By Anton Bridge

TOKYO (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.