Quotes of the Day
Corporate mergers in Japan are usually less than scintillating, proceeding as predictably as a Kabuki play. Executives of two companies—one strong, the other in dire financial straits—typically retreat behind closed doors to broker a deal, usually with little input from shareholders but plenty from the government. All too frequently, these secretive, stage-managed bailouts put a priority not on maximizing profits, increasing shareholder value or reforming busted business models but on preserving jobs (especially those of the managers themselves), promoting "stability" and maintaining the status quo.
But Japan's status quo isn't what it used to be. Three of the country's largest banks are engaged in an unusual corporate-takeover battle that could develop into something unheard of in the country's clubby and consensus-driven banking community: a hostile takeover bid. The combatants are Mitsubishi Tokyo Financial Group (MTFG) and Sumitomo Mitsui Financial Group (SMFG), Japan's second- and third-largest banks, respectively. They are vying to merge with UFJ Holdings, the sickest and smallest of the country's Big Four banks, in a bidding war that highlights the degree to which government reform and revived economic vibrancy have unleashed a fresh wave of market competition in this traditionally moribund industry. Many observers say the tussle may even be a harbinger of a rough-and-tumble style of capitalism that could spread across Japan's rebounding economy.
MTFG currently looks like it will win the merger fight. At an Aug. 12 press conference, executives from MTFG and UFJ announced that they had agreed to consolidate, a pairing that would create the world's largest bank, with assets of $1.7 trillion, outstripping U.S.-based Citigroup and Japan's Mizuho Holdings. But Yoshifumi Nishikawa, SMFG's iconoclastic CEO, has refused to bow out gracefully. Shortly after MTFG's deal was announced, he offered to merge with UFJ in a one-for-one stock swap valued at $29 billion—a generous 30% premium to UFJ's average market value over the past six months. "We went public with the merger proposal so that UFJ management and shareholders can decide on the better partner," says SMFG spokesman Takashi Morita, espousing sentiments rarely heard in Japan. "Valuing transparency and the shareholders, we decided to submit the offer this way."
In fact, SMFG made the offer to UFJ management and not directly to shareholders, meaning the bid is not yet truly hostile. But it does ratchet up the pressure on MTFG and UFJ, which has already faced criticism for hastily dismissing previous SMFG overtures, to fully disclose the terms of their offer. Although UFJ has said it is "prudently scrutinizing" SMFG's latest bid, analysts do not expect the MTFG deal to be aborted. "It's hard to imagine that UFJ will switch partners at this point," says Nozomu Kunishige, an analyst at BNP Paribas. Still, Nishikawa has another option: mount a hostile takeover by offering to buy out shareholders directly. On Aug. 17 he told reporters waiting outside his home that that was still a distinct possibility.
Considering the problems that plague UFJ, it's difficult to see why it is being courted so ardently. Formed three years ago through the merger of three ailing banks, UFJ Holdings has yet to turn an annual profit, losing $3.6 billion last year alone. It's carrying $42 billion in bad loans on its books and without assistance will probably be unable to comply with a government order to cut that amount by half within the next seven months. Worse yet, the winning bidder will be acquiring a bank at which some executives could face criminal charges for hiding information from the government. Last month, UFJ President Ryosuke Tamakoshi publicly admitted that during an inspection by regulators last fall some top officials oversaw the concealment of loan documents to problem borrowers in order to hide the extent of the bank's bad debt.
"UFJ has made lots of mistakes," says Patrick Lemmens, a money manager for ABN Amro Asset Management in Amsterdam, whose fund owns shares in both UFJ and SMFG. But, he adds, the bank possesses valuable assets that both suitors find attractive. It is relatively strong in small business and retail banking, as well as in trust and pension management. These would plug product-line holes in MTFG's case and establish outright dominance in areas in which SMFG is already strong. Moreover, MTFG and SMFG aspire to be global players and so need economies of scale—and after years of industry consolidation, UFJ is the only potential domestic lender that could provide the quantum leap in product array and asset size to put them on a footing to someday compete with international leaders, such as Citibank and HSBC.
The spirited fight for UFJ indicates a sea change in Japanese mergers and acquisitions, observers say. "This deal will be the starting gun for lots of mergers that are not the old-style friendly negotiations in the boardroom with the [Ministry of Finance] patting them on the back," says Stephen Givens, a corporate lawyer in Tokyo. The change has been encouraged by corporate reforms that over the past several years have eroded Japan Inc.'s favorite protective mechanism: the extensive cross-ownership of shares among affiliated companies, a practice that makes it easier for insiders to repel outsiders and maintain control. There has been a corresponding rise in the prominence and power of independent investors who care more about returns than stability—and they are becoming increasingly vocal. UFJ, for example, is now 31% owned by foreigners. "Foreign shareholders are bombarding UFJ with calls asking, 'What is going on?'" says Givens. "And thus, Japan is brought kicking and screaming into the modern world of M&A."
Indeed, ripples from the blockbuster bank merger are already reaching Japan's sclerotic retailers. To spruce up its balance sheets for the deal, UFJ is getting tough on a borrower, the ailing supermarket giant Daiei—one of the country's biggest "zombie" companies, enterprises that continue to operate despite crushing debt and chronic unprofitability. Daiei is carrying debt of nearly $10 billion. It has little hope of ever repaying, but it has always managed to convince a trio of lenders—UFJ, Sumitomo Mitsui Bank and Mizuho Holdings—to extend additional credit at crucial moments in order to keep it alive. UFJ is urging Daiei's management to accept assistance from the Industrial Revitalization Corporation of Japan (IRCJ), a state-backed bank designed to overhaul Japan's most hapless companies. Meanwhile, U.S. retailing juggernaut Wal-Mart, which already owns 38% of Japanese retailer Seiyu and is looking for a greater presence in the country, has met with the IRCJ and confirmed that it is interested in taking a stake in Daiei.
Daiei's owners, who face an early-September deadline for settling on a restructuring plan with the company's three lenders, are fighting to retain control by vigorously opposing both the IRCJ's and Wal-Mart's intervention. But with blood in the water, Japanese retailers Ito-Yokado and Aeon have expressed an interest in Daiei, too, leading analysts to predict that there could also be a takeover battle brewing in the retailing sector.
Regardless of who wins, the UFJ merger and Daiei restructuring are being hailed as progress for the Japanese economy. Even if the creation of the world's biggest bank proves as impractical and unprofitable as megamergers often turn out to be, it's likely to yield some fortuitous by-products: the disappearance of both Japan's worst basket-case bank and its most notorious corporate zombie. It also sets a strong precedent for increasingly open, shareholder-oriented corporate takeovers. By deviating so spectacularly from the Kabuki script that has governed corporate mergers for decades, the heads of Japan's largest banks are finally upholding a truism that theater and capitalism seem to share: the end of a drama is more satisfying when no one knows the outcome in advance.
- Jim Frederick | Tokyo
- An unusual takeover battle is shaking up Japan's consensus-minded bankers