on their website is my thinking here. I did both, Myke, I did both,

'''Brad Dowdy:''' come on.

'''Myke Hurley:''' Well, you're a nicer guy tonight, Brad, that's why.

'''Brad Dowdy:''' That's true, that is true. So, yes, keep doing what you're doing. Keep, the interesting thing to me over all these years doing this is how many giant conglomerate type stationary companies there are that we have no idea what their business is, right? I see Kukuyo as a notebook maker when they're actually probably one of the bigger companies in Japan, right? It's like, those things don't really add up to what we see.