Japan appears to have entered a new era of mergers and acquisitions with Oji Paper Co.’s recent takeover bid for Hokuetsu Paper Mills Ltd.
In a similar case, Aoki Holdings Inc., Japan’s second-largest menswear chain, is trying to acquire Kyushu- based Futata Co. through a public tender offer.
Some of the major issues involving tender offers and why takeovers, especially hostile ones, are becoming more frequent in Japan are discussed below:
What is a public tender offer?
When one company wants to acquire another, it makes a tender offer — an offer to purchase shares in the target company directly from shareholders, rather than through a stock exchange. The Securities and Exchange Law stipulates that a company must make a public tender offer if it plans to acquire more than one-third of another firm’s stock.
The acquiring company usually offers a premium of about 30 percent over the target firm’s average share price over the previous six months to give shareholders an incentive to sell their shares.
Was Oji’s attempt to buy out Hokuetsu a hostile takeover bid?
Not initially. A takeover bid is considered “hostile” when the acquiring company makes a public tender offer without the consent of the target firm.
In the Hokuetsu bid, Oji proposed a merger with the smaller firm on July 3. Hokuetsu rejected that proposal and announced plans to issue new shares to trading house Mitsubishi Corp.
Since Hokuetsu said it planned to use the cash raised from the new share issue to expand its factory in Niigata Prefecture, Oji, which feared a glut in the paper market, decided to make a hostile public tender offer.
Are all takeovers hostile?
No. In some cases, the management of the target company hopes to merge or be acquired by another company.
In other cases, an investment fund offers to purchase an ailing company in order to rebuild it with the help of the current management.
How can companies like Hokuetsu, which do not want to be taken over, prevent such a move?
The most popular takeover defense is a “poison pill.” Hokuetsu took this route, issuing some 30 billion yen in new stock to Mitsubishi Corp., which has a friendly relationship with Hokuetsu. This diluted Oji’s stake in Hokuetsu and made its planned acquisition more difficult.
To discourage Hokuetsu shareholders from selling to Oji, Hokuetsu has also been trying to convince them that the takeover is a bad idea.
Hokuetsu claims a merger with Oji would lead to a loss of between 13.4 billion yen and 17.9 billion yen in fiscal 2009.
It argues a combined company would likely to be forced to sell off part of its business, hurting shareholders’ long-term interests.
With the poison pill in place, is Oji’s takeover bid bound to fail?
Probably. In addition to Mitsubishi Corp., Nippon Paper Group Inc. has also come to Hokuetsu’s aid by purchasing an 8.85 percent stake in the company. It has thus become increasingly difficult for Oji to acquire the over 50 percent stake it needs to take over Hokuetsu.
Why are public tender offers becoming more popular?
Many companies are under pressure to grow through mergers and acquisitions in order to become more competitive at home and abroad. Takeovers are the quickest way to increase capacity and market share, and to obtain new technology.
Traditionally, Japan’s business culture has frowned on blatant takeover attempts, preferring a step-by-step approach, with business ties coming first, followed by a capital tieup and finally a full merger.
These days, many companies feel they cannot afford to build relations slowly in rapidly changing markets. So they are increasingly turning to takeovers, whether friendly or not.
Have there been other hostile takeovers in Japan?
There have been similar cases, but not involving full-fledged takeovers. In 2004, for example, UFJ Holdings Inc. backed out of plans to sell a subsidiary, UFJ Trust Bank, to Sumitomo Mitsui Financial Group Inc. because it wanted to merge with Mitsubishi Tokyo Financial Group Inc.
Angered by UFJ’s sudden change of heart, SMFG, which had hoped to expand its business by acquiring the UFJ subsidiary, filed suit to halt the merger talks between UFJ and MTFG.
SMFG then offered UFJ to merge on an equal basis — a deal that many analysts thought was better than the one offered by MTFG — but it was unsuccessful. SMFG eventually abandoned the offer and UFJ and MTFG formally merged in January, changing the name of the combined firm to Bank of Tokyo-Mitsubishi UFJ.
What are the implications of hostile takeovers for shareholders?
A public tender offer by a company that wants to acquire another firm lets shareholders judge which company’s strategy is more sound, the acquiring company or the target.
Until now, takeover negotiations were often held behind closed doors and shareholders did not have a say. Now, increasingly, they do.
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