The Aug. 2 takeover bid – by Oji Paper Co., Japan’s largest paper producer, for Hokuetsu Paper Mills Ltd., the nation’s sixth-largest paper maker, was Japan’s first-ever hostile TOB mounted by a major company against a domestic rival. The bid eventually failed as Oji President Kazuhisa Shinoda admitted Aug. 29 that the deal was heading “infinitely in the direction of a miscarriage.” After its foiled attempt to merge with Hokuetsu, Oji will try to improve its competitiveness on its own — by independently investing in new facilities.
As some of its facilities are near the age for scrapping, Oji had paid attention to Hokuetsu’s plan to install new equipment in its Niigata factory. So, in March, Oji privately made a merger proposal to Hokuetsu, followed by an official proposal July 3. Hokuetsu President Masaaki Miwa turned it down July 23 after meeting with the Oji side. Oji then made the merger proposal public the same day, before announcing the TOB plan Aug. 1.
In Japan, where business deals depend on building consensus through negotiations, Oji’s TOB was unprecedented. Even so, Oji may not have been completely free of traditional thinking. Its initial step-by-step, behind-the-scenes approach may have given Hokuetsu enough time to outmaneuver Oji.
On July 21, two days before Mr. Miwa’s meeting with the Oji side, Hokuetsu announced a defense plan — to issue 50 million new shares at 607 yen per share to Mitsubishi Corp., Japan’s top trading house, which had indicated it wanted to strengthen its position in the nation’s paper market.
On Aug. 7, Hokuetsu said it had completed the “third-party allocation” of new shares to Mitsubishi, making it Hokuetsu’s largest shareholder with a 24.4 percent stake. It is reported that Mitsubishi agreed to purchase the new shares even though it was not informed of the behind-the-scenes contacts between Oji and Hokuetsu.
Oji assumed that Mitsubishi, which had been on close terms with Oji, would side with Oji once the merger proposal was made public. But that didn’t happen. Oji did not take legal action, such as seeking a court injunction to block Hokuetsu’s issuance of the new shares to Mitsubishi, believing that such action would only contribute to worsening relations with Mitsubishi. This hesitation and inaction on Oji’s part appears to have hurt its prospects for acquiring Hokuetsu.
In addition, the nation’s No. 2 paper producer, Nippon Paper Group Inc., which shares the same corporate roots as Oji, came to Hokuetsu’s aid by actively buying Hokuetsu shares — a move that surprised Oji. Nippon Paper Group eventually purchased an 8.85 percent stake in Hokuetsu.
Thus a tripartite tieup was formed among Hokuetsu, Mitsubishi and Nippon Paper Group by mid-August, making Oji’s attempt to gain a controlling (more than 50 percent) stake in Hokuetsu extremely difficult.
Hokuetsu, which started in Nagaoka, Niigata Prefecture, in 1907 and still registers its headquarters in that city despite the fact that its actual main office is in Tokyo, took advantage of its longtime close links with the prefecture. When Hokuetsu requested that local banks, such as Daishi Bank and Hokuetsu Bank, not sell their stakes in the paper manufacturer, the banks complied. Niigata Mayor Akira Shinoda expressed his support for Hokuetsu’s effort to thwart Oji’s TOB.
Hokuetsu President Miwa visited the Niigata and Nagaoka chambers of commerce to urge local business leaders to support Hokuetsu. The labor union of Hokuetsu employees also supported management.
Hokuetsu thus succeeded in creating an image, at least within Niigata Prefecture, that its business activities were community-based and that Oji’s move was against the interests of local stakeholders.
Oji’s TOB was a clear failure. The leading paper manufacturer obtained only about a 30 percent stake in Hokuetsu. Oji President Shinoda aptly summarized Oji’s experience: “We have yet to step beyond the bounds of Japanese companies.”
The irony is that the failure of the TOB saved enough money for Oji to invest in new production facilities. In an effort to strengthen its competitive position, Oji now plans to invest 50 billion yen to 60 billion yen in advanced equipment for installation at its factory in Anan, Tokushima Prefecture, by the summer of 2008. Other paper makers are likely to follow suit. This could lead to excess supply in the paper market — the very thing that Oji wanted to stave off by merging with Hokuetsu.
Although Oji’s TOB for Hokuetsu failed, the event must have given executives of Oji and other companies food for thought as they work out future business strategies, regardless of whether they focus on mergers and acquisitions or other means.
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