As it gears up to pass new legislation that will make it easier for companies to merge or acquire other firms, Japan is getting cold feet.
The political and corporate uproar that has greeted the audacious bid by Internet services firm Livedoor Co. to gain a foothold in Japan’s staid media industry illustrates an unwillingness to accept that the age of mergers and acquisitions has already dawned.
Suddenly, companies are looking awfully vulnerable to hostile takeovers.
Businesses are unwinding cross-held shares — a situation in which companies with cozy business ties hold large amounts of each other’s shares to keep stocks out of unfriendly hands.
Dividends are typically low, muting the attraction of holding the stocks, and stock prices are stable but not out of the reach of upstart entrepreneurs.
“Many companies have come to us, asking how they can better defend themselves against takeovers,” said Laurent Develle, a partner at U.S.-based law firm Orrick, Herrington & Sutcliffe LLP and a specialist in such defenses here. “They say they feel utterly defenseless against foreign firms.”
The business community covets the kind of weapons that have been used heavily in the United States since the 1980s to help managers defend their companies from hostile takeovers.
Accordingly, the Justice Ministry and ruling coalition politicians are ready to respond to these concerns.
While on the one hand limiting requirements in respect of share-for-share trades, and so facilitating M&As, the ministry is expected to propose rules during the current Diet session that would legalize certain deterrents against takeovers and M&As, beginning in fiscal 2006.
Experts say that certain defenses, if backed with a mandate from shareholders, might be necessary.
But in Japan, where the managers and directors are usually the same people, and where shareholders rarely speak up, the result could be corporations in which managers can do as they please at the expense of shareholders, said Peter Tasker, consultant strategist at Dresdner Kleinwort Wasserstein (Japan) Ltd.
This could lead to falling corporate activity, investment and market prices, he said.
“If one company adopts these tactics, you can be sure others will follow,” he said.
The weapons in question include so-called poison pills, blank checks and unequal voting rights. All can delay or prevent takeovers, for instance, by giving friendly investors more power and restricting other shareholders’ stakes or voting rights at general meetings.
These could reduce the room foreign equity funds have in which to maneuver for a controlling stake in a struggling company and restructure it for a future sale.
If so, the exodus would be quick, according to the Japanese manager of a U.S.-based private equity fund that looks to invest 60 percent to 70 percent of its funds in Japan.
“It would be easy to rein in that target and shift more weight to Germany, where good deals are everywhere,” he said on condition of anonymity.
Resistance on the part of established businesses and the government represents the never-ending struggle between new and old Japan, said Koji Morioka, an economics professor at Kansai University and head of the Osaka-based civic group Kabunushi (Shareholders) Ombudsman.
“Which way is Japan going? Toward an open market or closed convoy system?” he asked. “If old-style Japan wins, it will limit new investment from abroad and from savings.”
One example of old guard resistance is the furor inspired by Livedoor President Takafumi Horie’s bid to wrest control of Nippon Broadcasting Systems Inc., a small radio station that holds a 22.5 percent leading stake in the much larger Fuji Television Network Inc., Japan’s biggest TV company by revenue.
Politicians have accused Livedoor of acting to bring “foreign” influences into the Japanese media.
Nippon Broadcasting has announced a massive equity warrant issue to Fuji TV, looking to dilute Horie’s 40 percent stake in the firm.
The move, which Horie is challenging in court, dilutes the value of all current Nippon Broadcasting stocks, not just Horie’s, and “there simply is no way this can be beneficial to current stockholders,” shareholder activist Morioka said.
Yoshiaki Murakami, president of M&A Consulting Inc. and one of Nippon Broadcasting’s major shareholders, wrote in a recent entry on his firm’s Web site: “Shareholders are supposed to choose the directors. But NBS directors keep trying to choose their shareholders.”
Murakami has aggressively pushed for better governance and higher dividend payments from companies hoarding cash. As of September, he has 17.9 percent of voting rights and 16.6 percent of Nippon Broadcasting’s shares through his company.
It is not certain whether Murakami has sold his shares in NBS.
Meanwhile, an economist argues that both the NBS move to select shareholders and the government’s planned legislation to help corporate managers defend against hostile takeovers are not only unrealistic, but might be harmful to the economy.
“Tell (the Japanese government) to stop” pushing for defenses against hostile takeovers, said Andrew Metrick, professor of finance at the Wharton School of Business at University of Pennsylvania.
Metrick’s studies show that the more power investors have, the better the stock returns in the 1990s in the U.S. A “democracy” portfolio of companies with strong shareholder rights outperformed by an average 8.5 percent per year a “dictatorship” portfolio of firms with a large number of defensive provisions from 1990 to 1999.
Coupled with other research, “I think it’s safe to say that weak shareholder rights, either indirectly or directly, caused poor performance in the 1990s,” he said.
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