Announcement of Opinion regarding the Tender Offer for the Shares of Hitachi Kokusai Electric Inc. by HKE Holdings G.K.

Transcription

1 October 11, 2017 To all parties concerned Company Name: Hitachi Kokusai Electric Inc. Representative: Kaichiro Sakuma, Chief Executive Officer (Securities Code 6756, First Section of the Tokyo Stock Exchange) Contact: Shoji Okuyoshi, General Manager of the Legal & CSR Division TEL: Announcement of Opinion regarding the Tender Offer for the Shares of Hitachi Kokusai Electric Inc. by HKE Holdings G.K. Hitachi Kokusai Electric Inc. (the Company ) announces that, with respect to a tender offer by HKE Holdings G.K. (the Offeror ) for the common shares of the Company (the Company Shares ) (the Tender Offer ), the Company resolved, at its Board of Directors meeting held on October 11, 2017, to express an opinion supporting the Tender Offer and to recommend the Company s shareholders to tender their shares in the Tender Offer, as stated below. According to Announcement Regarding the Commencement of the Tender Offer for the Shares of Hitachi Kokusai Electric Inc. (Securities Code 6756) issued by the Offeror today (the Offeror Press Release ), the Offeror will implement the Tender Offer on the premise that the Company Shares will be delisted, contemplating to turn the Company into its wholly-owned subsidiary through the Tender Offer, and the series of procedures scheduled thereafter described in (5) Policy for organizational restructuring after the Tender Offer (matters relating to Two-Step Acquisition ) within 3. Details on the Content, Grounds and Reasons for the Company s Opinion on the Tender Offer below and (A) Capital Reduction and the Share Repurchase by the Company within (c) Events on and after August 9, 2017 under (ii) Discussions between the Offeror, the Company and Hitachi, Ltd. ( Hitachi ), and JIP, and the decision-making process of the Offeror within 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer within (2) Grounds and Reasons for Opinion within 3. Details on the Content, Grounds and Reasons for the Company s Opinion on the Tender Offer below. In addition, according to the Offeror Press Release, Hitachi as the Company s parent company has agreed with the Offeror not to tender its shares in the Tender Offer, and the Company intends to acquire all of the Company Shares held by Hitachi (the Share Repurchase ) subject to successful completion of the Tender Offer and the Share Consolidation (as defined in (5) Policy for organizational restructuring after the Tender Offer (matters relating to Two-Step Acquisition ) within 3. Details on the Content, Grounds and Reasons for the Company s Opinion on the Tender Offer below; hereinafter the same) taking effect thereafter. Based on the Offeror s proposal, the Company intends to reduce the amount of capital, capital reserve, and profit reserve pursuant to Article 447, paragraph 1, and Article 448, paragraph 1 of the Companies Act (Act No. 86 of 2005, as amended; hereinafter the Companies Act ), and to transfer all or part of the capital and capital reserve so reduced to Other capital surplus, and to transfer the full amount of the profit reserve so reduced to Profit surplus carried forward, subject to successful completion of the Tender Offer and the subsequent Share Consolidation taking effect, in order to secure the distributable funds required for the Share Repurchase. The Company intends to hold an extraordinary general shareholders meeting whose agenda includes a proposal for a reduction in the amount of capital, capital reserve and profit reserve (the Capital Reduction ), and the Share Repurchase, by late March 2018 after the Offeror and Hitachi have become the sole shareholders of the Company through successful completion of the Tender Offer and effectuation of the Share Consolidation. According to the Offeror, in addition to the above, according to the Offeror Press Release, the Offeror intends to divest the Company s thin-film process solutions business through an absorption-type company split 1

2 whereby the Offeror will be the succeeding corporation after the Company becomes the Offeror s wholly-owned subsidiary through the Share Repurchase (the Company Split ) and a transfer of 20% of the Company Shares by the Offeror respectively to Hitachi and HVJ Holdings Inc. ( HVJ ), an entity backed by a fund which Japan Industrial Partners, Inc. ( JIP ) manages, operates, provides with information or otherwise maintains. Accordingly, the Offeror, Hitachi and HVJ will hold 60%, 20% and the remaining 20%, respectively, of the Company Shares after the completion of each of the above transfers. For an outline of the process for turning the Company into a wholly-owned subsidiary through the Tender Offer and the Share Consolidation, as well as the Share Repurchase, the Company Split contemplated and to be implemented by the Offeror and the Company after the Company becomes a wholly-owned subsidiary; the transfer of 20% of the Company Shares by the Offeror each to Hitachi and HVJ following the Company Split; and other transactions and similar associated with or related to the foregoing (collectively, the Transaction ), please refer to the Exhibit 1: Scheme Diagram of the Transaction attached as Exhibit 1 and for details regarding such transactions, please refer to (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror within 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer within (2) Grounds and Reasons for Opinion within 3. Details on the Content, Grounds and Reasons for the Company s Opinion on the Tender Offer below. The resolution of the Company s Board of Directors meeting was adopted subject to these series of procedures and other necessary procedures. (Note) In connection with the Tender Offer, the Offeror issued the press releases Announcement Regarding the Tender Offer for the Shares of Hitachi Kokusai Inc. (Securities Code 6756) dated April 26, 2017 (the Offeror s April 26, 2017 Press Release ) and Announcement Regarding Progress Toward Conducting the Tender Offer for Shares of Hitachi Kokusai Electric Inc. dated August 9, 2017, and the Company issued the press releases Announcement of Opinion regarding the Tender Offer for the Shares of Hitachi Kokusai Electric Inc. by HKE Holdings G.K. dated April 26, 2017 (the Company s April 26, 2017 Press Release ) and Announcement Regarding Progress Toward Conducting the Tender Offer for Shares of Hitachi Kokusai Electric Inc. by HKE Holdings G.K. dated August 9, 2017 (the Company s August 9, 2017 Press Release ), respectively. 2

3 1. Outline of the Offeror (1) Name HKE Holdings G.K. (Note) (2) Meiji Yasuda Seimei Building 11th Floor, 1-1, Marunouchi 2-chome, Address Chiyoda-ku, Tokyo (3) Name and Title of Representative Director Representative Partner: KKR HKE Investment L.P. Function Manager: William Janetschek (4) Businesses Commerce and any and all operations associated with or relating to commerce (5) Capital 25,000 (6) Date of Foundation February 2, 2017 (7) Major Shareholders and Ownership Percentage KKR HKE Investment L.P. (Ownership percentage: %) (8) Relationships Between the Listed Company and the Offeror Capital Relationships Not applicable Personal Relationships Not applicable Business Relationships Not applicable Related Party Relationships Not applicable (Note) We have been informed that since the Offeror will obtain the First Hitachi Investment (as defined in (2) Hitachi Investment Agreement within 4. Material agreement regarding the Tendering into the Tender Offer between the Offeror and the Company s shareholders below; hereinafter the same) through the issuance of preferred shares, the Offeror expects that it will change its company form from a limited liability company (godo kaisha) to kabushiki kaisha sometime between the date immediately following the last date of the purchase period under the Tender Offer (the Tender Offer Period ) and the First Hitachi Investment. 2. Price of the Tender Offer and Other Transactions Common shares: 2,900 per share (the Tender Offer Price ) 3. Details on the Content, Grounds and Reasons for the Company s Opinion on the Tender Offer (1) Details of the Company s Opinion The Company resolved at its Board of Directors meeting held on October 11, 2017, on the basis and reasons set out in section (2) Grounds and Reasons for Opinion below, that the Company would express its opinion supporting the Tender Offer and recommend the Company s shareholders to tender their shares in the Tender Offer. The above-mentioned resolution of the Company s Board of Directors was adopted by the method described in 5 The Transaction has received the unanimous approval of the directors with no interest in the Company within (6) Measures to ensure the fairness of the purchase price and avoid conflicts of interest, and other measures to ensure the fairness of the Tender Offer below. (2) Grounds and Reasons for Opinion 1 Summary of the Tender Offer According to the Offeror Press Release, the Offeror is godo kaisha incorporated on February 2, 2017 under the laws of Japan with the primary goal of controlling and managing the business activities of the Company following completion of the Tender Offer, through which the Offeror will acquire and hold the shares of the Company. All equity interests in the Offeror are currently owned by KKR HKE Investment L.P. ( KKR Fund ), a limited partnership established under the laws of the Cayman Islands on February 2, 2017, which is indirectly operated by Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates and other related entities, KKR ). According to the Offeror Press Release, KKR s investment philosophy is to invest from a long-term perspective in 3

4 partnership with the management of the acquired company. KKR partners with companies and management teams with outstanding potential and business foundations, and leverages its management resources, expertise, and network with the aim of creating industry leaders. Based on this philosophy, KKR focuses on carve-outs (business divestitures) of subsidiaries and business units from large corporations and supports their development as independent enterprises by promoting their growth strategy, profitability, and improvements in business efficiency both organically (by leveraging existing management resources) and inorganically (such as through alliances with, or acquisitions of, other companies). Globally, KKR has a track record of more than 50 carve-outs and has proven results in supporting independent enterprises. Founded in 1976, KKR is a comprehensive asset management firm, included among the world s leading private equity funds, and is listed on the New York Stock Exchange. According to the Offeror Press Release, since the opening of its Tokyo office in 2006, KKR has been actively expanding its investment activities in the Japanese market, with investment professionals from diverse backgrounds that possess an understanding of Japanese trade practices. According to the Offeror Press Release, in 2010, KKR invested in Intelligence, Ltd., a provider of comprehensive HR services. According to the Offeror Press Release, in 2014, KKR supported the carve-out of Panasonic Healthcare Co., Ltd. ( PHC ) from Panasonic Corporation, and subsequently through KKR s support PHC was able to acquire the diabetes care business of Bayer Aktiengesellschaft and affiliates of its subsidiary, Bayer HealthCare, in 2016, demonstrating KKR s capability in helping its Japanese portfolio companies carry out followon acquisitions of overseas enterprises. In 2015, KKR invested in Pioneer DJ, then a business unit of Pioneer Corporation. According to the Offeror Press Release, in 2017, KKR implemented tender offers for Calsonic Kansei Corporation, a listed subsidiary of Nissan Motor Co., Ltd., and for Hitachi Koki Co., Ltd., a listed subsidiary of Hitachi. According to the Offeror Press Release, through these initiatives, KKR has built on its track record of supporting the stand-alone growth of subsidiaries and business units of major Japanese companies following PHC s lead. According to the Offeror Press Release, as of April 26, 2017, the Offeror and Hitachi, the parent company of the Company, and HVJ have executed a basic agreement (the Original Basic Agreement ) which provides for matters including the following: under the Original Basic Agreement, (i) Hitachi will not tender any of its Company Shares (53,070,129 shares, representing an ownership percentage (see below Note) of 51.67% of the Company) (the Hitachi Shares ) in the Tender Offer; and (ii) after the Share Consolidation takes effect, Hitachi will sell to the Company all of the Hitachi Shares in accordance with the Company s planned repurchase of its own shares. In addition, on the basis that the Tender Offer Price and the Price Per Share for Share Repurchase (Pre-Share Consolidation) (as defined in 1 Capital Reduction and the Share Repurchase by the Company within (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror within 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer below; hereinafter the same) will be raised, the Offeror, Hitachi and JIP have executed a memorandum of understanding amending the Original Basic Agreement (the Amendment MOU ) dated October 11, For details regarding the Original Basic Agreement that has been amended by the Amendment MOU (the Basic Agreement ), please refer to 4. Material Agreement regarding the Tendering into the Tender Offer between the Offeror and the Company s shareholders and 9. Future outlook below. (Note) Ownership percentage, here and throughout this release, refers to the percentage (rounded to the second decimal place) of the number of Company Shares held by the shareholder in question to the number of shares (102,701,905 shares; the Number of Tendered Shares ) calculated by deducting (i) the number of the treasury shares held by the Company as of June 30, 2017 (2,519,354 shares) from (ii) the total number of issued shares as of June 30, 2017, i.e., (105,221,259 shares), (as stated in the Quarterly Securities Report for the First Quarter of the 94th Term filed by the Company as of August 9, 2017). According to the Offeror Press Release, if the total number of the shares tendered in the Tender Offer (the Tendered Shares ) is less than the minimum number of shares to be purchased in the Tender Offer (24,815,889 4

5 shares), then the Offeror will not purchase any of the Tendered Shares. The Offeror has not set a limit on the maximum number of shares to be purchased in the Tender Offer, because the Offeror intends for the Company Shares to be delisted, and if the total number of Tendered Shares is equal to or exceeds the minimum number of shares to be purchased in the Tender Offer (24,815,889 shares), the Offeror will purchase all of the Tendered Shares. The minimum number of shares to be purchased in the Tender Offer (24,815,889 shares) is 24,815,889 shares, which is the majority amount of 49,631,776 shares (the so-called majority of the minority) where 49,631,776 shares is the total amount of shares calculated by subtracting the number of treasury shares (2,519,354 shares) and the number of the Hitachi Shares (53,070,129 shares) as of June 30, 2017, from the total number of presently issued shares (105,221,259 shares) as of the same date as stated in the Company s Quarterly Securities Report. According to the Offeror Press Release, if the Offeror is unable to acquire all of the Company Shares (other than the Company s own shares held by the Company and the Hitachi Shares) in the Tender Offer, then, following the successful completion of the Tender Offer, the Offeror intends to request that the Company undertake the Share Consolidation as part of the Transaction, as set forth in (5) Policy for organizational restructuring after the Tender Offer (matters relating to Two-Step Acquisition ) below. (For details regarding the Share Consolidation, please refer to (5) Policy for organizational restructuring after the Tender Offer (matters relating to Two-Step Acquisition ) ). According to the Offeror Press Release, the Offeror intends to provide part of the necessary funds for settlement of the Tender Offer from a portion of the funds procured through borrowing from financial institutions (the Debt Financing ), as well as receiving a capital investment from KKR Fund (the KKR Investment ), an advance payment from HVJ of part of the proceeds (the amount specified by the Offeror with the upper limit of 4 billion) of the Partial Share Transfer (HVJ) as defined in (B) Partial carve-out of the Company business (the thin-film process solutions business) to the Offeror, and partial transfer of the portion of the Company Shares (the video and communication solutions business) to Hitachi and the JIP fund within (c) Events on and after August 9, 2017 within (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror within 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer below; hereinafter the same (the First JIP Advance Payment ) ( 8,768 million) and part of funds raised through the First Hitachi Investment (the amount reasonably specified by the Offeror with the upper limit of 5 billion). According to the Offeror Press Release, the Offeror intends to obtain the Debt Financing, the KKR Investment, the First JIP Advance Payment and the First Hitachi Investment by the business day prior to the first day of settlement for the Tender Offer, subject to conditions including the successful completion of the Tender Offer. For the class A preferred shares to be issued by the Offeror to Hitachi as a result of the Hitachi Investment (as defined in (2) Hitachi Investment Agreement within 4. Material agreement regarding the Tendering into the Tender Offer between the Offeror and the Company s shareholders below; hereinafter the same), please refer to (2) Hitachi Investment Agreement within 4. Material agreement regarding the Tendering into the Tender Offer between the Offeror and the Company s shareholders below. For the background of the Hitachi Investment, please refer to (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror within 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer below. According to the Offeror Press Release, after the successful completion of the Tender Offer, as part of the Transaction, the Offeror also intends to request the implementation of the Share Consolidation, as stated in (5) Policy for organizational restructuring after the Tender Offer (matters relating to the Two-Step Acquisition ) below. According to the Offeror Press Release, the acquisition price for the total number of fractional Company Shares accrued from the Share Consolidation will be covered by a part of the funds procured through the Debt Financing and a part of the Second Hitachi Investment (as defined in (2) Hitachi Investment Agreement within 4. Material agreement regarding the Tendering into the Tender Offer between the Offeror and the Company s shareholders below; hereinafter the same). In addition, according to the Offeror Press Release, taking into account the cash needed for the payment for the 5

6 Share Repurchase (which will be within the scope of the amount distributable by the Company), the reserves held by the Company and the levels of reserves needed to continue operating the business, the Offeror intends to lend funds to the Company and the Company will use such funds for the payment of a portion of the amount to be paid to Hitachi in the Share Repurchase. The Offeror intends to fund such loans with the funds to be procured through the Debt Financing, a prepayment of the remaining purchase and sales proceeds of the Partial Share Transfer (HVJ) by HVJ ( 8,768 million) (the Second JIP Advance Payment, and together with the First JIP Advance Payment, the JIP Advance Payment ), and all or portion of the deposit by Hitachi of the amount equivalent to the purchase and sales proceeds of the Partial Share Transfer (Hitachi) (as defined in (B) Partial carve-out of the Company business (the thin-film process solutions business) to the Offeror, and partial transfer of the portion of the Company Shares (the video and communication solutions business) to Hitachi and HVJ within (c) Events on and after August 9, 2017 within (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror within 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer below; hereinafter the same) ( 8,768 million). According to the Offeror Press Release, in the Debt Financing, security will be created over all of the issued shares of the Offeror and over the Company Shares acquired by the Offeror in the Tender Offer; and, after the effective date of the Share Consolidation, security will be created over certain assets of the Company, and the Company will be a joint and several guarantor. 2 Purpose and background of the Transaction, including the Tender Offer, and management policy following the Tender Offer The background, purpose and decision-making process leading to the Offeror s decision to conduct the Tender Offer as well as the management policy following the Tender Offer are described below. The description of the Offeror included below is based on publicly available information disclosed by the Offeror, the Offeror Press Release, and explanations received from the Offeror. (i) The Business environment and other situations of the Company The Company is a joint-stock corporation incorporated under the laws of Japan established in October 2000 from the merger of three Hitachi Group companies engaged in businesses related to video, wireless communications, and semiconductor manufacturing equipment. As of today, the Company is listed on the First Section of Tokyo Stock Exchange, Inc. (the TSE ). Since its formation, the Company has endeavored to build infrastructure for a safe and prosperous society in the spirit of its corporate statement ( Hitachi Kokusai Electric Group strives to realize a society of security, safety, and happiness; creates value by applying advanced technologies; and pushes the boundaries of tomorrow ) and the Hitachi Kokusai Electric Way ( 1. Customers First; 2. Global Leader; 3. Human Assets; 4. Basics and Ethics; 5. Harmony, Sincerity, and Pioneering Spirit ), and has been creating new value in the areas of Video and Communication Solutions and Thin-Film Process Solutions. Video and communication solutions business The Company has globally manufactured and sold, and deployed solution business related to a variety of system products (wireless communications and information systems, such as disaster-preventive administration radio systems, radio communication products for various operations, high-speed wireless repeaters (Note 1), infrastructure for mobile telecommunications and wireless packet communication units, broadcasting and video systems, such as UHD and HDTV camera systems and transmission, transmitter systems, video surveillance systems, and industrial video cameras) in the areas of communications, broadcasting and video. In addition, the Company has been engaged in a wide range of businesses, such as financial/stock exchange 6

7 information solutions and wireless/radio systems for the Ministry of Defense. Thin-film process solutions In addition to the vertical thin-film systems (Note 2) and single wafer systems business (Note 3) as its flagship business, the Company has provided services, including single wafer processing systems, maintenance of systems, sales of parts, relocation or alteration of systems and sales of second-hand systems. (Note 1) Low electric power data communication system utilizing frequency bands, such as 25GHz, that can be used without obtaining licenses and that are easy to build a communication system between bases. (Note 2) Processing systems to form thin-film with wafers in a batch (batch process for multiple wafers) in a vertical direction. (Note 3) Systems to treat each wafer (single wafers). In the video and communication solutions business, centered on video and wireless technologies, the Company is promoting its growth strategy by shifting from systems products to solutions businesses, expanding its global business and launching new businesses. In addition, in order to realize a globally-competitive cost structure, the Company is undergoing cost structure reform through reduction of its indirect business costs and other measures and changes to its business portfolio through selection and concentration. With regard to its segments concerning video security, IoT (Internet of Things) high-reliability wireless solutions (Note 4), and railway solutions (Note 5), the Company is pursuing further business expansion through collaboration and joint development with other companies in the Hitachi Group. The Company considers that, with respect to the market environment for the video and communication solutions business, overall demand in the overseas market will grow in the medium- to long-term. However, as recent weakness in demand of emerging countries is expected to continue for a while, the Company is promoting structural reform such as the reorganization of its operational system. On the other hand, competition in the domestic market is becoming increasingly intense, as the supply-demand balance is relaxing due to factors such as receding demand for reconstruction in areas affected by the Great East Japan Earthquake. In the government and other public agencies on which the Company has traditionally focused, core customer needs have been shifting from sale of existing products and systems to solutions to issues, with a downturn in growth of demand. As such, the Company has a pressing need to expand its social infrastructure solutions business that is a component of the social innovation business promoted by entire Hitachi Group, by shifting focus to a business model centered on its high-growth solutions taking advantage of its core technologies, such as IoT high-reliability wireless solutions and video security. In response to such changing trends in the video and communication solutions business, the Company is shifting and developing its human resources to and for the solutions business in its video and communication solutions business, as well as strongly promoting business- and cost-structure reform. More specifically, in addition to recognizing its overseas operational system, in Japan the Company has also promoted the optimization of its personnel structure through a special offering of an early retirement incentive plan, in order to establish a stable business foundation. For details of the special offering of the early retirement incentive plan, please refer to the Company s press release dated January 26, 2017, Implementation of Special Offering of Early Retirement Incentive Plan. In the thin-film process solutions business, the Company commenced the operation of a new production facility at its Toyama Technology and Manufacturing Center in January 2017, and is otherwise enthusiastically reinforcing its production and research and development capabilities. In its main business (i.e., the vertical thin-film systems business), the Company is, with the aim of advancing further research and development of thermal processes (Note 6) technology as its core technology and the sophistication of its product lifecycle businesses (Note 7), putting its efforts into increasing its share in the mass-production line for its customers 7

8 advanced devices (Note 8) by leveraging its capability to develop new types of equipment and films. The Company has been focused on accelerating the following new businesses: (i) the development of single-wafer equipment for treatment to improve film quality after film formation (Note 9); and (ii) increasing the sales of secondhand equipment for the IoT market, where demand is increasing rapidly, and redesigned legacy equipment (Note 10). In its service businesses with sustainable growth potential, the Company is working to expand the scale of its parts and retrofitting businesses, as well as further advancing the businesses through expanding the range of services to support services for its customers operations, such as diagnosis services to help customers prevent incidents and improve their processes by utilizing IT technologies. In the semiconductor manufacturing equipment industry in which the thin-film process solutions business operates, demand is expected to grow steadily, driven by a shift into 3D NAND flash memory (Note 11). Particularly, for the next few years the demand for equipment is expected to grow rapidly with active capital and research and development investment by leading memory manufacturers. In the vertical thin-film equipment market which is the core of the thin-film process solutions business, the thin-film and etching processes (Note 12) will become increasingly important with the migration of semiconductor devices to a 3D structure, and such devices are expected to gain a larger share of capital investment by semiconductor manufacturers. On the other hand, the Company believes it will become increasingly important for the Company to make research and development and capital investment to stay ahead of its competitors, as it is expected that competition will become increasingly intense as the semiconductor manufacturing equipment industry undergoes rapid technology innovation and industry reorganization. (Note 4) Solutions to build optimal communication networks even in poor conditions through combination and utilization of various wireless communication methods, such as airwaves, communication carrier lines and microwaves. (Note 5) Solutions to contribute to improvement of operational efficiency and operations relating to the transportation sector, such as railways. (Note 6) Process of forming thin-films with heat. (Note 7) Total life cycle business that range from the business of selling systems to the business of providing after service (including renovation of systems for long-term use, sale of parts, repair and remodeling of systems). (Note 8) The mass-production line for semiconductors for cutting-edge devices, such as 3D NAND flash memory. (Note 9) Systems to treat the improvement of film quality for each wafer by removing impure substances or stabilizing particles in films by adding plasma or heat or by other treatment. (Note 10) A system using existing technology at the time when a 200 mm-wafer was standard. (Note 11) Non-volatility semiconductor memory with a device structure that changed from 2D (flat surface) to piled-up 3D (steric) (contents are saved after turning the power off). (Note 12) Process in which multiple characteristic tuning, such as etching characteristics after formation of thinfilms, is complicated and extremely difficult in the manufacturing process of 3D structural semiconductor. Given the circumstances described above, according to the Offeror Press Release, KKR considers that the corporate value of both the video and communication solutions business and the thin-film process solutions business described above may be further enhanced in their respective business environments as follows: (a) with regard to the video and communication solutions business, the Company can work towards business enhancement and optimization of management together with Hitachi and JIP (for specific measures, please refer to (B) Partial carve-out of the Company business (the thin-film process solutions business) to the Offeror, and partial transfer of the portion of the Company Shares (the video and communication solutions business) to Hitachi and HVJ within (c) Events on and after August 9, 2017 within (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror below), and (b) with regard 8

9 to the thin-film process solutions business, the Company can utilize the global resources network, know-how, and rich investment experience in semiconductor-related fields provided by KKR. (ii) Discussions between the Offeror, the Company and Hitachi, and JIP, and the decision-making process of the Offeror (a) Events up to April 26, 2017 Based on the foregoing and through internal discussions, the Company has concluded, from the viewpoint of improving the enterprise value of the entire Company, that it will be in the interest of enhancing the enterprise value of each business to pursue management optimization of each business rather than to respond to recent changes in the business environment. In mid-july 2016, the Company discussed with Hitachi, its parent company, the strategies and future policies for each of its businesses. As a result, the Company confirmed Hitachi s agreement for its policies and the direction that Hitachi would sell the Company Shares in its possession, as necessary. In the process of examining an implementation plan based on such policy, the Company had also considered a choice to sell its video and communication solutions business and thin-film process solutions business that have distinct features, separately and individually. However, the Company decided that, in light of tax impact and from the viewpoints of business continuity and maximization of enterprise value as a listed company, selling the businesses separately would face various difficulties. Accordingly, the Company decided that the proposed tender offer would be subject to the Offeror acquiring all Company Shares, including those held by Hitachi, in order to reorganize the capital relationship and management system of the video and communication solutions business and the thin-film process solutions business after delisting the Company Shares (for details, please refer to 3 The decision-making process and reasons of the Company below). Further, in light of distinct features of the video and communication solutions business and the thin-film process solutions business, the Company adopted the bidding process in which a joint bid by multiple potential purchasers who are only interested in one business would also be allowed on the premise that of the video and communication solutions business and the thin-film process solutions business would be separated after delisting of the Company. Under such framework, instead of a negotiated transaction with a sole potential purchaser, the Company decided to solicit bids from a large number of potential purchasers in order to provide its shareholders with an opportunity to sell their shareholding at a fair price. In late September 2016, the Company and Hitachi commenced inquiries with multiple potential purchasers regarding the acquisition of all Company Shares, including those held by Hitachi. As the video and communication solutions business is expected to have increasing opportunities to expand operations through collaboration with the social innovation business of Hitachi Group had a close business connection with Hitachi, the Company and Hitachi reached an agreement that it was highly significant that the video and communication solutions business maintained a certain capital relationship with Hitachi even after the Transaction. Therefore, the Company set, as a condition for the first tender, a transaction scheme in which, following the completion of the Transaction, Hitachi as a minority shareholder would reinvest in the Company (the video and communication solutions business) after the Offeror succeeded to the thin-film process solutions business that was carved out through an absorption-type company split, taking into account the business continuity. From early October 2016 to mid-november 2016, KKR and other participants in the first bid conducted primary due diligence procedures on the Company s business and finances and interviewed its management. The Company and Hitachi also reviewed the outlook and management policies for the business to be acquired as presented by the respective potential purchasers. The first bid proposals were submitted from multiple potential purchasers in mid-november 2016, the Company and Hitachi compared and examined the terms thereof. From early December 2016, each potential purchaser that successfully passed the first bid proceeded with further analysis and examination of the acquisition of the Company Shares through full-scale due diligence on the Company s business, finances, legal affairs and other factors, interview with its management, and other 9

10 measures. The Company and Hitachi discussed the future business operating policies and other factors of KKR and other potential purchasers who proceeded on to the second bid in order to examine the suitability of new potential partners for the respective businesses. In the second bid proposal dated February 13, 2017, KKR proposed 195 billion as the assessed stock value of all of the issued and outstanding Company Shares (excluding the Company s own shares held by the Company) and the following form of phased acquisition: 1 KKR would acquire all Company Shares, excluding those held by Hitachi, through the Tender Offer and the subsequent Share Consolidation; and 2 KKR would acquire the Company Shares held by Hitachi through a share repurchase, after it became delisted as a result of the Tender Offer and the Share Consolidation. Regarding KKR s relevant proposal, the Company and Hitachi had discussions and negotiations with KKR, based on the Company s historical share price fluctuations and the advice of Nomura Securities Co., Ltd. ( Nomura Securities ) and Credit Suisse Securities (Japan) Limited ( Credit Suisse Securities ), the financial advisors to the Company and Hitachi, respectively. KKR was also requested by the Company and Hitachi to further consider the joint bid proposal with JIP (see below Note), who submitted the second bid proposal for the video and communication solutions business aiming to help to increase the value of the bid price. (Note) JIP, since its formation in November 2002, is a fund operating company in Japan that is specialized in carve-outs (carving-out of businesses) and develops private equity funds that will contribute to restructuring or business reconstruction of Japanese companies. Up until now, JIP s total number of investment projects is 20, covering a wide range of businesses, such as food, distribution and service, with a focus on manufacturing, and JIP has experience in various types of investment, such as a business carve-outs and MBOs. Thereafter, through repeated negotiation on terms and conditions, KKR and JIP submitted a revised joint proposal in early April 2017 that the assessed value of the Company Shares would be increased to 215 billion and the video and communication solutions business following the Transaction would be reorganized as a joint venture among three parties, i.e., KKR, JIP and Hitachi, subject to the Offeror receiving the Hitachi Investment (expected to be 10.5 billion as of early April 2017) through a preferred equity investment (or preferred shares if the Offeror s organization is changed to a stock company), and other conditions. In parallel with continuous discussion and negotiation on the proposed terms with KKR and JIP, the Company and Hitachi reviewed KKR s and JIP s revised joint proposal as a whole in light of the purpose of reinforcing the Company s competitiveness and enhancing its enterprise value, and economic rationality of various conditions, such as tax impact and business continuity, the Company and Hitachi selected KKR and JIP as the final Tender Offer candidates in early April Further, the Company and Hitachi decided to proceed with negotiations with intent to accept the proposal of transactions from (i) the phase in which the Company is turned into a whollyowned subsidiary by the Offeror, (ii) the phase of an absorption-type company split whereby the Offeror will be the succeeding corporation, and then (iii) a transfer of 20% of the Company Shares by the Offeror to each of Hitachi and JIP. When the tender offer price and the purchase price per share for the share repurchase are determined on the premise that an aggregate value of the Company s shares of 215 billion proposed in the revised joint proposal, if there was an increase in either the Tender Offer Price or the Share Repurchase Price, the other price would decrease and create a conflict-of-interest relationship between the Company s minority shareholders and Hitachi. Therefore, for the sake of fairness of price setting, after considering the opinions of the third-party committee, the Company discussed and negotiated with KKR and Hitachi as to the tender offer price (the price for the share purchase and other related transactions in the tender offer as announced in the Company s April 26, 2017 Press Release, the Original Tender Offer Price ) and the price per share for the share repurchase (the amount calculated by dividing the total amount of the consideration for the Hitachi Shares announced in the Company s April 26, 2017 Press Release by the number of the Hitachi Shares (53,070,129 shares), hereinafter the Original Price Per Share for Share Repurchase (Pre-Share Consolidation) ) on several occasions from the middle of April As a result, as of April 26, 2017, the Company, Hitachi, and KKR agreed to fix the Original 10

11 Tender Offer Price at 2,503, and the Original Price Per Share for Share Repurchase (Pre-Share Consolidation) at 1, (rounding off to the second decimal place; hereinafter the same in descriptions regarding the Original Price Per Share for Share Repurchase (Pre-Share Consolidation)). In order to confirm that substantial discussions and negotiations were conducted to raise the Original Tender Offer Price, Mr. Kenshiro Koto, a third-party committee member, attended the negotiations on the price and terms and conditions mentioned above between the Company, Hitachi, and KKR. Regarding the relationship between the Original Tender Offer Price and the Original Price Per Share for Share Repurchase (Pre-Share Consolidation), KKR explained to the Company that by setting the Original Price Per Share for Share Repurchase (Pre-Share Consolidation) lower than the Original Tender Offer Price, the Tender Offer will be an advantageous sales opportunity for the Company s minority shareholders. For Hitachi, on the other hand, it was explained that it is possible to realize proceeds from sales comparable to those that would be realized by responding to the Tender Offer in terms of after-tax amount because the tax rule of exclusion from gross revenue for deemed dividends would be applied to the sale of the Company Shares through the Share Repurchase. The Company confirmed the basis for the estimation of tax effect of Hitachi regarding the Original Price Per Share for Share Repurchase (Pre-Share Consolidation), and, based on the Company s independent trial calculations, confirmed that the actual after-tax amount from the sale that include the tax effects regarding the deemed dividend per share for Hitachi through the Share Repurchase do not exceed the after-tax amount that would be realized by receiving the Original Tender Offer Price. As stated above, since the Company, Hitachi and JIP agreed upon the assessed value of the Company Shares and the scheme and various terms and conditions of the Transaction, including implementation of the Share Repurchase and the amount therefor, the Offeror executed the Original Basic Agreement with Hitachi and HVJ on April 26, 2017, and determined that the Tender Offer would be implemented, if the conditions precedent to the commencement of the Tender Offer (the Condition Precedent to the Tender Offer ) were satisfied (or waived by the Offeror), as well as determined the Original Tender Offer Price to be 2,503. In addition, 2,503 as the Original Tender Offer Price and 1, as the Original Price Per Share for Share Repurchase (Pre- Share Consolidation) were determined based on the proposal of KKR and JIP and discussions and negotiations between the Company and Hitachi and KKR and JIP. Furthermore, the revised joint proposal of KKR and JIP is subject to the Offeror receiving the Hitachi Investment (expected to be 10.5 billion as of April 2017) through a preferred equity investment (or preferred shares if the Offeror s organization is changed to a stock company), and other conditions. (b) Events up to August 9, 2017 Since the procedures and actions regarding approvals and authorizations required under domestic and overseas competition acts, and other laws and regulations have been completed and the fulfillment of the Condition Precedent to the Tender Offer had become likely, as announced in the Company s Press Release dated August 9, 2017, the Company was informed by the Offeror on July 19, 2017 that it intended to commence the Tender Offer on August 10, 2017 as the commencement date of the tender offer, subject to the fulfillment of the Condition Precedent to the Tender Offer. Having been informed as such, the Company requested on July 31, 2017 that the third-party committee consider whether there was any change in its opinion expressed to the Company s Board of Directors in the April 26, 2017 Report (as defined in 3 The decision-making process and reasons of the Company below; hereinafter the same), and that, if there was no change, the committee advise the Board of Directors to that effect, or if there was any change, then the committee issue a revised opinion reflecting such change. The third-party committee submitted a report to the Board of Directors of the Company on August 9, 2017 (the August 9, 2017 Report ) and expressed its opinion as follows. With respect to Matter of Inquiry 1 (as defined in 4 The Company has established a third-party committee and has obtained an opinion within (6) Measures to ensure the fairness of the purchase price and avoid conflicts of interest, and other measures to ensure the fairness of the 11

12 Tender Offer below) and Matter of Inquiry 2 (as defined in 4 The Company has established a third-party committee and has obtained an opinion within (6) Measures to ensure the fairness of the purchase price and avoid conflicts of interest, and other measures to ensure the fairness of the Tender Offer below), there is nothing to be changed in its opinion expressed in the April 26, 2017 Report. However, with respect to Matter of Inquiry 3 (as defined in 4 The Company has established a third-party committee and has obtained an opinion within (6) Measures to ensure the fairness of the purchase price and avoid conflicts of interest, and other measures to ensure the fairness of the Tender Offer below), as of August 9, 2017 it is difficult for the committee to maintain its opinion that the legitimacy and propriety of the Original Tender Offer Price and the value of the Original Price Per Share for Share Repurchase (Pre-Share Consolidation) have been ensured. Therefore, it is difficult to maintain its opinion on Matter of Inquiry 4 (as defined in 4 The Company has established a third-party committee and has obtained an opinion within (6) Measures to ensure the fairness of the purchase price and avoid conflicts of interest, and other measures to ensure the fairness of the Tender Offer below) in the April 26, 2017 Report because it is based on the opinion on Matter of Inquiry 3 in the April 26, 2017 Report. Accordingly, on August 9, 2017, the Company informed the Offeror that the opinion expressed by the thirdparty committee to the Board of Directors of the Company on April 26, 2017 has been revised as above. The Company was informed that the Offeror decided on August 9, 2017 not to commence the Tender Offer in early August 2017 as previously scheduled, given that the April 26, 2017 Report approving the Matters of Inquiry (as defined in 4 The Company has established a third-party committee and has obtained an opinion within (6) Measures to ensure the fairness of the purchase price and avoid conflicts of interest, and other measures to ensure the fairness of the Tender Offer below) is considered withdrawn by the submission of the Report dated August 9, 2017 and thus the Condition Precedent to the Tender Offer has not been satisfied as of August 9, (c) Events on and after August 9, 2017 The Offeror continued to consider the purchase price and other conditions of the Tender Offer, with reference to, among others, the contents of the Notice on the Revision of Earnings Forecast announced by the Company on July 26, 2017 (the July 26 Revision of the Earnings Forecast ). As for the reference made here, on and after August 9, 2017, and based on that, the Offeror informed the Company on September 5, 2017 of its intention to raise the Tender Offer Price to approximately 2,750 from the Original Tender Offer Price ( 2,503) and the Price Per Share for Share Repurchase (Pre-Share Consolidation) to approximately 1,810 from the Original Price Per Share for Share Repurchase (Pre-Share Consolidation) ( 1,710.34). In response, the Company explained to the Offeror that the current situation is such that the performance status and the forecast regarding the orders to be received up until August 2017 will exceed the July 26 Revision of Earnings Forecast and that the Company may once again make an upward revision of its performance forecasts. Given this, the Company and the Offeror repeatedly discussed with each other under the common understanding that the operating results and the financial condition of the Company may change in conjunction with the semiconductor market that is unstable in nature that the product price could collapse and capital investment could be curtailed due to a rapid expansion of a gap between supply and demand. Thereafter on September 26, 2017, the Offeror informed the Company of its intention to commence the Tender Offer in early October 2017 as the commencement date of the tender offer, on the premise that the Tender Offer Price is increased to 2,850 and the Price Per Share for Share Repurchase (Pre-Share Consolidation) is increased to 1,850. Having been informed by the Offeror of its intention to raise the Tender Offer Price as described above, considering the opinions of the third-party committee, the Company presented to KKR the tentative figures set forth in the Notice on the Revision of Earnings Forecast announced today (the October 11 Revision of Earnings Forecast ), and discussed and negotiated with KKR and Hitachi as to the tender offer price and the price per share for share repurchase (pre-share consolidation) on several occasions, taking into account the October 11 Revision of Earnings Forecast and the trends in the semiconductor manufacturing equipment 12