Tue, Oct 26, 2004 page9

• Japan's battle of the banks draws international attention

  The ongoing duel between two large banks for UFJ Holdings is being closely watched, as it's seen as an indicator for the future of mergers and acquisitions in Japan

  • AFP
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  An unprecedented merger battle to create the world's largest bank by assets is serving as a test case for how far Japan has come in transparency and competition and how much influence individual shareholders will wield, analysts said.

  With months to go before a still uncertain outcome, the battle of the banks is drawing global attention as foreigners put more money into Japan and the government mulls further opening mergers and acquisitions to international players.

  Mitsubishi Tokyo Financial Group, the most profitable of Japan's four megabanks, and fourth-largest bank UFJ Holdings announced in mid-July they would negotiate to merge.

  But by the end of July, what in the old Japan would have been a straight-forward and government-blessed acquisition of a weaker firm by a stronger one took an entirely different turn.

  Sumitomo Mitsui Financial Group, which would be relegated into third and last place among Japan's megabanks if the Mitsubishi Tokyo-UFJ merger becomes reality, made a unsolicited counteroffer.

  "Much of this, if not all, would have taken the form of a backroom deal in erstwhile Japan," said Noriko Hama, professor at the management school of Doshisha University in Kyoto.

  "Keeping up appearances used to mean hiding things in corporate Japan. Now it looks as though the emphasis has shifted to appearing transparent and shareholder friendly," Hama said.

  "Yet it remains to be seen how far content matches appearances," she said.

  In August, even after Mitsubishi Tokyo and UFJ had announced their wedding date of October next year, Sumitomo Mitsui made an offer of one of its shares for each of UFJ's -- a generous offer to a troubled bank -- and promised a cash infusion of ?700 billion (US$6.5 billion).

  Mitsubishi responded by actually injecting the same sum into UFJ just in time for the closing of the half-year books at the end of last month.

  But it came with a so-called "poison pill" by which Mitsubishi, in the event of a hostile bid for UFJ, could convert its shares into voting stock to prevent a takeover. Mitsubishi did not reveal its merger ratio.

  UFJ called on its shareholders to side with Mitsubishi Tokyo through an open letter published in the Nihon Keizai Shimbun business daily and in the international press -- another unprecedented event in Japan.

  The open hostility between the banks in Japan's orderly business culture and authorities' discreetness in the very public affair are both novel in Japan.

  And more surprises could be in store, as Sumitomo Mitsui has delayed until the end of June next year its deadline for UFJ to accept its offer.

  "Considering Sumitomo Mitsui's attitude up until now, you can't rule out more fireworks," said a European specialist on the banking sector who declined to be named.

  Sumitomo Mitsui could make a hostile bid for UFJ, which would be a first in Japan's banking sector.

  "Given the certain daredevilry -- for a Japanese bank, that is -- in their company psyche, they [Sumitomo Mitsui] might consider it worthwhile to appear to be the innovator in this competition," Hama said.

  Or UFJ's foreign shareholders, who represent an unusually large 30 percent of its capital, could revolt and demand more information from Mitsubishi Tokyo or require UFJ to pay more attention to the offer by Sumitomo Mitsui.

  "Naturally foreign shareholders are likely to become a bit more vocal and have a bigger say just because their shareholdings have gone up," said Ned Akov, a banking sector analyst at Macquarie Research.

  Japan is studying making acquisitions through share exchanges open to foreign companies, in a proposed amendment to the commercial code to be drafted by February, a justice ministry official said.

  But for the moment some hurdles could still "blunt the apparent intent of the reform" such as the current "less favorable tax treatment for share to share acquisitions by foreign firms," said Richard Jerram, chief economist at Macquarie.

  And according to an economy ministry official new measures are being studied to prevent hostile bids.

  Jerram said in a recent commentary that the plan was being silently delayed and that he was "skeptical about any timetable for reforms" in Japan.

  A Japanese government official confirmed that "if we reach the conclusion that current proposals cannot be achieved, it is possible that the amendment will not be put forth."

  In a sign of Japan's wariness about making acquisitions by foreign firms easier, the Nihon Keizai recently wrote that such a change would force more Japanese firms to take measures against hostile bids.

  The course of the UFJ saga, even if not directly involving foreign companies, will reveal much about the future of mergers and acquisitions in Japan.

  Whichever company ends up with UFJ will see a huge increase in its size and "neither can allow the other to get away with the prize," Hama said.

  "UFJ the laggard has suddenly become UFJ the desirable. This is the irony of being the weakest among the largest," she said.
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