Japan is beginning to open the door wider to foreign direct investment. The Justice Ministry has completed a skeleton draft of a new law that will make it easier for foreign companies to purchase Japanese ones. Japanese executives understandably fear that their companies might become targets for foreign takeovers.
Under current laws, buying out a company is a costly undertaking that requires purchasing a large amount of its stock. The proposed legislation, which is expected to take effect in 2006, will eliminate the need to achieve buyouts through equity swaps between the acquiring company and the company to be acquired. This rule will apply to both Japanese and foreign interests.
The government welcomes direct investment from abroad. Japanese corporate managers, however, are worried that lower barriers to buyouts could make their companies easy takeover targets for giant foreign companies or investment groups. A takeover bid may be difficult to deter, they say, if the market capitalization (share price multiplied by the number of shares) of a target corporation is relatively small.
Last year, a U.S. buyout fund called “Steel Partners” spooked the Japanese stock market by mounting a takeover bid for Yushiro Chemical Industry Co., the producer of metalworking oil agents. The company, listed on the Tokyo Stock Exchange, fended off the bid by sharply increasing its payout of dividends — a move intended to make a takeover less attractive to the would-be acquirer.
A takeover bid is either friendly or unfriendly. The attempt by the U.S. fund was friendly, meaning that it was not aimed at a changeover in management. (A hostile takeover, which often includes an attempt to remove existing management, would have sent alarm bells ringing in Japanese boardrooms.) Nevertheless, the move came as a shock because a huge amount of stock was purchased in an unusual manner.
No wonder many companies here are considering ways to protect themselves against foreign acquisitions. In particular, companies of lower market value could be easy targets because the traditional defense against takeovers — the existence of stable long-term corporate shareholders under the cross-shareholding system — has all but collapsed. An immediate line of defense may be to raise stock prices, but that’s easier said than done.
Some companies are trying to stave off foreign buyouts through mergers with Japanese partners. For example, two drug companies, Yamanouchi and Fujisawa, are set to merge in April. But, as their executives acknowledge, a merger is no sure guarantee against a foreign takeover. For one thing, the two firms’ combined market capitalization is only about one-tenth the market value of Pfizer Inc., a major U.S. drug company.
Concerns about hostile takeovers may be a little exaggerated, according to Japanese buyout agents, because such forceful acquisitions are not amenable to Japan’s consensual corporate culture. The important thing is to “polish up the competitive edge of the company.” Thus they advise Japanese businesses to make steady efforts to improve themselves on a long-term basis, rather than resorting to makeshift measures. Still, with international takeover artists looking for attractive targets, fears of unfriendly buyouts remain deep.
Some companies are reportedly studying a more drastic deterrent: the so-called “poison pill,” a contractual clause that enables existing shareholders to buy newly issued shares at a price lower than market value and redeem them at a premium price after a takeover. This makes an acquisition more expensive and therefore less attractive to a bidder. This measure is a common practice in the U.S., but in Japan it is more a theoretical curiosity than a practical option.
That aside, it is worth noting that hostile takeovers can serve constructive purposes, their negative implications notwithstanding. Not all buyers are obsessed with greed or power. A good number of them — either companies or investors — appear motivated to remake target companies by replacing their inefficient management and reviving their sluggish stock prices. In other words, “good” hostile takeovers can turn around failing companies.
It is said that stocks of listed Japanese companies are often undervalued compared with their actual profit performance. This can be taken as evidence that such companies are not adequately rewarding their shareholders or taking good care of their interests. If so, management will likely face the prospect of a changeover through third-party acquisition. That should be welcome at a time when corporate vitality is badly needed.
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