Steel company mergers are a little below Timothy Geithner’s radar. Yet the U.S. Treasury secretary should think long and hard about a recent one in Japan.
On the surface, Nippon Steel Corp. and Sumitomo Metal Industries Ltd. joining forces to become the world’s second-largest producer isn’t wildly interesting. It’s the “why” below it that’s important: Such deals are now the official policy of a Japanese government desperate to boost its global standing.
Expect a 1980s-like overseas-buying binge amid a strong yen, a simplified takeover approval process and a sudden urgency for economic relevance at the highest levels of government.
This burst of acquisitiveness has China and the rest of developing Asia written all over it. Japan has been painfully slow to realize the world is passing it by and now is racing to again be relevant. No fruit hangs lower than mergers and acquisitions, and Japan’s focus there is music to the ears of bulls like hedge-fund manager Curtis Freeze. They see an M&A boom as Japan’s way out of deflation and the world’s biggest public debt.
Even when Geithner was a staffer in Bill Clinton’s Treasury Department in the 1990s, the U.S. was urging Japan to contribute more to world growth. Yet the U.S. may not be ecstatic about Japan’s new game plan. Instead of reflecting free-market principles, Japan’s M&A tear will have more of a Chinese flavor -- more “Beijing consensus” than “Washington consensus.”
This merger wave is, for better or worse, going to be government directed. China’s rise is beginning to catalyze Japan, as many economic observers long expected, though not exactly as they had hoped. This is more an attempt to emulate China’s state-capitalism than buyout legends like Henry Kravis.
You may think you’ve seen this movie before. That economic machine known as Japan Inc. with its incestuous ties between government and industry is what delivered the nation to today’s heights. The public-private partnership worked wonders until markets and banks crashed two decades ago.
There’s a crucial difference, though. Japan’s ‘80s-era shopping binge was about vanity. Ego was behind headline-generating purchases of Rockefeller Center and the Pebble Beach golf course. It wasn’t Japan’s government that had company presidents bidding on every Van Gogh, Picasso and Monet up for auction. It was hubris. Many of those investments ended badly, or were dumped at fire-sale prices as cash became scarce.
This time, the government will lead the charge, China-style, to ensure deals are strategic, logical and primed for long-term growth. Japan needs raw materials, and bigger is better when bidding for them overseas. The laissez-faire crowd won’t be happy to see Japan Inc. re-assert itself. What’s more important, though, is that the end justifies the means.
The collapse of Lehman Brothers Holdings Inc. irreparably damaged the U.S.-capitalism brand. When you are competing with a country that’s run like a company -- China -- the lines between government and the private sector are bound to disappear.
It may be too late for Japan, which for decades dragged its feet. The extent to which Japan is playing catch up was apparent recently when Korea Electric Power Corp. led a group that won a $18.6 billion order to build nuclear power plants for the United Arab Emirates. The size of the deal shocked Tokyo.
Freeze and his ilk believe inbound and outbound M&A is the shock Japan’s flat-lining economy needs. And Freeze, chairman of Honolulu-based Prospect Asset Management Inc., has done well by clients by putting his money where his mouth is: His firm’s Japan-focused hedge fund returned 210 percent last year.
Mr. 210 Percent
So how does Mr. 210 Percent, as Freeze is sometimes called in Tokyo, view the government’s M&A push?
“The best is yet to come,” he says, predicting management buyouts where companies are taken private and delisted and straightforward takeover bids will rapidly pick up pace.
Japan needs a bit of this drama. Every January opens with a barrage of predictions that this is Japan’s year, the one in which growth will return. Each time, hopes are thwarted.
Last year was a banner one for disappointment. Deflation deepened, Japan Airlines Corp. went bankrupt, Toyota Motor Corp. became a punch line, Sony Corp. slid further toward irrelevance and China became Asia’s biggest economy.
Yet here is a sign Japan gets it. The benefits of increased M&A activity might be profound and provide a much-needed growth engine to help Japan rely less on debt and zero interest rates.
Increased productivity, improved corporate governance and fresh economic growth rank near the top of any investor’s wish list for Japan. All of these concerns, and more, might be addressed by domestic companies eliminating inefficiencies and executives looking overseas for greater market share and growth opportunities.
It won’t fix all of Japan’s problems. The population still is aging too fast, the birthrate is too low, job growth is too anemic and entrepreneurship is too rare. Yet M&A has the power to shake up an economy that’s too rigid and insular for its own good. If giving Japan Inc. a new lifeline can do that, then so be it. Could Geithner really disagree?
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
Click on “Send Comment” in the sidebar display to send a letter to the editor.