Much media attention has been paid recently to what was billed by the Wall Street Journal as ‘the first hostile takeover bid by a Japanese company for another Japanese company’. The story? The public tender offer for shares of Shoei Co, a smallish second-section TSE-listed company with interests in electronics, construction, real estate, and laundry services.
Is the hyperbole justified? Does this deal (which failed) represent a turning point for Japanese M&A specifically or Japanese business in general, and what does it bode for future transactions and for Japanese IR?
Although many commentators depict Japanese business as an old boys’ club where US or UK-style takeover wrangles are settled behind closed doors, the truth is more complicated. In the first place, there have always been mergers and amalgamations going on in Japan. Indeed mergers between Japanese companies ran at about 1,000 deals per year and more during the boom years of the 1980s babiru economy. Although that’s around one-third the number of deals going on at the same time in the US, it’s no small number. These were usually friendly deals of consolidation within industries, orchestrated by one or another of the major keiretsu groups or, as in the case of the ongoing consolidation in banking, directed by a government ministry such as MoF. But even then there were hostile deals, both foreign-instigated and homegrown.
The battles reported in the West, though, usually involved foreign bidders, and the only bidders willing to have a go in Japan then were swashbuckling types, sometimes operating with a less-than-obvious rationale.
Seasoned observers will recall the days when Britishers Terry Ramsden and Charlie Knapp made a run at Minebea in the mid-1980s through the back door of warrants and convertible Eurobonds sold by Minebea in London. Then there was the case of Cypriot entrepreneur Asil Nadir’s UK-listed Polly Peck International. It bought 51 percent of struggling stereo component manufacturer Sansui Electric in 1989 to complement its line of dried fruit (and collapsed not long after). The Pickens-Koito standoff is even more memorable (see Tilting at windmills, page 39).
Creating the context
Starting in the late 1980s, US public pension funds began investing more in non-US equities. Because Japan’s market was then the world’s largest by market cap, billions of dollars of governance-aware money went into Japanese stocks over the course of the 1990s. Indeed 1990 was the first year non-Japanese institutional investors participated in Japanese shareholder meetings en masse.
During the last decade, these activist institutions became more comfortable with exercising their rights as shareholders in Japanese companies, and with their role as long-term shareholders with new governance ideas and the gravitas to get those ideas heard. The Japanese press struggled to make sense of strange phenomena ranging from pension funds voting against dividend proposals because the payout ratios were too low, to mega-fund trustees arriving at Narita carrying their own bags.
While it was obvious at first that Calpers and their kin were serious international institutions, it made no sense to Japanese observers that these funds should act (as they thought) as disrespectfully to management as sokaiya, the Japanese blackmail specialists who do not disrupt annual meetings by asking embarrassing questions about the chairman’s girlfriends (if paid off). This author’s 1991 appearance at Tokyo’s foreign correspondents’ club, as proxyholder for more than $3 bn in US-held Japanese shares, was billed American Sokaiya. Later articles about GPSC voting proxies for US institutions were filled with references to Perry’s infamous black ships which appeared in Japan’s harbors at the first opening to foreigners. This backlash softened over the course of the 1990s, however, as we pursued a quiet campaign of cordial ‘investee relations’ meetings between the largest US funds and top Japanese executives to explain the US style of investor participation in corporate governance.
Japanese business and regulatory officialdom reacted to these inroads at first like antibodies. Soon, though, they came to consider seriously their potential good for Japanese capital markets and corporate performance. Pillars of the Tokyo establishment such as the Keidanren held joint conferences with US and other foreign institutional investors to discuss comparative corporate governance. The Japan Productivity Center for Social-Economic Development (JPC-SED), set up in the 1950s to improve manufacturing and management after the war, also took up the cause and began its now-annual investor relations study team missions to the US. Just as it had sent teams of engineers to study manufacturing at US television factories in the 1960s, so now they sent teams of executives from a wide range of industries to attend US stockholders’ meetings and seminars with institutional investors, proxy solicitors and governance experts.
Friend or foe?
All of these points of bilateral contact, in the context of the Asian financial crisis of 1997, Japan’s economic stagnation and banking crisis, and the rise of younger, more western-oriented management, have led to an environment in which a hostile tender for Shoei can take place. But what is Shoei’s significance, if any? Is it, in fact, the first attempted hostile takeover of a Japanese company – not by a foreign black ship but by another Japanese company?
The answer to this question has to be no. Despite the outward harmony of the Japanese corporate scene, some pretty fierce battles for control have gone on just under the surface – not widely noticed by gaijin observers. Japan’s securities exchange laws have, for years, contained detailed and well thought-out rules governing all public tender offers that result in the bidder holding at least 10 percent of the target. These laws, together with the commercial code, provide in detail for all sorts of corporate governance mechanics, and there is case law on a wide range of real situations.
In July, 1988, for example, Koshin Co, a Japanese corporate raider, built up a stake of 26 percent in Kokusai Kogyo Co, with a view to taking it over. The two companies arrived in Tokyo District Court (Japan’s answer to the Delaware Chancery Court for corporate law) when the target tried to get the voting rights of the nominees squashed. The Kokusai group eventually exercised their rights as holders of over 3 percent of the target company and requisitioned an EGM at which (Kokusai having no statutory limit to its board size) 15 new outside directors were elected by Koshin, completely diluting the board of directors and wresting control from management.
Another example is Showa Group, a real estate company, buying into (but not taking over) Chujitsuya and Inageya, two consumer-goods retailers which retaliated by trying to issue dilutive shares to each other. Then there are Cosmopolitan Co’s repeated attempts to remove directors of Takuma Co, of which it held 32.6 percent.
So Japan has a rich history of corporate conflict and fights for corporate control dating back long before this year’s Shoei bid. But even if it is not the first attempt at a hostile takeover in Japan, Shoei is still interesting. If it is going to be the first of a new phase of Japanese M&A, it must have features that can be repeated on a wider scale and not be a fluke. But what can be extrapolated to other situations? What lessons can be learned from Shoei’s successful defense?
Grab-bag offer
On the surface, there is little about Shoei that would attract anyone’s attention. Founded in 1931 as a raw silk manufacturer with financing from Fuji Bank, it has since drifted into other businesses, from property (its real estate motto: ‘We provide conformable amenities in the Life!’) to electrolytic capacitors to ‘clean bedding and laundry services’. Why would anyone in their right mind make a public tender offer for this grab-bag? Like so much in Japan, what you don’t see is what you get. According to a leading Japanese analyst at a UK brokerage firm, Shoei’s attraction is this: years ago, along with spinning silk, Shoei spun off what is now Canon, and still holds a big block of Canon shares. This stake is not reflected in Shoei’s share price, as the shares are carried on Shoei’s books at par and not marked to market. The relationship, according to this analyst, is similar to that of progenitor Toyoda Automatic Loom to its child, Toyota Motors.
In the typical symbiotic relationship of old keiretsu Japan, offspring Canon and original investor Fuji Bank still effectively control Shoei through cross-holdings of 11.25 percent and 5 percent respectively. Former Fuji Bank managers have served as Shoei’s president since the war, while the bank fills two of the six board seats with its own personnel and provides one of two statutory auditors.
In January, a retired 16-year veteran Ministry of International Trade and Industry official, Yoshiaki Murakami, having arranged financing from leasing giant Orix, announced a public tender offer of ´1,000 per share cash for 14 mn shares in Shoei (interestingly for numerologists, the bid price was at a 14 percent premium to the market, and expired on February 14). Although couched by Murakami and Orix in fashionable corporate governance-speak, the bid looks to have been an old-fashioned attempt to pay a modest premium over market to take out as many holders as possible, get control, sell the Canon shares, and pocket the spread between bid price and net assets. Failing that, get the market to bid up the price to something near net asset value and bail out.
This is an old and venerable practice, but doesn’t work so well where ownership is relatively concentrated, and especially where the price offered is just too low. According to Murakami himself, although his bid valued the company at ´14 bn, in his estimate its assets were worth ´30 bn. In other words, he was trying to buy the store for only 47 sen on the yen. According to one highly knowledgeable analyst, the value of the bid was worth less than the value of Shoei’s Canon shares alone.
Penny pinching
What caused the bid to fail, then, was not Japanese culture but penny-pinching. Possibly a higher bid – in the ´1,500 per share range – would have succeeded. Indeed, one source recounts that a major Japanese corporate group that held Shoei shares considered seriously tendering, but was put off by what it considered an inadequate price. Despite what one has heard time and again regarding the sanctity of inter-corporate relationships in Japan, this major holder objected to the paltry terms, not the deal itself.
This is perhaps the most significant aspect of the Shoei takeover attempt. Although not many Japanese companies can claim to be the parents of giants like Toyota or Canon, most large public companies hold substantial share positions in other public companies, and these are carried at par, not marked to market (at least until 2001, when new accounting rules phase in). At the same time, these old cross-holdings are being unwound now at a much faster rate than before (over a trillion yen worth already in 2000, according to HSBC). If more of these corporate shareholders are willing to sell into tender offers, there may be more deals of the Shoei type actually completed.
In other ways, though, Shoei is atypical, even for firms with undervalued assets. Apparently its total staff is fewer than 50; it is more of a holding company for five affiliates than an operating company. A larger manufacturer with factories, lots of employees, and – worse still – unions, would be far harder for a successful hostile bidder to digest. Even friendly mergers, like that which formed Dai-Ichi Kangyo Bank, have taken a decade or more to integrate.
Corporate control of the really big fish is being transferred not through public tender offers, but through a different, less public market. The real M&A news in Japan is in carefully negotiated strategic alliances. In the automobile business, where relationships such as Ford Motor’s more than 30 percent stake in Mazda had already set the precedent, the past months have seen Renault’s purchase of 37 percent of Nissan, GM buying 20 percent of Fuji Heavy, and now DaimlerChrysler buying 33 percent of Mitsubishi.
In banking, turnaround private equity fund Ripplewood Holdings has taken LTCB off the hands of the government receiver in the first case of a non-Japanese fund buying a bank. Although it involved a public tender offer, Cable & Wireless’ trumping of NTT in its bid for IDC is in a totally different category from Shoei, and involves industrial strategy far more than realizing buried assets. C&W was among the original founding shareholders of IDC in 1986, and was an insider all along; it resorted to the public bid only when private negotiations didn’t work out.
Shifting lines
Overall, the line demarcating Japanese and gaijin ownership of Japanese companies is shifting and blurring in many ways. The Bank of Japan just reported that foreign direct investment (FDI) in Japan rose 340 percent in 1999. MBO funds in Japan are gearing up and scouting for opportunities to finance disposals of unwanted subsidiaries and divisions by slenderizing companies. Although some M&A departments in Tokyo are being expanded, their presence does not make a market. Indeed, alliances between Nomura and Wasserstein Perella, Yamaichi and Lodestar, and Fuji Bank and Wolfensohn, all predate 1990.
So, the race is on – between analysts looking for hidden assets, would-be raiders raising funds, companies looking for foreign strategic investors, cross-shareholders looking to dispose of now-unwanted assets at decent prices, and M&A specialists looking for an entre. But those players have always been on the scene, and will not drive it.
In this writer’s view, only the slow dissolving of the large cross-held share blocks into a liquid public market will make tender offers like Shoei the best way to gain control. By next year, however, the ‘mark-to-market’ rules will have gone into effect, and the long-hidden assets will begin appearing on balance sheets, presumably lifting valuations and eliminating the spreads a raider needs. Stay tuned.
In the meanwhile, there is much to do in even basic Japanese IR. Despite everything that has happened recently, I can’t find a single use of the word shareholder on the Shoei web site. Management’s ‘Advance 21 interim term management plan’ states, ‘The Shoei group will advance from the inauguration phase into a phase of vigorous progress and consolidate our position as a group of companies entering the 21st century with healthy profits and the respect of society.’ Wow. They’re just lucky that Murakami’s bid was priced too cheap. I think I’ll go talk to one of those itchy Tokyo M&A bankers.
Joe Lufkin founded GPSC, the proxy firm that helped take US institutional participation in Japanese corporate governance from zero in 1989 to over $30 bn in 1997. He advised Calpers on Japan from 1990 to 1996, and chaired the investment committee on US-Japan Structural Impediments Initiative for the US Treasury Department. He is now a consultant for shareholder communications based near Washington, DC.
