Some interesting deal-making issues are raised by the formation by Sony, Toshiba and Hitachi of a combined Liquid Crystal display operation funded by the Japanese Government (to be called ‘Japan Display’). The Innovation Network Corp of Japan is putting in 2.6 billion and will own 70% of the shares in the vehicle.

You can see why the deal has been done. This is a very competitive sector with increasing competition from players in Taiwan and South Korea including Samsung and LG. All 3 companies must have “reassurance” negotiating needs as must the Japanese Government which must view these companies’ interests as being of strategic importance nationally.

Creating this combined huge operation will certainly give scale which is an acknowledged source of potential bargaining power. However, whether such scale delivers genuine market power remains to be seen. Huge organisations can be very cumbersome and it is often difficult to realise internal synergies, which make great sense when discussed at Board level, but don’t have the commitment of the workplace at large. Workforces often find the prospect of such synergies rather frightening as they often involve people losing or changing roles – and as a result, they may resist change which can then become difficult to implement.

Moreover, organisations which are heavily supported by the Government often tend to be uncompetitive – they know they can rely on the Government to bail them out so they have less motivation to be lean and hungry. The history of Nationalised Industries in the UK and the former Soviet bloc tells us everything we need to know about that. So, if the Government holds 70% of the shares that may be an obstacle to turning scale into actual market power.

If you turn the analogy into very human terms, there is some evidence that size (being tall or heavily built) can be an advantage as a negotiator – but that is only the case if you use your size effectively. If your size causes you to slouch around lazily then it’s no advantage at all….

It’s interesting to see that the markets are certainly not convinced that this will work – especially in a sector where technology inevitably drives price and margin down over time – Sony and Toshiba shares both closed down on news of the announcement…