Japan: Land Of The Hostile Takeover?

An M&A wave, even involving foreigners, may hit Japan

It finally happened. Japan has faced its first hostile foreign takeover in some two decades. Germany's Boehringer Ingelheim Group spent just $223 million to buy a controlling stake in SS Pharmaceutical Co., Japan's No. 4 maker of over-the-counter medicines and a one-time comet on the Tokyo Stock Exchange. That deal, in mid-February, came after an international consortium led by New York's Ripplewood Holdings bought Long-Term Credit Bank of Japan Ltd.--at auction no less--for a piddling $1.1 billion. Once a centerpiece of Japan's postwar recovery, LTCB's last starring role was in the nation's banking crisis.

In all, foreigners acquired nearly $16 billion of Japanese corporate assets last year. That's more than double the 1998 total, according to KPMG Corporate Finance. But it is still the lowest among industrialized nations. Nonetheless, the dealmaking in Japan "is happening faster than before," says Nicholas E. Benes, president of Japan Transaction Partners Inc., a Tokyo M&A boutique. "For savvy foreign companies that know M&A well, there are growing opportunities." Not surprisingly, merchant banks in Tokyo are bulking up their M&A units. At Morgan Stanley Dean Witter Japan, for example, President Thierry Porte has expanded his M&A staff by more than a third in the past 18 months.

Japan as a hot M&A market? It's not the laughable notion it once was. Shareholder pressure is unwinding the closely held crossholdings that long protected corporate Japan. New accounting and disclosure laws combined with low stock prices and a weaker yen are enticing foreign companies into a range of deals, chiefly in the financial and pharmaceutical industries.

Foreigners have bought some healthy companies, certainly: GE Capital's $6.6 billion purchase of Japan Leasing Corp. last March, for example. But after a decade of pummeling, many of the assets on the block are distress sales. LTCB is a case in point. To clinch the deal, Tokyo agreed to inject new capital and assume existing bad loans at a total cost of nearly $35 billion.

A changing corporate ethos is also influencing the dealmaking. While most corporate boards are still dominated by insiders, transparency is increasingly the norm. And instead of protecting jobs, which was long a nonnegotiable management priority, executives have to protect share prices. Foreigners now hold 14.1% of Japan's listed stock--a record high. Japanese investors, too, are more eager to realize gains. Says Hiro-kazu Moriyama, president of consulting firm Moriyama & Co.: "Stockholders are starting to pressure companies to do M&A so they can cash in."

This pressure is rippling through the market. Analysts such as Moriyama now recommend stocks based on their attraction as takeover targets. According to Morgan Stanley's Porte, at least five American private equity funds are focusing on M&A in Japan.

AGING POPULATION. So far, the action is concentrated in two sectors. Financial groups, reeling from the post-bubble crisis of the 1990s, are clear targets, says Aki Watanabe, a partner at KPMG Corporate Finance in Tokyo. And in a nation whose population is aging faster than that of other industrialized countries, drug companies look promising.

But the M&A phenomenon could spread, especially as the economy recovers. Managers will come under even greater pressure to bolster profits and pay dividends. Companies will have to spin off noncore businesses and welcome foreign partners. And since imports usually follow investment, the M&A wave could eventually help reduce Japan's ever-touchy trade surpluses.

Some day. "We're in a transitional phase," says Yoshiaki Murakami, a former Ministry of International Trade & Industry bureaucrat. "In Japan, change starts out slowly but then accelerates." Murakami's counting on that. He launched an M&A consultancy last year.

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