Fear over a swarm of hostile takeover attempts by foreign firms has prompted the government to examine whether Japanese companies can adopt U.S.-made defensive measures under the nation’s legal framework.
The Ministry of Economy, Trade, and Industry set up an advisory panel of legal specialists and company executives last month to discuss the issue.
The panel’s launch coincided with an unusual competition in recent months between Mitsubishi Tokyo Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. to merge with ailing UFJ Holdings Inc.
UFJ hopes to merge with MTFG and took action to discourage SMFG from attempting a future hostile takeover. But in a country where hostile acquisitions have been rare, companies need a greater range of protective options, experts say.
The experts say Japanese firms need to place more emphasis on reaping benefits for their shareholders, which would provide a form of protection because existing shareholders would find it attractive to hold onto their stakes and more costly shares would make takeovers more difficult.
The METI panel will study whether Japan can introduce typical defensive measures such as the so-called poison pill and employee stock ownership plans under the current legal framework.
The panel will meet monthly and plans to make a proposal by the end of March.
Under the poison pill tactic, which U.S. firms started to use widely in the 1980s, the targeted company issues a huge number of new shares when a hostile takeover bid is placed. This makes it more difficult for a company to gain a controlling stake and makes a takeover bid more expensive.
Employee stock ownership is a kind of defined contribution benefit plan that encourages workers to buy shares in their company. Firms can use the plan to protect themselves from hostile bids because the majority of shareholders are employees who theoretically will not sell out to such bids.
UFJ’s case is more complicated, however.
MTFG gained preferred stocks of UFJ Bank when it injected 700 billion yen into the bank in the form of financial support. By holding a massive number of nonvoting shares, which can be converted into voting rights in case of a third-party takeover, MTFG can use them as a protective measure against a possible takeover attempt by SMFG.
“While the country has encouraged active corporate restructuring, there are not many defensive measures in Japan,” said Tadaaki Chigira, assistant director of a METI division dealing with the panel.
A METI survey in August found that 44 out of 62 Japanese companies polled by the ministry feared hostile takeovers, and 49 said they needed some form of protection.
The number of takeover bids in Japan has increased.
Recof Corp., which provides consulting services related to mergers and acquisitions, said there were 52 takeover bids in 2003, compared with 21 each in 2002 and 2001. There were 35 between January and August.
Japanese companies and their creditor banks used to rely on a system of cross-held shares to cement ties. But the long economic slowdown and sliding share prices have prompted companies to unwind such ties.
“I expect Japan to see a flood of takeover bids by foreign firms in the near future,” said Shigeru Nakajima, an attorney specializing in M&As.
He said Japanese companies have relatively low market prices for their business performance, making them attractive takeover targets.
The market capitalization of Takeda Pharmaceutical Co., the nation’s leading drugmaker, is about 4 trillion yen, against global health-care group Pfizer’s 26 trillion yen.
In the banking industry, the value of MTFG is about 6 trillion yen, compared with Citigroup’s 25 trillion yen, he said.
He said Japanese companies need to raise their market values by benefiting shareholders with higher dividends, while gaining trust through close communication and corporate disclosure.
Takeovers will only increase unless Japanese companies introduce such defensive measures, he said.
But experts have voiced caution over the government’s plan to encourage protective measures.
Responding to a question about the launch of METI’s panel, Yoshifumi Nishikawa, head of the Japanese Bankers Association, told a news conference last month that excessive measures to limit takeovers are not good for the Japanese economy.
“Foreign companies’ acquisitions of Japanese firms are not bad for the Japanese economy if they stimulate the overall economy and promote growth,” said Nishikawa, who is also president of SMFG.
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