Friday, March 19, 2004
Hostile takeovers become agents of change in Japan
Reuters Tokyo, March 19
Threats by foreign investors to take over companies against their will are spurring corporate reform and shareholder activism in Japan, slow to restructure after years of stagnation, analysts say.
In a country where unsolicited bids are few and far between, Steel Partners Japan struck doom into the hearts of many Japanese firms recently by making bids for textile firm Sotoh and metalworking oil maker Yushiro Chemical Industry.
The two companies -- both flush with cash that exceeded their market capitalisations -- repelled Steel Partners' attentions by boosting annual dividends by up to 15-fold to keep shareholders from selling out. Their shares have since soared.
Both companies ended up evading the clutches of the US-based fund. But the threat of more attempts to come is sparking a growing realisation that firms need to boost shareholder returns by raising dividends or buying back shares.
"This is basically pretty much a first in Japanese history," said Goldman Sachs chief strategist Kathy Matsui. "Before, there was never really the threat of being taken over. What is the easiest way to fend off a takeover bid? Raise the share price."
Sotoh shares have since been hovering just below record highs hit after Steel Partners' offer and Yushiro shares have been around highs not seen in more than a decade.
Fund managers say what Steel Partners and other would-be corporate raiders carried out was a form of "greenmail", announcing takeover bids in an attempt to drive up share prices and make hefty gains.
"What Steel Partners did in Japan was clearly a wake-up call to these companies," said Takehiko Serai, co-manager of Gabelli Japanese Value Partners, a U.S.-based long/short hedge fund.
"Although Steel Partners did not become the majority owner of these two companies, their returns on these investments... have been spectacular." But while market watchers count the days until another foreign fund decides to follow the trail blazed by Steel Partners, hopes that big Japanese companies are now actively seeking to boost shareholder value are premature, others say.
"This is a game for foreigners to play in small- and mid-cap stocks," said Alexander Kinmont, a strategist at Nikko Citigroup. "To go beyond that, no."
PLEASE STAY PUT
One result of the changes has been a push by Japanese firms to boost dividends to induce shareholders to stay put. In June, companies will shell out 2.45 trillion yen ($23 billion) in dividends for the fiscal year ending March 31, a 5.1 per cent increase on the year before. Fund managers say that number will continue to rise.
"As a result of the Steel Partners action, there is no doubt that potential TOB (takeover bid) targets' management has learned that increasing dividends is the easiest defence," said Gabelli's Serai.
The average dividend yield for companies in the broad-based TOPIX index is 0.9 per cent, one of the lowest among major Asian bourses, compared with Hong Kong's Hang Seng index at 3.4 per cent.
New guidelines requiring that pension asset managers -- who run a juicy chunk of the investment in Japan -- exercise their votes in shareholder meetings are leading to an increasing number of votes against management, according to Goldman Sachs.
And a decade of economic stagnation has prompted many financial institutions to sell shares held in other companies, making the hostile takeover more of a reality.
Hostile takeovers are simply "one way of executing stock holders' rights", said Nomura Securities analyst Jiro Nakano. "This kind of activism will stimulate the companies' management."
Others have been pushing for change in hidebound Japan. Former Trade Ministry official Yoshiaki Murakami, who runs asset management firm M&A Consulting Inc, takes minority stakes in cash-rich, undervalued firms to demand that managers increase returns to shareholders.
And the Pension Fund Association, representing about 1,400 employee pension funds around Japan, said it would launch the country's first corporate governance fund -- investing in firms rated highly on shareholder value -- worth 10 billion yen in May.
But some analysts say the big firms dominating Japan's business landscape are the ones that need to change.
"The companies that ought to be taken over are the big companies," said Kinmont at Nikko Citigroup. "Why would they do anything until they were forced to?"
© Hindustan Times Ltd. 2004.