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Evolution likely, not revolution
Western banks hoping for a US-style aggressive takeover wave are unlikely to have their dreams fulfilled soon, says Gillian Tett
 In recent months, Western investment banks in Tokyo have started a new marketing pitch. For as restructuring gets under way, some banks are trying to win business by promising to protect Japanese companies from a hostile takeover.
Thus far, few Japanese companies are buying these defence services. For Japan's corporate world has witnessed practically no hostile bids - known locally by the aggressive phrase "tekitai teki baishu", or "bid by the enemy".
But until recently, this concept of "bidding against the enemy" was almost inconceivable in Japan's cosy corporate culture. Consequently, the fact that Western banks have even launched this new marketing drive points to striking changes now under way in Japan's corporate world.
For although M&A activity has been underdeveloped in the past in Japan, there are signs that this is now starting to swell - the total value of deals rose from $17.5bn in 1998 to $150bn last year, according to Gary Stead, head of Asian M&As at Merrill Lynch. And most observers expect this trend to continue, reshaping the face of corporate Japan.
"The momentum for M&As is very strong. The deals only represent 6 per cent of market capitalisation, compared with 13 per cent in the US and 18 per cent in Europe," says Mr Stead. "We've got a long way to go."
This M&A boom has largely arisen due to a steady change in the manner in which Japan's corporate system allocates capital. During recent decades, capital was effectively rationed by large Japanese banks, which offered cheap loans to favoured allies, who were intimately linked with their banks through cross shareholdings.
This system allowed little scope for M&As, unless it was formally orchestrated by a main bank. And, though an "M&A boom" of sorts took place at the end of the 1980s, this was almost entirely driven by "in-out" deals - or Japanese companies buying groups in the US, Europe and Asia.
| Asian M&A top ten deals |
| (Jan 1 to Jun 19 2000) |
|
| Target |
Acquirer |
Value of deal ($m) |
|
| Cable & Wireless HKT (Hong Kong) |
Pecific Century Cyberworks (Hong Kong) |
35,495.1 |
| Worldwide Semiconductor (Taiwan) |
Taiwan Semiconductor Mnfr (Taiwan) |
6,448.0 |
| Tonen Corp (exxon Mobil) (Japan) |
General Seklyu (Esso Eastern) (Japan) |
3,207.3 |
| Hansol M com (South Korea) |
Korea Telecom (South Korea) |
2,556.5 |
| Mitsubishi otors (Japan) |
DaimlerChrysler (Germany) |
2,103.1 |
| Lawson (Japan) |
Mitsubishi (Japan) |
1,607.7 |
| Pacific Century Cyberworks (Hong Kong) |
Telstra (Australia) |
1,500.0 |
| DDI Corp (Japan) |
Toyota Motor (Japan) |
1,143.5 |
| Ceylon Steel (Sri Lanka) |
Hanjung (South Korea) |
1,000.0 |
| PetroChina (China) |
BP Amoco (UK) |
1,000.0 |
|
| Asian target any acquirer nation. Deals announced and not withdrawn. Excludes open market repurchase and split-offs. |
| |
| Source: Thomson Financial Securities Data |
But in the 1990s this system slowly started to fragment. This is partly because the collapse of the 1980s bubble created deep financial holes in many parts of corporate Japan. But Japan's own banking industry is also being restructured, and thus is less willing - or able - to provide cheap loans to favoured allies.
This has forced companies to raise funds in the markets, meaning that capital has started to be allocated according to price. It has also forced companies to take more radical steps, such as spinning off subsidiaries, selling cross shareholdings, or finding new buyers for their entire operations.
And this in turn has triggered a new wave of M&As - much of which has been "out-in" as foreign investors have grabbed at a host of unprecedented opportunities. Renault, to cite one example, recently bought a large stake in Nissan when the company became engulfed in debts; similarly, GE Capital took over Toho Mutual, a life assurance company, after it effectively collapsed.
Thus far, most of these deals occurred only where companies were already in deep distress. For many Japanese managers still regard M&As as a "last ditch" option that is not needed when companies still have sufficient protection from their banks, or related group companies.
| Asian M&A advisers ranking |
| (Jan 1 to Jun 19 2000) |
|
| Rank |
Adviser |
Rank value
($m) |
Market share
(per cent) |
Number of
deals |
|
| 1 |
Salomon Smith Barney |
41,548.5 |
40.6 |
15 |
| 2 |
Merrill Lynch |
41,397.6 |
40.5 |
10 |
| 3 |
UBS Warburg |
37,158.9 |
36.3 |
4 |
| 4 |
Flemings |
36,117.5 |
35.3 |
14 |
| 5 |
Credit Suisse First Boston |
35,938.5 |
35.2 |
5 |
| 6 |
ING Barings |
35,550.1 |
34.8 |
2 |
| 7 |
Greenhill |
35,495.1 |
34.7 |
1 |
| 8 |
Bank of China |
35,495.1 |
34.7 |
1 |
| 9 |
Goldman Sachs |
14,156.2 |
13.8 |
13 |
| 10 |
Morgan Stanley Dean Witter |
9,529.2 |
9.3 |
21 |
| 11 |
Nomura Group |
4,251.1 |
4.2 |
28 |
| 12 |
Bank of Toyko-Mitsubishi |
2,146.6 |
2.1 |
5 |
| 13 |
J Morgan |
1,344.2 |
1.3 |
11 |
| 14 |
Industrial Bank of Japan |
1,270.4 |
1.2 |
13 |
| 15 |
Chase Manhattan |
1,241.0 |
1.2 |
3 |
| 16 |
BNP Paribas |
1,158.0 |
1.1 |
9 |
| 17 |
Sanwa Bank |
1,054.8 |
1.0 |
6 |
| 18 |
Rothschild |
1,042.0 |
1.0 |
8 |
| 19 |
HSBC |
909.8 |
0.9 |
7 |
| 20 |
Lehman Brothers |
817.7 |
0.8 |
5 |
| 21 |
Societe Generale |
765.0 |
0.8 |
2 |
| 22 |
Yu Ming Investment Management |
645.9 |
0.6 |
1 |
| 23 |
PriceWaterhouseCoopers |
415.6 |
0.4 |
6 |
| 24 |
Kotak Mahindra Finance |
324.8 |
0.3 |
2 |
| 25 |
Nikko Securities |
276.2 |
0.3 |
3 |
|
| Asian target any acquirer nation. Deals announced and not withdrawn. Excludes open market repurchase and split-offs. |
| |
| Source: Thomson Financial Securities Data |
This attitude is deeply frustrating for many foreign bankers, who are yearning for more deals - and point out that many companies in Japan have market capitalisations that are a small proportion of their book assets. Indeed, in some cases, the companies' capitalisations are actually lower than the value of their share portfolios, meaning that they would be ripe for takeover in most other countries. "Change is only really occurring when the money runs out," mutters one US banker.
But the big question now is whether this attitude will change and Japanese companies will start to embrace M&As without a crisis. Some optimists hope they will.
"Many Japanese companies now realise that they cannot revive themselves without restructuring - this happened in the US 10 years ago, and now it is Japan's turn," argues Taiji Okusu, vice-chairman of UBS Warburg in Japan, which has almost doubled its M&A staff in the past six months to fight for some of these deals.
And one factor that may spur this change is that the Ministry for International Trade and Industry is now introducing legislation that will make it easier for companies to spin off subsidiaries. Another "trigger" is the recent introduction of tighter accounting standards, which will reveal unpleasant losses at subsidiaries for the first time - unless companies quickly spin them off.
"Before, companies were only doing deals because they had to - now they are doing them because they want to," says John Macfarlane, country head of Deutsche Securities.
But Japan is a country that prefers evolution to revolution - meaning that this shift is unlikely to occur as fast as some foreign investors would expect. Indeed, many of the foreign private equity firms which raised money for deals last year have found it surprisingly difficult to spend their funds effectively.
And the one instance of a truly "hostile" bid that has emerged so far - namely a bid for Shoei pharmaceutical company by a private Japanese investor - ended in failure after Shoei's shareholders blocked it. The concept of hostile bids, in other words, may have now entered the mind of corporate Japan for the first time.
It may even be spurring corporate change. But western banks hoping for a US-style aggressive M&A wave are unlikely to see their dreams fulfilled soon.
Brothers bank on similar careers
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