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APRIL 21, 2000 VOL. 26 NO. 15 | SEARCH ASIAWEEK

Unafraid To Face Investors
This Japanese Internet mall expects a windfall
By MURAKAMI MUTSUKO Tokyo

Given the volatility of technology stocks globally, you could excuse Internet companies for wanting to delay their initial public offerings. Not a chance, says Rakuten Inc., a Tokyo-based company that runs an online shopping mall. The company anticipates healthy demand for its stock when it begins trading April 19 on Tokyo's over-the-counter bourse, which is run by the Japan Securities Dealers Association. Rakuten is pricing its shares at $300,000 each, which locks out all but institutional investors and wealthy individuals. The company expects to rake in $463 million - a record haul for a Japanese IPO - with its listing.

RAKUTEN Tokyo
An operator of Japan's largest Internet shopping mall, this company will go public on April 19 on Tokyo's over-the-counter (OTC) market

THE BUSINESS Its site has more than 2,300 shops

THE MANAGER Founder and president Mikitani Hiroshi, 35, left the Industrial Bank of Japan after gaining an MBA from Harvard

THE HISTORY Its virtual shopping site is named after a famed 16th-century bazaar near Kyoto

THE FUNDAMENTALS The company's l999 profit was $1 million on sales of $5.6 million

THE BUZZ Robert Burghart, an Internet analyst for ING Baring, says Rakuten can expect to hold a "commanding presence" among Japanese Internet malls for the next year or two. "Five years from now? That is more difficult to say."

In the first three months of this year, 25 companies went public on the OTC exchange and the five-month-old Tokyo Stock Exchange-affiliated bourse called Mothers (Market for High-Growth and Emerging Stocks). That compares with just nine during the same period in 1999. Japanese securities dealers expect as many as 200 IPOs this year. Many may find investors are unenthusiastic. Six of seven IPOs on Mothers are priced below where they started trading on their first day.

Analysts say Rakuten is different. For one thing, it has a track record of small but growing sales - and profits. Robert Burghart, an Internet analyst for ING Baring in Tokyo, says the company is substantial compared with others that have no history. Sales for the three-year-old company are not huge, but they increased four-fold in 1999 from the previous year to $5.6 million. Profits for the year were $1 million - an impressive profit-to-sales ratio of 18%.

Rakuten is the creation of Mikitani Hiroshi, a 35-year-old business whiz who was traveling along a highly respectable path to success - an MBA from Harvard gained while working with the Industrial Bank of Japan - before he decided to pursue a new kind of Japanese Dream. His friends thought he was crazy when he launched Rakuten in 1997 to compete with Internet shopping malls started by giants like NTT.

It turns out that Rakuten's independence from a large corporate bureaucracy was a big advantage. As Internet use exploded in Japan - the number of Japanese Net surfers has doubled to more than 20 million in the last two years - the company reacted quickly to changing tastes. Rakuten managers say they've been able to create a feeling of community among shoppers with interactive links to online stores. Rakuten, with 2,300 online stores and 3 million page views per day, now counts itself as Japan's most successful online shopping mall.

However, the halcyon days of competing against slow-moving companies may be ending. Yahoo! Japan, partly owned by Softbank, is aggressively expanding its Japan-focused Internet shopping mall. Burghart predicts Rakuten will remain strong for a year or two. After that? "The trick is to keep adding and diversifying so that customers will keep coming back instead of drifting off," he says. Not so different from the challenge facing a bricks-and-mortar retailer.



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