When the Japan Post companies debut next week, it will be the world’s biggest initial public offering this year and the nation’s largest privatization since the 1980s. It will also be the first time a company and its subsidiaries have gone public at the same time.
That’s putting the spotlight back on a practice seen as open to abuse: parent-child listings. The structure is a “barbarous relic” that has largely disappeared from other markets, according to CLSA Ltd.’s Nicholas Smith, a strategist at the brokerage, who notes the possibility for listed subsidiaries to be plundered by their parents or forced into unprofitable business at their behest.
While the simultaneous nature of Japan Post Holdings Co. and its banking and insurance subsidiaries’ public offerings is something new, the arrangement itself has been common in Japan for years. It’s mainly a problem if units don’t increase their independence from the parent after listing and eventually become separate entities, according to Nomura Holdings Inc. senior strategist Kengo Nishiyama. This has been a common pattern in Japan, he said.
“Being public and private is completely different,” Nishiyama said in an interview in Tokyo on Wednesday. “If you’re a group company but not listed, it’s fine to think what you like. But if you go public you have to be aware of minority shareholders and the market.”
The IPO and the renewed debate about parent-child listings come as Japan considers what’s next in its moves to overhaul corporate governance. The country started rules for companies in June after introducing complementary principles for investors last year.
“It seems likely that changes in corporate governance codes will ultimately put an end to this barbarous relic,” Smith wrote in a report this year. “Parent-child listings seem a clear violation of the principle of equal treatment of shareholders.”
Such listings are already decreasing, according to data from Nomura. They fell to 284 at the end of March, an eighth straight year of declines since 2007, when the Tokyo bourse said in a statement that parent-child arrangements were “not always desirable.”
The stock exchange operator reviewed the matter carefully before approving the Japan Post companies’ listings, Akira Kiyota, chief executive officer of Japan Exchange Group Inc., told reporters in Tokyo on Sept. 25. He noted that this kind of simultaneous parent-child listing structure is unprecedented globally.
Activist investors, who have been sensing opportunities in Japan since Prime Minister Shinzo Abe started his overhaul of corporate governance, are honing in on parent-child listings. Oasis Management, a Hong Kong-based fund, called on Canon Inc. earlier this year to take private two listed subsidiaries, according to a letter to the fund’s investors obtained by Bloomberg.
Nishiyama says the practice isn’t banned in any country, and people have moved from seeing it as always negative to deciding based on the individual case. For him, the biggest issue in Japan is how reluctant parent companies are to cut ties with their units. Maintaining the arrangement for 20 or 30 years is wrong, he said.
“In the U.S. the child leaves home to go to university,” Nishiyama said. “In Japan, they’re often still there after they graduate.”
The Japan Post IPOs aren’t such a concern because the banking and insurance units are slated to become fully independent of the holding company, according to CLSA’s Smith. The government plans to sell its entire stakes in the subsidiaries “eventually.”
“I’d counsel: never mind eventually,” Smith said. “Run, don’t walk.”