So "Takeover" Does Translate

Foreigners are after Japanese companies -- with better governance as one result

Back in 1989, legendary Texas oilman and corporate raider T. Boone Pickens Jr. gained notoriety in Tokyo for unmasking Japan Inc.'s rigged stock market and incestuous corporate cross-shareholdings. His Mesa Petroleum owned a 20% stake in Koito Manufacturing, making him the biggest shareholder in the company, which supplied auto parts to Toyota. Naturally, Pickens wanted a seat on the board. But he was told to shove off, enhancing Japan's well-deserved reputation as a wasteland of corporate governance.

Maybe Pickens should try again. On Dec. 19, Steel Partners Japan Strategies LP, a private equity fund run by Wall Street investor Warren G. Lichtenstein, decided it wasn't getting enough return on its investment in Yushiro Chemical Industry Co. Steel Partners owns an 8.9% stake in the machine-oils producer, which, like Koito, is a big Toyota Motor Corp. (TM ) supplier. Lichtenstein didn't just want a board seat, however. He launched a hostile takeover bid, offering $10.80 per share for the rest of the stock.

Lichtenstein's interest highlights how cheap many Japanese stocks are. Before Steel Partners appeared, Yushiro was trading well below its book value of $193 million. That included $100 million in cash, which Steel Partners and other investors thought should be doled out to benefit shareholders or reinvested in operations.

In an earlier time, Yushiro would have rallied its Japanese shareholders to send the gaijin packing. This time, the result was a lot more favorable to investors. Yushiro fended off Steel's offer, but not before a panicked management agreed to increase the company's dividend fourteenfold, to $1.80 a share. Shareholders, including Lichtenstein, were ecstatic. Not only will they get $28 million in cash, but Yushiro's stock has vaulted 54% since mid-December -- raising the company's market cap to $255 million. "The environment in Japan is changing," says a top Steel executive in New York. Steel has also launched a takeover bid for textile maker Sotoh Co. that is still unresolved.

So has Japan Inc. suddenly discovered shareholder value? Well, not quite. Average return on equity for Japanese companies in 2003 was still only 7%, about half the U.S. level and among the lowest in the industrialized world, according to Nikko Citigroup Ltd. (C ). A low ROE translates into low share prices.

ON THE CHEAP. But the pressure is building to improve the numbers. Japanese companies once relied on extensive cross-shareholdings with their banks to keep intruders out. But with sick banks being forced to sell out, about half those shareholdings have been put on the market since 1991.

That has given an opening to foreigners, who last year alone snapped up $70 billion in Japanese equities, with investment funds such as Ripplewood Holdings, Lone Star, and Cerebus picking up distressed banks, manufacturers, and real estate developers on the cheap. Now even Japanese turnaround boutiques such as M&A Consulting Inc., which is run by former bureaucrat Yoshiaki Murakami, are going after mismanaged companies. "Recovery-oriented investors are now recognized as legitimate" among the Japanese public, says Tatsuo Kubota, a Tokyo investment banker. Kubota should know: He works for dealmaker Wilbur L. Ross Jr., who last year teamed up with powerful California Public Employees' Retirement System (CalPERS) pension fund to launch a $200 million fund that will take stakes in companies and agitate for better corporate governance.

Japan certainly has a long way to go before it becomes open territory for corporate takeover artists. Nevertheless, the arrogant attitude Japan Inc. once had toward shareholder activists is looking increasingly like a luxury it cannot afford. So come on back, T. Boone -- the game's starting to get interesting.

By Brian Bremner in Tokyo, with Mara der Hovanesian in New York

— With assistance by Mara Der Hovanesian

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