ARE THE RECENT CORPORATE HOSTILE TAKEOVERS IN JAPAN CHANGING THE FACE OF JAPANESE BUSINESS?
THE IMPACT OF HOSTILE TAKEOVER IN JAPAN
Introduction
According to corporate finance theorists, the objective of the firm should be to maximize value or wealth. This means for stockholders to maximize stock prices. By focusing on maximizing stockholder wealth, the firm exposes itself to the risk that managers, who are hired to operate the firm for stockholders, may have their own objectives. This can lead to conflicts between both parties. Stockholders have the power to discipline and replace managers who do not attempt to maximize their wealth. For managers there are several techniques to protect themselves for these actions (, 2001).
In other words: stock price
maximization is the most important goal of
most corporations. Stockholders own the firm and elect the board of directors,
who then appoint the management team. Management is supposed to operate in the
best interests of the stockholders. However, it is known that because the stock
of most large firms is widely held, the managers of large corporations have a
great deal of autonomy. This means that managers might pursue goals other than
stock price maximization. Therefore managers run the risk of being removed from
their jobs, either by the firm's board of directors or by outside forces.
Hostile takeover is a
process that occurs when management does not want the firm to be taken over.
These are most likely to occur when a firm's stock is undervalued relative to
its potential because of poor management. In a hostile takeover, the managers of
the acquired firm are generally fired, and
any who are able to stay on, lose the autonomy they had prior to the
acquisition.
A potential agency conflict arises
whenever the manager of a firm owns less than a substantial percentage of the
firm's common stock. In most
large corporations, agency conflicts are quite important, because large firms'
managers generally own only a small percentage of the stock.
Hostile takeover is being pursued by cornering a certain company’s stock on the market or via takeover bidding to publicly purchase shared in the industries on the market. An organisation whose market valuation is lower than its net asset value is more prone to become the victim of the hostile takeover bids (2003). This is because the potential acquirer has the opportunity to make a larger profit than the cost of the acquisition if the acquirer will be able to purchase the targeted industry and then sell its assets. It is said that in the Japanese market, there are few hostile takeovers which has been conducted against some Japanese industries.
Primarily, the goal of this paper is to assess the emergence of hostile takeovers against Japanese business. In addition, this will also attempt to determine the impact of hostile takeovers on business operations of Japanese firms. Herein, different examples of hostile takeovers will be cited including the
Japanese Business
Japan is considered to be one of the Asian countries which are economically and politically stable. The secrets of Japan's high economic growth and the superior quality of low-priced Japanese products have been sought principally in the way Japanese business is managed. The Japanese system, functions not only to harmonize the relationships among the corporation, its shareholders, and its senior managers, but also to facilitate productive efficiency (1990). Comparative corporate governance, once an academic backwater, now enjoys important government and scholarly attention. U.S. government reports attribute Japan's competitive success in part to features of the Japanese system (, 1992).
The value system in Japanese business has been heavily influenced by Shinto, Buddhism, and Confucianism ( 1994). Although much has been written on Japanese business success, correlating it with such cultural idiosyncrasies as participative management, lifetime employment, respect for people, and just-in-time production, little has been written about how Shinto drives the national and individual spirit ( and , 1994). Often overlooked are the sacrifices the Japanese make to maintain and expand Japanese business, as well as the reasons for those sacrifices and why they are inspired by Shinto.
Japanese inter-company interactions are analysed in terms of three differing structures of relations. These include corporate alliance economic centrality, and industrial interdependency ( 1992). In accordance with (1992) the importance of each of these arrangements is analysed with a sample of the forty largest industrial corporations and twenty major financial companies in Japan across set of connections of equity possession, interconnected directorships, and banking borrowing. The macro-network block modelling investigation utilized by (1992) presents that the monetary hierarchy is an all-encompassing model for all sets of relations, and the location of industrial corporations in the network is principally established by corporate group membership.
Majority of the competitive performance, and the potencies as well as limitations of Japanese enterprise, can be with good grace noted by the disposition of Japan's groupism (1990). The acknowledgment of responsibility and the subsequent time obligations give details why Japanese have the propensity to draw back from making new relations, more than ever those external their group or gaijin. For them, such connections are basically not merit the personal energy they necessitate. Above and beyond the majority of non-Japanese do not understand and give in return the appropriate and full degree of the requirement a relationship call for. This is the reason why a lot of Westerners find it complicated to build up close acquaintance with Japanese.
Hostile Takeover in Japan
It has been noted that the first hostile foreign takeover in Japan has happened two decades ago. In this instance, the companies involved are the Germany’s Group and the . a manufacturer of over-the-counter medicines. In this takeover, the German company spent $223 million to purchase a controlling stake in . Such arrangement came right after an international consortium. There are different attempts of hostile takeovers in Japan for the past years. However, such takeovers have never been successful and most of the market analysts say that there has only been one truly corporate takeover attempt in recent years in Japanese business. Such attempt was the offer by to acquire in 2000.
The attempt of taking over is another issue that makes Japanese corporations realized that there are companies in Japan which are really prone in hostile takeovers. In 2003, the there are some attempts of hostile takeover in Japan. This happened when fund initiated a tender offer against two Japanese which are . Although such attempt failed, the management of both industries succeeded in deterring the unwelcome solicitor by declaring more than tenfold increase in terms of dividend which resulted in increasing stock prices significantly over tender offer price.
In addition, there are also deals which involve a contest for control with in 2004. is a holding company for different financial institutions such as . That same year, have signed a memorandum of agreement which states that they are selling and other industries connected to it. The agreement states that has the right to acquire in two years time. In addition such agreement contained a standard no shop condition which forbids either a firm to engage in consultations or giving information to any other third party in line with a transaction which could interfere with the agreement. In addition, such MOA required each involved party to deal in good faith any other issue not included in such agreement.
However, due to financial constraints, have a conversation with . The transaction states that would acquire all of ’s enterprises which include . Because of this occurrence, such takeover failed. The second attempt involves battle for takeover which is a part of . Likewise such deals have not been successful.
Although, there are many attempts of merger and acquisitions against Japanese firms, Japan is still trying to protect themselves against takeovers. Japanese firms have been able to secure their properties against the attempts of other firms to take control of their business operations.
Impact of Hostile Takeovers in Japan Business
It is noted that because Japan has one of the strongest economy, its businesses have been considered to be the focus of merger and acquisition of different global industries. In this manner, shareholder pressure is loosening the closely held crossholdings that serves as a protection for Japan’s corporation. Further, new accounting and disclosure laws combined with weaker yen and low stock prices are enticing global companies into various deals and negotiations, chiefly in the pharmaceutical and financial institutions.
Some foreign investors have bought healthy companies including the purchase of . However, after years of striking many of the assets on the block are stressing sales. In addition, a changing corporate philosophy is also affecting the deal making. Even those most corporate boards are still subjugated by Japanese; transparency is increasingly becoming the trends. Accordingly, most stockholders are beginning to pressure industries to do merger and acquisitions so they can intrude.
Throughout the years, corporate governance of Japan has been bothered by hostile takeovers. However, such takeovers did not succeed because Japanese business are considered impregnable and has always been protects by stable shareholders as well as loyal personnel. Interestingly, there are institutional deterrents to hostile takeovers in Japan and therefore very few occur. These deterrents reduce the risks to Japanese managers of potential takeovers. Some argue that this allows Japanese managers to take greater risks and invest in the development of more firm-specific skills. Alternatively, it also buffers these managers from external actions in a market for corporate control if they perform poorly and take inappropriate strategic actions (, 1987).
In addition, through hostile takeovers, the Japanese enterprises have been able to use different strategies to protect themselves. For example, corporation engage in cross-holding or interlocking so as to increase trade or create a tie between the corporation as well as the suppliers and dealers. In other words, interlocking forms business groups and strengthens strategic alliances. It also protects them against hostile takeover, which has become more important as stockholding by non-Japanese interests increases ( 1998).
In addition, because of the threat of hostile takeover, Japan has used the safe shareholder strategy to protect their companies. In this manner, firms got financial institutions and firms with whom they regularly dealt to buy and hold their shares to prevent their shares being bought up and themselves taken over (, 2000). Herein, corporation in Japan protect themselves from takeovers by means of this peculiarly Japanese manoeuvre and this is an exceedingly convenient thing for companies and the managers who represent them. In such a way is the system of 'companism' assured.
In addition, Japanese has been able to formulate regulation for protecting their corporations against hostile takeover. Japanese takeover regulations increase the cost of tender offers by imposing various disclosure obligations on bidders and by enhancing the right of target shareholders. Under Japanese law, tender offers cannot be submitted without public disclosure of the offer, notification of the Ministry of Finance and informing of the target company ().
The bid must remain open for at least twenty and no more than sixty days. During this period the bidder may not acquire any shares without resorting to the offer. Target shareholders are protected against price cuts and price discrimination. Once offered, an increase in the buying price becomes effective for all shares tendered, even those which were tendered prior to the price increase. Japanese takeover regulations further entitle shareholders to withdraw their agreement to tender during the entire period of the tender offer. If more than the specified number of shares has been tendered, bidders must buy shares on a pro rata rather than a first-come-first-served basis. Contrary to the US and similar to Germany, hostile takeovers have never been a big issue in Japan. Consequently, Japanese legislators have not come under political pressure to enact anti-takeover laws (, 1990).
Japanese Managers Embraced Grafting
In order to cope with the trends of merger and acquisition, Japanese corporate governance are now trying to embrace the concept of grating. Since, Japanese has realized that importance of merger and acquisition, Japanese business are now trying to adapt such concepts in or between domestic industries and their domestic intermediaries. Hence, Japanese managers are increasingly embracing the context of grafting, which was first introduced by called . Today, grafting means adapting, incorporating or applying Western ideas, technology and corporate methods, that work in Japan and within the culture and business practices of the Japanese.
As Japan had realized that there is a need to adapt a new system that would help the country become more economically stable and to protect their business among hostile takeover, they adapt the business ideas and practices of the Western nations, particularly the Americans. Such adaptation means embracing the technology, management ideas and practices and institutions frameworks used by western business. Such influence is called westernization or sometimes Americanization. This occurs when institutions and organization in other counties such as Japan used the western ideologies and practices as a reference for local changes. It is a process which results are characterized by selection, transfer, change and adaptation, to local, regional or national circumstances.
In Japan, business organisations have begun to adapt the western concept of Merger and acquisition. The western corporate governance is an integration of internal (control through voice) and external control through exit. Voice is a choice that shareholders have if they are not satisfied with the performance of the company in which they have shares. In this manner, they exercise voice if they express their dissatisfaction attempting to alter management style. On the other hand, exit is a choice that shareholders have if they are not contented with the performance of the company where they belong. To exit, the shareholders simply sell their shares. The Western style is very different with that of the Japanese style which is largely based on voice in the role of banks and industrial patterns where most funds are channelled through the banks and they dominate the capital markets. As there are no hostile takeovers, the role of the stock market is not significant as a source of capital.
Information on the volume of
successful domestic merger and
acquisition transactions for the lower half of the 1980s has been noted. It is
said that the market for mergers is much more active in western countries like
US and UK than in Japan. According to (1997), "just over 2% of his sample of
large Japanese firms were taken over or merged in the period 1980-1989,
[compared with] over 22% of his sample of the large US firms" (, 1994). In
direct relation to these reports, (1996) report that during 2 years in the
mid -1980s there were thirty-five successful
hostile bids made in the UK. In the USA and UK, the exposure of managers to the
threat of takeovers is regarded as the primary means of insuring good
performance of organizations. In the US, managers tend to forgo medium or
long-term interests in order to undertake their short-term interests. On the
other hand, in Japan, there is a limit to the pressure the market for
corporate control can release.
(1992) argued that the US has a
'fluid capital' system, where
institutional investors are impermanent as owners. Their stakes in many
companies are divided, as investors; they focus on the profits, which can be
made from a particular transaction rather than from the relationship as a whole.
When deciding whether to buy or sell their stock, they depend on the limited
information available to all outsiders and oriented toward predicting
fluctuations in the short-term stock price. In contrast, Japan has "dedicated
capital" systems with permanent owners and is more interested in long-term
relationship with the company. In conclusion, corporate governance issues around
hostile takeovers are largely confined to those countries which have adopted the
western approach to governance.
Basically, the Japanese are relationship oriented. The market is not liquid and the ownership is not concentrated while the western system differs from it. The western system is the reverse. However, since the growing trend in the global market is the concept of merger and acquisition, some of the Japanese companies had been able to adapt some of the business practice applied for Western companies.
In order to embrace grafting, the first thing that Japan did was to adapt the principle of Foreign Direct Investment. Accordingly, FDI plays significant role in Japan’s economic growth. The introduction of new management expertise and new technologies that is included in FDI enables Japan to restructure its corporate management in western style. In addition, the initiation of FDI also provides substantial expansion of consumer demand and choice of convenience as well as employment increase.
Such reform has started since the mid-1990s. The reforms include encouragement of foreign investment in communication, financial, and distribution sectors. In addition, enhancement in bankruptcy provisions, corporate law as well as accounting principles helped in attracting foreign capital to Japanese corporations. Moreover, part of the changes is the adaptation of the concept of the concepts of merger and acquisitions. Principally, in recent years, applying merger and acquisition has been a major aspect, as corporation struggle to survive in globalized market through corporate reformation on a world level. Nevertheless, the recent report regarding foreign direct investment in Japan shows a slight delay in investment growth.
Although, Japanese corporations had adapted Western ideas, specifically M&A as part of their business practices, they still try to protect their companies by formulating the Commercials Code of Japan. Effective October 1, 1999, the Commercial Code of Japan ("the Code") was amended to permit Japanese companies to effect corporate acquisitions and reorganizations by means of a "stock swap (, 2001)." The new stock swap system was widely touted by the Government of Japan and commentators as a positive step towards promoting and facilitating merger and acquisition ("M&A") activity in Japan (, 2001).
In a nutshell, the stock swap amendment to the Code ("the Amendment") permits, among other things, an acquiror to compel minority shareholders of a target company to exchange their shares of target company stock for newly issued shares of the acquirer’s stock in a tax-free manner, following approval of the transaction by holders of two-thirds of the shares represented at a meeting of the target's shareholders, and provides dissenting shareholders with appraisal rights (i.e. the right to receive the cash equivalent of the value of their shares rather than stock of the acquiror). This new share exchange system can be used by Japanese companies to consummate both so-called "squeeze-out" acquisitions and "going private" transactions provided that stock, rather than cash consideration, is used (, 2001).
The Amendment is most notable for taking the first small step towards making it easier to acquire 100% of a Japanese company despite minority shareholder opposition (, 2001). Until recently, squeeze-out transactions and contested or hostile acquisitions have been not only difficult, but also entirely unthinkable in Japan. In addition to oft-cited cultural taboos in Japan concerning the negative implications of acquisitions (i.e., that the target company was having financial problems or was being mismanaged), the traditional Japanese pattern of cross-shareholdings and stable shareholders and the obstacles inherent in the Japanese legal system have been largely responsible for the rarity of such transactions (2001). The widely-publicized contested acquisition of International Digital Communications Inc. (IDC) in 2000 before the Amendment was adopted was significant because it was one of the first high profile contested acquisitions of a Japanese company by a foreign company (, 2001). Notably, however, the IDC acquisition and the more recent attempted contested acquisitions have involved cash, rather than stock consideration, making the Amendment inapplicable.
The going private transaction is also a fairly new concept in the Japanese M&A market. Unlike U.S. companies, Japanese public companies have not yet gone through the cycle of being bought by controlling shareholders in partnership with private equity funds, taken private, restructured, and then taken public again within a few years (, 2001). It is clear that the current state of Japanese law makes it more difficult to replicate this model for both foreign and Japanese acquirors. Due to the nature of going private transactions, stock is rarely the desired form of consideration unless the transaction is part of an internal corporate reorganization (, 2001). By preventing cash from being used in squeeze-out transactions, current Japanese law restricts the ability of Japanese, not just foreign, venture capitalists and controlling shareholders to successfully take a company private (, 2001).
Most significantly, the Code does not permit cash mergers (, 2001). Acquirors of Japanese companies wishing to use cash consideration generally conduct cash tender offers. As a practical matter, acquirors usually are not able to acquire 100% of a target company in a tender offer, whether because shareholders are unaware of the tender offer or because they wish to continue holding their shares (, 2001). In the United States, this does not present any real obstacle for acquirors because, assuming the requisite number of shares required to vote in favour of the transaction or to obviate the need for a shareholder vote are acquired in the tender offer, the remaining shareholders can be eliminated through a second-step cash merger. Because cash mergers are not permitted in Japan, it is almost impossible to acquire 100% of a company for cash ( 2001). Third, Japanese companies are not permitted to use the so-called "reverse subsidiary merger" transaction structure which is often used in the United States to squeeze-out minority shareholders (, 2001)..
Such changes made by the Japanese corporations can be said to be a better move to make the economy of the country more stable. In addition, allowing foreign investment and engaging in M&A which is dominant in most western countries is a good initiative for Japanese Corporations for them to easily find ways on determining the most effective style to protect themselves from hostile takeovers.
Hostile Takeover Defences
Hostile takeovers are assumed to be a governance mechanism in the market for corporate control. They are designed to focus on firms' assets that are undervalued by the market and the management of the firm is either unable or unwilling to make the changes necessary to ensure that the market properly values those assets ( 1991). However, evidence shows that not all hostile takeover bids are designed to accomplish these purposes. For example, in some cases, after the hostile takeover is completed, the managers of the acquired firm continue to operate the firm as they did previously. As such, the hostile takeover does not discipline poorly performing managers as assumed in these cases. Also, in some instances, hostile takeover bids have been made for firms that were performing well above their industry counterparts. The managers of these firms likely do not need to be disciplined (1996)
Dominant means of improving the market value of firms that are acquired in hostile actions include employee layoffs and asset sales. If the firm acquired is widely diversified, unrelated businesses are frequently sold in an attempt to down scope or refocus the firm on its core businesses ( 1990). Of course, the layoffs and asset sales can be controversial because of their effect on people and communities. Clearly, if managers of the targeted firm are operating in their own best interests and not in the interests of the shareholders, it seems that hostile takeover actions are justified.
Alternatively, if the firm is performing well and stakeholders are satisfied, some believe that there should be protections against third parties who seek to take over companies by using inappropriate tactics (, 1985). Some argue that stakeholders other than shareholders must be considered to evaluate the appropriateness of hostile takeovers. For example, some workers and communities have suffered greatly from the layoffs and the sale of assets that accompanied hostile takeovers. In other cases, the hostile takeovers were unsuccessful because of actions taken by the firm.
However, those actions sometimes entailed the use of significant amounts of debt or other steps that required a substantial reduction in expenses, often accomplished through employee layoffs or asset sales ( 1992). In these cases, takeover defences may be appropriate except when they have major negative effects on other stakeholders such as the employees and communities in which the firm operates
One of the defence mechanism used by different industries is the so called poison pill. The term poison pill is used to represent any action taken by management of a potential target that makes a takeover so potentially costly that it is likely to discourage an auction. Poison pills have been divided into two kinds: those that require approval by the shareholders and those that may not require the approval of shareholders. One kind of poison spills is the shark repellents.
Shark repellents are known to be a special class of poison pills that typically require approval by the shareholders ( 1996). Common forms of shark repellents include classified board provisions, supermajority provisions, fair price provisions, elimination of cumulative voting rights, and establishment of unequal voting rights. A classified board provision divides directors into distinct classes (typically three), with only one class up for election each year. Consequently, a successful takeover does not mean that the new owner will assume control of the board of directors immediately.
Such a provision prevents the acquiring firm from firing top managers immediately on acquisition. Supermajority provisions increase the percentage of shareholder votes needed to approve a merger. For example, they may require approval representing two-thirds or three-fourths of the outstanding shares.
The fair price provision requires a supermajority vote for approval unless the board of directors approves the merger and some minimum fair price is paid for remaining outstanding shares. Eliminating cumulative voting rights precludes shareholders from casting all their votes in favour of a particular nominee for director, thus restricting one large shareholder, such as a corporate raider, from electing its representative. Finally, unequal voting rights provisions reduce the voting power of a shareholder once a certain threshold percentage of ownership is attained.
The majority of large United States corporations have instituted some form of shark repellent and such measures are also common in other countries ( 1991). The popularity of such measures seems closely tied to industry norms. For example, poison pills are moving like a wave through the real estate investment trust (REIT) industry. In 1998, thirty-one REITs instituted shareholder-rights plans, compared to only five in 1997 ( 1999).
As mentioned, there are some poison pills that do not require the approval of shareholders. A flipover provision gives current shareholders the right to purchase additional shares of stock at a deep discount in the event of a tender offer. This right transfers to the acquiring firm in the event the takeover is accomplished. A back-end plan allows shareholders to sell their shares back to the target firm at very attractive prices. Each of these strategies makes a potential takeover very expensive ( 1996). In addition, managers of potential targets may sell off their “crown jewels, ” which are highly prized assets, take on huge financial obligations, or make acquisitions themselves that a would-be acquirer might find unattractive or could create antitrust concerns.
Golden parachutes provide huge payments to target firm top executives if an acquisition leads to their dismissal. In the strategy, the target purchases a large block of shares in the suitor in an attempt to gain control ( 1992) , in an attempt to thwart a hostile acquisition attempt by , spun off its hotel and gambling operations and its technical schools, took on $2 billion in new debt, and repurchased a large block of its own stock (, 1997).
Shark repellents and poison pills increase the power of management in the event of a takeover attempt or make a takeover so unattractive that potential suitors either withdraw or are discouraged from even trying. Not only do they reduce the frequency of takeover bids, but they do not increase the expected value of shareholder gains when takeover contests do occur ( 1988). In fact, just adopting an anti-takeover charter amendment leads investors to devalue a firm's stock, even if no deal is in sight.
Anti-takeover amendments are in the shareholders' best interests because they strengthen the ability of managers to fend off hostile suitors desiring to acquire the firm at an unreasonably low price ( 1993). Poison pills provide strong motivation for acquiring firm executives to negotiate directly with target firm executives, as opposed to offering to buy shares directly from shareholders in a tender offer. Most poison pills become void if the top executives of the target firm approve of the merger. The charter amendment that contains the pill may have wording to this effect or, if not, the terms can be revoked by shareholder vote as a part of the deal.
Conclusion
It has been said that hostile takeovers in Japan is not a threat for Japanese corporations. This is because the government has been able to implement rules and regulations that will protect their corporations against hostile takeover. In this manner, merger and acquisition is not implemented as part of Japanese business practice. Because the Japanese corporations believe that joining a merger and acquisition is a way of foreign companies to takeover the company and management. However, because the growing trend in the market place and other stable economy is the adaptation of M&A, the company has been able to utilised Western ideologies and doing business through the initiation of Foreign Direct Investment.
In order to do so, Japanese corporation and government has implemented some changes. In this manner, a government regulation in various divisions which hinders FDI has been removed. This enables to improve and enhanced the investment climate in Japan. It can be said that Japanese corporations had been able to realise the strength of western ideologies to help them have a more competitive management practices.
Reference
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