Sun, Apr 29, 2007 page12

• Japan caught in the grip of merger mania

  A new law taking effect on Tuesday will make it easier for foreign companies to buy Japanese rivals through share swaps

  • AP
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  Time was when Japan Inc shunned the heady world of corporate raiders as a vulture club anathema to the country's consensus culture.

  When stomached at all, Japanese takeovers typically preyed on foreigners, most notoriously gobbling up US icons like Firestone, 7-Eleven and Columbia Pictures.

  But in a sign of new openness in the world's second-largest economy, merger mania has gripped the country and homegrown firms are now among the hunted as well as the hunters.

  

  The Morgan Stanley corporate sign is seen in front of the company's Japan headquarters in Tokyo last Wednesday. Morgan Stanley Japan Securities Co plans to issue a 67.5 billion yen (US$564.2 million) worth of real estate loan securities aimed at overseas investors next month, company sources said. The issue will be backed by 99 Japanese properties. Analysts believe Morgan Stanley could be fueling a speculative bubble in the Japanese property market.

  PHOTO: EPA

  Merger and acquisition activity in Japan hit an all time high of 2,775 deals last year, compared with just 260 in 1985. Now, from board rooms to living rooms, Emu ando eh, as M&A are known, has entered common parlance and is upending business as usual.

  "Definitely, we are in a merger boom," said Akihiro Watanabe, a partner at the Tokyo-based M&A consultancy GCA Co. "The psychological barriers are falling down."

  Investors and business leaders expect the next surge to begin on Tuesday, when a new law takes effect making it easier for foreign companies to buy Japanese rivals through swapping shares, something all but barred in the past.

  Foreshadowing the change, a TV show called Hagetaka, or "Vultures," aired earlier this year dramatizing a fictional US investment fund's drive to revive a hapless Japanese bank through unforgiving Western-style reforms.

  The program was an unexpected hit. But Japan's grudging acceptance of takeovers as a cutthroat reality of everyday business has been fitful at best.

  Takeovers have long been frowned upon in a country that shuns heated showdowns and prizes consensual management. So as not to stigmatize the seller as the "loser," parties typically paint the buyout as a merger of equals.

  "The traditional view of your company is that it's your child, and you would never sell your child. But now that attitude is slowly changing," said David Snow, editor of Private Equity International, a specialty publication tracking global deals.

  In late 2005, toymaker Takara Co launched a board game called "Game of Life M&A" to tap growing public fascination with the trend. But it pulled the product last year after its chief inspiration, freewheeling entrepreneur Takafumi Horie, was arrested for accounting fraud at Internet firm Livedoor Co, a former darling of the M&A crowd.

  Even the merger law taking effect next month was delayed for a year by lawmakers so Japanese companies had time to ready takeover defenses like so-called "poison pills," measures that weaken share prices and make the company less attractive to unwanted suitors.

  The new law allows overseas businesses to buy Japanese ones by swapping shares in a domestic subsidiary. That should lighten the load of having to pay cash, as nearly all foreign companies had to do before.

  Analysts, bankers and even the government say fresh blood is badly needed.

  After slogging through Japan's decade-long slowdown, many Japanese companies are weakened to the point of requiring outside help to restore profits.

  Direct foreign investment in Japan amounted to merely 2.1 percent of the country's gross domestic product in 2003, compared with 22 percent in the US and 38 percent in Britain. The government now wants to double the amount of foreign investment by 2010.

  Back in 1990, Japanese takeovers of foreign businesses accounted for 61 percent of all M&A activity in the country. That dwindled to just 15 percent last year, said Recof, a market research company based in Tokyo.

  The tumble was offset by a surge in domestic deals, which now account for 78 percent and a rise in foreign buyouts of distressed Japanese assets.

  The 2,775 M&A deals in Japan last year were but a fraction of 13,691 in the US and 14,702 in Europe, Thomson Financial said. GCA's Watanabe expects the Japanese M&A market to quadruple in the next five to 10 years.

  But important milestones are already being chalked.

  Just last year, Japan witnessed its first-ever hostile takeover attempt between domestic blue chips when Oji Paper Co tried but failed to buy Hokuetsu Paper Mills.

  Also turning heads was Japan's biggest takeover of a foreign firm -- Japan Tobacco's US$15 billion buyout of Britain's Gallaher Group, a deal finalized this month.

  Perhaps the biggest watershed was US-based Citigroup's tender offer bid for Japanese brokerage Nikko Cordial. That offer, which runs through on Thursday and is valued at up to US$13.4 billion, would be the largest-ever foreign takeover of a Japanese company.

  Today, all the big private equity firms, including Kohlberg Kravis Roberts & Co, Permira and the Carlyle Group, have offices in Japan. Yet, some still gets a vulture's reception.

  When the US investment fund Steel Partners announced in February it wanted to take a controlling 66 percent stake in Sapporo Holdings, one of Japan's biggest breweries, the initial response was an emphatic "No."

  In an ironic twist, Sapporo and archrival Asahi Breweries Ltd even bandied the idea of a capital tie-up to block the overseas interloper. That fell through and Sapporo has since bolstered its poison pill ramparts as it stalls for time.

  Shareholders may be the final arbiter of whether Japan further warms to M&A. After years of suffering interest rates close to zero, average Japanese have entered the stock market by the droves for the first time seeking higher returns.

  Unlike the old boy networks that tied up shares between conglomerates and were oft vilified for perpetuating the cozy status quo of Japan's loss-making "zombie" companies, the new breed of private investor has its eyes on profits.

  In a nod to the trend, Citigroup boosted its offer for Nikko by 26 percent, after some market players said the first bid was too low.

  "You now have shareholders who are willing to listen because they are economically motivated,'' said Scott Callon, chief executive of Ichigo Asset Management in Tokyo. "They'll give it a hard look."
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