TOKYO, Nov 26 (Reuters) - KKR has gained the

upper hand in its clash with another private equity giant, Bain

Capital, to take little-known Japanese IT firm Fuji Soft

private.

The struggle for the $4 billion software maker is noteworthy

for KKR's use of unusual tactics, and illustrative of Japan's

growing prominence as a hotspot for deals.

The country has had a record $81 billion this year in

inbound M&A as of end-October, up 17-fold from the same period

last year, LSEG data shows.

WHY IS FUJI SOFT ATTRACTIVE?

Like many Japanese companies, Yokohama-based Fuji Soft has

hefty real estate assets that could be sold and the proceeds

returned to investors or used to fund the business.

But IT services are also a rare bright spot in Japan's

shrinking domestic market, given that many companies retain

antiquated systems and have few specialist software engineers on

staff.

This translates to growing demand for software and systems

engineering firms such as Fuji Soft. While it has achieved

consistent revenue growth of 7-8% in the past three business

years, its operating profit margin has barely budged at around

6.9%, well below some of its competitors.

"I wouldn't be surprised if Bain or KKR could double Fuji

Soft's margins," said James Halse, co-founder of Sydney-based

Senjin Capital. Senjin does not own Fuji Soft shares, but Halse

previously managed a fund that was invested in the company.

HOW DID THE BATTLE EVOLVE?

Fuji Soft had long been under pressure from Singapore-based

investor 3D Investment Partners (3D) - its largest shareholder

with a 23% stake - to boost corporate value.

3D sought out private equity suitors to take Fuji Soft

private and in August, the board agreed to KKR's tender offer of

558 billion yen ($3.7 billion) or 8,800 yen a share.

3D and another fund, U.S.-based Farallon Capital, which

owned around 9%, agreed to tender their shares to KKR.

In September, Bain said it planned to outbid KKR and later

made a formal offer of 9,450 yen a share, about 7% higher than

KKR's, conditional on attaining the backing of Fuji Soft's

board.

KKR'S UNUSUAL TACTIC

KKR responded by shifting to a two-part tender process which

allowed it to first secure 3D and Farallon's shares and more

shares held by management to bring its stake to around 34%,

enough to veto any move to approve Bain's tender offer.

Meanwhile, Bain gained the backing of Fuji Soft founder and

major shareholder Hiroshi Nozawa. He and other family members

hold a combined 18.5% stake.

Nozawa urged the board to withdraw its recommendation for

the KKR bid and denounced the way the deal had been conducted.

Fuji Soft's board supported the first stage of KKR's tender

while simultaneously saying it was logical for shareholders to

wait to see the outcome of Bain's bid if and when that launched.

WHERE DO THINGS STAND?

In the first stage of its tender KKR acquired around 34%,

and then on Nov. 15 raised the price of the second stage to

9,451 yen - 1 yen higher than Bain's - which launched last

week.

KKR also said it would pay the higher price of 9,451 yen per

share to all shareholders who tendered in the first stage,

provided their total shareholding after the second stage reached

53.22%.

Bain has yet to launch its tender offer, as it was

conditional on gaining management support.

Fuji Soft's board then came out in support of KKR, saying

Bain's offer would not be viable as KKR could now block it.

The special committee Fuji Soft set up to examine the deal

also said Bain should not make a higher offer and should dispose

of all the confidential information it collected during due

diligence.

Without management support Bain is now unlikely to make a

higher, hostile bid, analysts say.