Profile Of A Greenmailer

[Mulboyne]

[Mulboyne]

[Mulboyne]

A related article:

IHT: Japan merger culture - an investors' guide

The latest official data show the Japanese economy entering a lukewarm period, and the lackluster performance of Japanese stocks confirms it. But at least one area of Japanese business is hot: mergers and acquisitions, which after years in the backwaters are now becoming a central part of Japanese business culture. And that, professional investors say, could bring boom times back to Japanese stocks sooner rather than later. The number of deals involving at least one Japanese company surged to 2,775 in 2006, the highest ever and up from just 621 in 1996, according to Recof, a company that compiles statistics on mergers and acquisitions. The value of takeover bids initiated in 2006 totaled Y3.5 trillion, or $29 billion - a sixfold increase from the previous year...more...

[Captain Japan]

Wake Up, Corporate Japan!
WSJ

TOKYO -- Finally, global competition, financial reform and deregulation are combining to shake up corporate governance in Japan. With unprecedented boldness and scope, primarily foreign activist funds are currently fueling a record wave of shareholder resolutions calling for higher dividend payouts or share buybacks. And for the first time in the post-war era, shareholders have sufficient rights and regulatory freedom in Japan to cash in. It's an arbitrage opportunity par excellence.

The flurry of activity is hard to miss. This year, the number of shareholder resolutions submitted to public companies is likely to double to about 40 from 19 last year. These resolutions are widely varied, both in their corporate targets and in their demands. Steel Partners Japan Strategic Fund is agitating for changes at eight firms, including tender offers for Sapporo Holdings, Bulldog-Sauce and Tenryu Saw Manufacturing. Dalton Investments has launched a management buyout attempt for Nippon Fine Chemical and Fujitec, an elevator company. Children's Investment Fund Management wants increased dividend payouts from Electric Power Development and Chubu Electric Power.

This shake-up was bound to hit Japan's shores eventually. The world of business and finance has changed rapidly over the past few decades, dramatically expanding investment opportunities in Asia and elsewhere. Japan's regulatory, financial and accounting systems have, by and large, kept up with these changes. Japan's executives, by and large, have not. So there now exists a substantial and growing gap between what executives can do and what executives and their more traditional shareholders are willing to do.

Consider the cash holdings of Japan's listed companies. In 2006, the sum of all cash and marketable securities held by listed companies represented approximately 16% of annual Japanese gross domestic product. The comparable figure for the U.S. is about 10%. It was natural for investors to ask why Japanese companies aren't reinvesting more vigorously in their businesses, or paying the money back to shareholders.

Such pressure has not traditionally come from domestic institutional investors. Those institutions are often the "main banks" that do a lot of other business with the companies whose stocks they own. Because much of their revenue depends on a lending relationship with the companies, their interests don't align with those of other shareholders. In good times, the banks often "request" that companies take on more debt than they otherwise would, as a way of boosting interest revenue for the bankers. To insure against the greater risk inherent in higher debt, banks will then expect companies to hold unusually high cash reserves.

Meantime, responsibility for management in Japan remains stubbornly diffuse. Corporate resources are often, in effect, jointly controlled by management, employees, suppliers, buyers, boards, banks and shareholders, resulting in high transaction costs when reallocating resources to higher value-added use. Group companies, large suppliers and customers all exert control through a combination of shareholdings, board representation and informal business commitments. Insurance companies for example frequently hold shares of their customers. The amount of business they receive from a particular customer is often in direct proportion to the size of the shareholding.

This explains why company presidents frequently seem surprisingly uninterested in obvious shareholder-value maximizing approaches like boosting dividend payouts. Such actions are perceived to create an unwanted domino effect, threatening to require the restructuring of a whole host of implicit stakeholder agreements -- a process which may entail substantial business risk, management resource burdens and highly uncertain outcomes.

Some sectors may take longer to reform than others. Firms in quasiregulated industries such as health care, energy, utilities, construction -- and to a lesser extent, chemicals and pharamaceuticals -- are often populated with former government bureaucrats and may have ties to local politicians. They pose particularly tough challenges and, lacking favorable circumstances, may just not be worth the opportunity cost. At least two of the upcoming proxy fights initiated by foreign investors are in these industries, and have little chance of success.

Shareholder rights cut to the core of the public debate about the future of Japanese capitalism. Individual shareholders account for nearly 60% of shares traded daily in Japan, and they would like to see a greater return on their shares. But so far, the interests of institutional investors with the clout to effect change have not been aligned with the interests of those small shareholders. Foreign institutional activism may finally be helping to break that logjam.

Mr. Marra is a principal in the Tokyo office of A.T. Kearney, a management consultancy.

[Mulboyne]

[Captain Japan]

[Mulboyne]

This feature looks at how the Carlyle Group went about acquiring KDDi's PHS company and rebranding it as Willcom:

WSJ: Private equity kings battle Japan maze

[Mulboyne]

Reuters: Steel Partners ousts board of Japan's Aderans

U.S. hedge fund Steel Partners helped oust most of the board of Japanese wig maker Aderans Holdings on Thursday, the first time management of a Japanese firm has been ejected under pressure from an activist fund. The news pushed Aderans shares up nearly 9 percent and marked a rare win in Japan for U.S.-based Steel Partners, which owns 26.7 percent of the wig maker, one of the 30 or so Japanese companies it has been pressuring to improve shareholder returns. The failure by Aderans to get President Takayoshi Okamoto and all members of its board except outside directors re-elected at its annual shareholders' meeting could also serve as a wake-up call for Japanese management. "This is going to be a catalyst," said Yoshinori Nagano, chief strategist at Daiwa Asset Management. "In the past two to three years, management has increasingly given shareholders more attention, for example by raising dividends ... and this will accelerate the trend of management listening to shareholders," he said. Steel Partners told Aderans in February it lacked confidence in management and was disappointed with the company's deteriorating performance. Last month Aderans posted a 90 percent fall in net profit for the year ended February 29.

The activist fund has gained significant control of some U.S. firms and it began shaking up corporate Japan in 2004, launching two hostile bids for small Japanese firms. It has profited some from firms hiking their dividends, but it was slapped back last year when a Tokyo court backed the use of a "poison pill" anti-takeover defense by sauce maker Bull-Dog Sauce Co to thwart the fund's bid. Blocking the reappointment of board members will be seen as a landmark win for the fund. "This is in effect the first time where a fund and others have taken the lead and minority shareholders have pushed out management," said Nomura Securities strategist Kengo Nishiyama. Steel Partners has also taken on management at brewer Sapporo Holdings Ltd, where it is seeking a one-third stake and is pushing for change at confectionery maker Ezaki Glico, false teeth maker Shofu Inc and spice producer House Foods Corp. Aderans shares closed up 8.7 percent at 2,020 yen.

[Mulboyne]

Asahi: More companies scrap retirement package system for board members

Facing mounting criticism mainly from foreign investors, more Japanese companies are scrapping their severance pay systems for board members that provide lump-sum payments regardless of performance. Instead, many of the companies are adopting a system offering remuneration related to business results and stock prices, not the length of period on the board. The ratio of companies that either do not have the conventional retirement benefit system in place or have recently abolished it jumped to 52.6 percent in 2007 from 10.7 percent in 2004, according to an annual survey by Nomura Research Institute Ltd. The survey covers companies listed on the First and Second sections of the Tokyo Stock Exchange.

Experts say the shift has been prompted by a large number of foreign investors lambasting the system for not reflecting corporate performances. Nissin Food Products Co. is expected to decide to abolish the system at a shareholders meeting next month. The company plans to give board members warrants that will allow them to buy its shares at 1 yen each as part of their remuneration. The warrants would enable them to receive more unrealized gains in their shareholdings if they have successfully increased business results and lifted the share prices. Sompo Japan Insurance Inc. and Takeda Pharmaceutical Co. are expected to follow suit at their shareholders meetings in June. Fuji Television Network Inc. also intends to abolish the retirement benefit system at a shareholders meeting this year.

It's true that foreign investors have been the most active in pushing for this kind of change but, as in the case of Aderans above, it can only happen if domestic institutions join in. They can do this actively by supporting a measure or passively by not opposing it. I think changing the cushy deal for retiring board members is very important. The sense of entitlement such packages engender can create any number of warped incentives for executives which are to the detriment of everyone else associated with the company.

Sadly, the 1 yen warrants aren't much better since they effectively guarantee money to the retiree provided the company is solvent which isn't a particularly high performance hurdle. There is a slightly better alignment of interests, I suppose, given that the retiree stands to do substantially better if the share price is higher.

[amdg]

"1 yen warrants" ?? Sorry, I don't know much about this stuff, but I'm interested.

[Mulboyne]

This feature looks at how the Carlyle Group went about acquiring KDDi's PHS company and rebranding it as Willcom:

WSJ: Private equity kings battle Japan maze

The story above ended with the line:

For Mr Marumo, Willcom has turned into "our showcase deal," he says. "It has really gotten our investment team here off the ground."

However, this story explains that things haven't quite worked out as planned:

Willcom may ask creditors for 100 bil. yen debt reprieve

[Mulboyne]

Things just got worse for Carlyle.

AFP: Japanese mobile firm Willcom goes bankrupt

Japanese low-cost mobile telephone operator Willcom Inc. went bust Thursday with debts of about 2.3 billion dollars -- the country's second high-profile bankruptcy in less than a month. Willcom, which offers no-frills, low-cost mobile telephones but has never really posed a serious challenge to its bigger rivals, filed for protection with the Tokyo District Court under the corporate rehabilitation law. The company said it aimed to revive its business under the supervision of a state-backed agency that is also overseeing the bankruptcy proceedings of Japan Airlines, which went bankrupt on January 19 with 26 billion dollars of debt. "We will continue our existing services," company president Yukio Kubota told reporters. "There will be no effects on our customers and business partners."

The firm is asking for emergency financial support from the state-backed body along with Softbank, Japan's number three mobile telephone operator, as well as investment fund Advantage Partners LLP, he said. Willcom is a leading provider of a type of basic cellphone known as a personal handy system (PHS). But it has seen customers steadily defect to its three bigger rivals, NTT DoCoMo, KDDI and Softbank, which offer more high-tech handsets and faster Internet services. Willcom had a 3.7-percent share of Japan's mobile market as of the end of January with 4.24 million subscribers, according to industry figures.

Shareholders in Willcom, shouldering debt of 206 billion yen (2.28 billion dollars), will lose their investment, Kubota said. "We will have our shareholders take their responsibility by reducing capital by 100 percent," he said. US investment fund Carlyle Group owns a 60-percent stake in Willcom, while Kyocera Corp. holds 30 percent and KDDI Corp. has the remaining 10 percent. Kubota and other board members will resign to take responsibility for the company's failure, although Kubota will act as an administrator for the bankruptcy proceedings, he said.

Bankruptcy is not the only thing that Willcom and JAL have in common: the mobile firm is advised by Japanese tycoon Kazuo Inamori, the Kyocera founder who was picked by the government to lead the airline's turnaround efforts. Many Japanese firms, particularly those with a domestic focus, are struggling in the face of a weak economy and a population that is both ageing and shrinking.