No. 9 — March 3, 2000


Weekly Review

--- by Jon Choy

The opposite results of two recent bids to gain control of Japanese companies illustrate how far Japan's mergers and acquisitions market has developed — and how far it remains behind its American and European counterparts. In the first case of an attempted hostile takeover of a domestic business by another Japanese firm, Merger & Acquisition Consulting Inc. failed to win the support of major institutional shareholders of its target, Shoei Co., Ltd., a real estate holding company, leaving it well short of a controlling (33.4 percent) interest. In contrast, Boehringer Ingelheim GmbH, one of Germany's larger pharmaceutical makers, successfully completed an unwelcome but open bid to become SSP Co., Ltd.'s top owner by winning the support of the over-the-counter drug producer's individual shareholders.

M&AC, founded in August 1999 by Yoshiaki Murakami, a former Ministry of International Trade and Industry bureaucrat, disclosed January 24 that until February 14, 2000, it would pay ¥1,000 ($9.10 at ¥110=$1.00) for each of Shoei's 1.4 million outstanding shares. That represented a 39.7 percent premium over the stock's average price during the previous 12 months. Shoei's board of directors quickly rejected the unsolicited offer and announced restructuring plans and an increase in its dividend to fight the hostile takeover.

By the time M&AC's offer had expired, the freshman acquisition fund had accumulated less than 6.6 percent of Shoei's outstanding shares, mainly because members of the Fuyo keiretsu (corporate grouping), including Canon Inc. and Fuji Bank, Ltd., had refused to sell their combined 60 percent stake. Not only were the Fuyo companies unwilling to budge, but market watchers say that they also may have helped the beleaguered real estate holding company and electronic parts maker lift its stock price as part of its takeover defense; that pared M&AC's premium to less than 15 percent. After considering upping the offer price, M&AC executives decided to let the firm's bid stand.

M&AC's head, Mr. Murakami, emphasized that the tender offer was not aimed at the breakup and the sell-off of Shoei's assets. Instead, he explained, the effort was meant to prod Shoei management to focus more urgently on boosting the company's value for shareholders. M&AC's bid attracted the support of several Japanese executives known to favor greater powers and benefits for owners of stock in Japanese firms. Mr. Murakami also said that his controversial action found support among Shoei's foreign shareholders, so much so that by his calculation, M&AC will have the authority to vote 20 percent of Shoei's stock at the next annual shareholders' meeting. Far from walking away from Shoei, Mr. Murakami plans to continue to press company leaders to give greater priority to the concerns and the interests of equity owners.

In contrast to M&AC and Shoei, Boehringer and SSP, which ranks second in the OTC products market, are longtime business associates. The Japanese firm distributes the German company's products in cooperation with Nippon Boehringer Ingelheim Co., Ltd. The German pharmaceutical maker surprised SSP executives, however, with its January 16 warning that it planned to launch a public bid the next day for a controlling block of SSP shares. Boehringer, according to market watchers, was worried that SSP's low stock price made it a tempting target for American and European competitors — not an unwarranted fear, given the consolidation currently reshaping the global drug industry. Nippon Boehringer, which already owned 19.6 percent of SSP's stock and controlled one seat on the firm's board of directors, offered a 42 percent premium, or ¥1,100 ($10) per share, to entice shareholders to sell.

Although SSP executives officially remained neutral toward the unsolicited offer, privately they derided it. In contrast to Shoei, however, institutional investors owned only 34 percent of SSP's shares before Nippon Boehringer's bid. Individual investors held 37 percent and corporations the remaining 9.4 percent. SSP officials were confident that they would retain the support of institutional and corporate investors. They did not expect small and individual investors to accept the offer since most of them are owners of family drug stores dependent on SSP for supplies. According to analysts, however, SSP's recent efforts to court large pharmacy chains and its inattention to mom-and-pop stores had all but eliminated its support among individual investors.

Nippon Boehringer officials said that their bid had generated a huge response from individuals in the form of thousands of phone calls for information and more than 2,600 offers to sell. By the time the tender closed February 15, Nippon Boehringer had obtained just under 35.9 percent of SSP's stock, giving it veto power over major decisions in its new role as controlling owner. The successful bid caused shock waves not only in Japan's clubby drug industry but also throughout the country's equity markets since it depended on the actions of small shareholders.

This transaction is just one indication of the vitality of the Japanese M&A market. Nikko Securities Co., Ltd. says that total mergers and acquisitions jumped 24 percent in 1999 to 1,160, the sixth consecutive yearly gain. Acquisitions of a controlling share numbered 394, while 370 of the deals involved capital affiliation (purchase of a noncontrolling share) and 237 consisted of the complete or partial acquisition of one firm's operations by another. By Nikko Securities' count, 159 mergers occurred in 1999. Deals between domestic companies totaled 769 compared with 550 in 1998, while transactions involving foreign firms beat that year's total by 30 to reach 154. The big brokerage house calculated that the total value of Japan's M&A activity doubled in 1999 to more than ¥6.7 trillion ($60.9 billion).

Global accounting powerhouse KPMG LLP reports that corporate Japan renewed its cross-border M&A activity in 1999, signing deals worth $20.4 billion to buy foreign firms compared with just $7.2 billion the year before. This made Japan the seventh-largest acquirer on a global basis. Foreign purchases of Japanese companies also surged, according to KPMG figures, more than doubling 1998's $6.9 billion total in hitting nearly $15.8 billion. This was just enough for Japan to squeak into last place among the top 10 global sellers based on KPMG's ranking.

Besides the fact that M&As long have been taboo in Japan's corporate world, the regulatory framework made it difficult to conduct a merger, an acquisition or a spin-off, even if it was friendly. Gaining the approval of regulators and then performing the necessary audits and due diligence was a lengthy, costly process. The Commercial Code and other laws governing business had become straitjackets, limiting entities like spin-offs to the creation of wholly owned subsidiaries. Tokyo quietly has been changing these laws since 1997, when it allowed firms to offer employees stock options. In 1998, the government opened the door for financial and nonfinancial holding companies, a change that has facilitated such major deals as the pact among Dai-Ichi Kangyo Bank, Ltd., Fuji Bank and Industrial Bank of Japan, Ltd. (see JEI Report No. 33B, August 27, 1999).

Two recent pieces of legislation and several other developments have coalesced to open Japan's M&A market even further:

While Japan's M&A market soars, in part because of transpacific deals, Washington and Tokyo continue to hold talks on promoting foreign direct investment in Japan. Under a pact signed last year (see JEI Report No. 19B, May 14, 1999), the two governments agreed to work to ease barriers to investment flows and to help American and Japanese business leaders build better relationships. The first such conference of government officials and executives was held March 1 in Tokyo. The 1999 agreement builds on the U.S.-Japan Framework for a New Economic Partnership, under which members of the Working Group on Investment and Buyer-Supplier Relationships have been discussing this topic since 1993. While the talks are described as beneficial, the real action clearly is in the marketplace.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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