Is Japan Open for Takeovers?
May 1 2005 by Chief Executive
Day in and day out, headlines in respected Japanese newspapers scream: “Livedoor buys another 3 percent of Nippon Broadcasting Systems (NBS) shares.” Or, about NBS’s parent company: “Fuji Television will do 50 billion yen new share offerings to fend off Livedoor’s hostile bid.” And the most extreme: “Foreign capital will maul Japan, Inc.”
From the way the takeover drama has transfixed people, it would appear that 2005 is the dawn of an era of hostile mergers and acquisitions. But Japan has been staunchly resisting such deal-making since T. Boone Pickens’ aborted stab at Koito Manufacturing, a Toyota Motor group company, in 1989.
The Japanese are not ready for U.S.-style hostile acquisitions or American management tactics. The Japanese fret that taking a Japanese company by force would badly sap worker morale and could destroy the company. Although the Japanese are, in fact, trying to open up to certain kinds of foreign investment, as evidenced by a government-sponsored “Invest in Japan” advertising campaign, they are drawing the line at overtly hostile deals.
In the deal between Internet provider Livedoor and NBS, Japanese authorities and other opinion makers have been incensed by the fact that Lehman Brothers lent acquisition money to Livedoor, making it a hidden and major stakeholder. They are still smarting from the role Goldman Sachs played in supporting Sumitomo-Mitsui Financial Group last year in another hostile acquisition.
Japan is even making its legal structure unfriendly to foreign M&As. Prime Minister Junichiro Koizumi’s cabinet sent legislation to the Diet in March that would delay for one year the ability of a foreign company to buy a Japanese firm with foreign shares. The current practice, which would be extended for that year, is that buyers must use cash or Japanese stocks.
So should Japan be back on the CEO radar screen? Many American chief executive officers have bypassed Japan in recent years for other faster-growing and more open markets. The numbers show it: Japan’s inward flow of foreign direct investment is now as little as 2.1 percent of gross domestic product. Even if Prime Minister Junichiro Koizumi is able to raise that to 3 percent by 2006, as he has promised President Bush, it would pale when compared with the United States’ 22 percent and the European Union’s 34 percent.
Despite the Livedoor-NBS flap, it appears the Japanese are serious about foreign investment. They recognize that foreign managers and capital can be positive, as evidenced by Carlos Ghosn’s role at Nissan and Sir Howard Stringer’s elevation to the top job at Sony. Certainly, there are investment opportunities aplenty, among them portfolio investment in Japanese companies and consultancy and management of the country’s $14 trillion in personal assets. Another factor: U.S. Secretary of State Condoleezza Rice recently cast China as more of a rival than a partner. That could fuel more U.S. investments in Japan.
Once as expensive as gold in Japan, real estate prices here have come down to such a level that it is now cheaper than real estate in Hong Kong and even some prime Shanghai locations. That has nudged office rents low enough for U.S. companies to justify building R&D, design and even manufacturing facilities. Cisco Systems recently announced a $12 million R&D center, following AMD’s decision last year to open an engineering lab in Tokyo for IT-connected electric appliance research.
In terms of portfolio investment, the Japanese stock market, now barely about 11,500, remains near its rock-bottom levels from its December 1990 peak of 39,000, meaning the market has little room for further slide. The betting is that foreign investors will start seeking bargains. “Japanese companies, despite their huge unrealized assets, are undervalued,” says Bain & Company managing partner Shintaro Hori. He expects foreigners to target these opportunities through acquisitions, partnerships and other methods of collaboration with Japanese firms. “This is a very attractive market to invest in,” Hori argues. “It is just coming out of a long hibernation period.”
Some foreign investors, many of them American, already are taking a fresh stab at Japan. They are buying shares of unlisted Japanese companies and even purchasing traditional Japanese hot spring inns and country clubs. “They clearly know that Japan is an excellent target for M&A activities,” says Takashi Kanasaki, COO of Japan Credit Rating Agency. “Japanese companies’ price-earnings and price-to-book ratios are so low that for portfolio investors, the risk is not investing in Japan.”
But that doesn’t mean hostile acquisitions will work. Lehman and Goldman both encountered stiff resistance because they were working as “kagemusha,” or shadow warriors. That’s what prompted Koizumi’s Cabinet to push back for a year the law allowing the use of foreign shares to buy Japanese assets. “It’s like the wolves are not here yet, but Japan is erecting defense barriers,” sighs Nicholas Benes, president of investment consulting agency JTP Corp. and chairman of the FDI Committee of the American Chamber of Commerce in Japan. “American companies are not interested in engaging in hostile takeovers. They do not want to have the same negative reputations as Commodore Matthew Perry’s black ships, which forced Japan to open in 1853.”
Analysts say the horizon for foreign investment is widening to such areas as video game software, biotechnology, specialty semiconductors, new materials, auto parts, nursing care and industrial designs. “A Louis Vuitton hospital of Japan” would be one such possibility, says Merrill Lynch Japan analyst Jesper Koll. “It would be a fantastic business providing services to the growing aging society in Japan,” he says.
Bucking a recent trend, property investments in Japan are attracting U.S. and foreign private equity firms and property investors. A New York-based private equity firm, Ethos, wants to purchase about $150 million worth of preferred shares of a Matsushita Electric’s property unit, as well as $3 billion worth of its resort properties. In February, Singapore’s Government Investment Corp. acquired a shopping mall from Japan’s Aeon retail group, which it leased back.
Tourism could emerge as another investment hot spot. Koizumi has launched a “Yokoso (Welcome to) Japan” promotional campaign, aimed at doubling the number of foreign tourists to 10 million within a few years. Tokyo hoteliers are gearing up to increase room capacity by 5,200 rooms by the end of 2006. Some 1,000 of those will be built by foreign companies.
In anticipation of more foreign tourists flocking to Japan, Starwood Capital purchased Westin Hotel Tokyo from Sapporo Brewery in December, while the Mandarin Oriental and Peninsula groups are building hotels for opening in 2006 and 2007.
Goldman Sachs is snapping up bankrupt onsen (hot springs) inns in hopes of drawing Asian tourists. It purchased Furumaki Onsen Shibusawa Park, a prestigious inn located in the northern province of Aomori late last year, and Izumiso in Shizuoka, another famous inn southwest of Tokyo earlier this year, both for undisclosed sums.
Although the Livedoor-NBS flap signals that hostile bids for Japanese companies remain unwelcome, offering M&A advice is acceptable. Deloitte Touche Tohmatsu has been advising Chinese companies shopping for Japanese targets. Likewise, A.T. Kearney, ChuoAoyama Audit Corp. and others have been advising on poison pills and other defenses.
Clearly, there is room in Japan for foreign money to come in in many arenas. A cowboy like T. Boone Pickens might not be satisfied, but there has been a seismic shift in Japan’s thinking about the value of foreign investment.