Shaking up corporate Japan

Mar 23rd 2005
From The Economist print edition

Takafumi Horie, a 32-year-old internet entrepreneur, has shocked Japan’s business establishment by positioning himself to gain control of Fuji TV, a big broadcaster. As takeover fever grips the country, will regulators come to the aid of the status quo?

WHILE an aggressive young upstart fills them with terror, Japan’s old-guard managers hope that a miracle drug will soon soothe their frazzled nerves. The medicine they seek is the “poison pill”: a takeover defence developed in America in the 1980s, after hostile corporate acquisitions took off there. With the infamous cross shareholdings among Japanese firms unravelling and return-seeking investors gaining influence, there has long been talk that a similar, if smaller, takeover trend may start in Japan. Since last year, some civil servants have been preparing for this by trying to clarify the rules of the corporate-control game. This low-level debate has recently grabbed the national spotlight, however, thanks to Takafumi Horie (pictured), the 32-year-old head of Livedoor, an internet company. Mr Horie has boldly challenged a broadcasting industry run by slow and sleepy men twice his age.

Since last month, Mr Horie, a university dropout, has captivated Japan by taking on—with dreams of taking over—a big and badly run broadcaster, Fuji TV. By gobbling up shares in after-hours trading, Mr Horie was able quickly to bypass reporting rules and amass a big stake in Fuji TV’s subsidiary, Nippon Broadcasting System (NBS), acquiring more than half of the voting rights. As NBS owns 22.5% of Fuji TV, this has raised the spectre of Livedoor using its NBS beachhead to mount an assault on Fuji TV itself. Fuji TV responded by hurling the corporate equivalent of boulders and boiling oil down the ramparts at the advancing enemy. Thus have Japanese viewers grown enraptured by the debate—reported with soap-opera intensity on TV—over the proper way to launch and defend against a corporate takeover.

Entering the death spiral

Mr Horie has grown his firm—once called Livin’ on the Edge—mostly through mergers. The financing of the current bid has been especially controversial. Lehman Brothers gave Livedoor the money in exchange for “death spiral” convertible bonds, which give Lehman the right to convert the bonds into shares at a constant discount to the share price. This, in effect, would reduce the value of Livedoor’s shares—indeed, Livedoor’s shareholders may already be suffering from that. There has been talk that, because of its Livedoor role, Lehman will struggle to find new clients in Japan (though if Mr Horie triumphs, such talk will surely end). Two weeks ago Eisuke Sakakibara, a former top finance ministry official once known as “Mr Yen”, resigned abruptly from Lehman’s advisory board, apparently because of the controversy surrounding the bid.

The courtroom is the latest battlefield. NBS’s board has tried to dilute Livedoor’s stake by issuing warrants to Fuji TV, which could be converted into shares. Mr Horie took the company to court and has won several times, including most recently in the Tokyo high court on Wednesday March 23rd. Even so, Fuji TV is considering announcing its own new plan to dilute Livedoor’s stake in it by issuing new shares of its own.

But whatever the ultimate outcome of the battle between Mr Horie and Fuji TV, for corporate Japan as a whole the real action is just beginning, thanks to civil servants from the economy, trade and industry ministry (METI). Although these bureaucrats are flying a reformist flag, there is every risk that they will mow down progress in a blaze of friendly fire. The reason? METI is advancing “rights plans”—ie, poison pills—as part of a new set of corporate-takeover rules.

This follows the recommendations of a panel of wise men that METI set up six months ago to look into such issues. The basic ideas they settled on are that bidders should be more free to launch takeover attempts; that boards of directors should take these bids seriously, for a change; and that while boards consider such bids or mull over alternative offers, they should be allowed to slow down a takeover.

In fairness to METI, these ideas coincide with other reforms that could do some good. On March 22nd the government submitted to parliament a new corporate law, backed by METI, that could make starting a small company or spinning off a division just a bit easier. The new rules will also make it possible for foreign firms to pay for deals using their own shares. But, maddeningly, ruling-party politicians voted to impose a one-year delay on this overdue reform. This was widely viewed as having been done in response to lobbying from Japanese firms nervous of foreign bids.

Still, all of this pales in comparison with METI’s efforts to set clear rules for mergers and acquisitions. METI’s misguided argument is that even America and Britain allow practices that corporate boards can use to slow down and thwart takeover attempts. They argue that this allows directors to consider all offers calmly during a takeover battle, and so reward their shareholders by attracting the highest bid from the most eligible suitor.

This is a spurious argument. It is true that in both America and Britain—two economies reputedly friendly to shareholders—managers nevertheless can throw up barriers to change and gum up the market for corporate control. But there are many instances in both countries in which this has clearly harmed shareholders, not helped them. And even if on balance these rules benefit investors in American and British firms—which is debatable at best—that is because both of those countries also have long-established laws and institutions that aim to protect the interests of shareholders. The boards of directors of British and American firms, for instance, have a clear fiduciary duty towards those shareholders.

Japan has none of these advantages, and it will take time and relentless pressure before they take root. So what METI is proposing, in effect, is to imitate much of what is wrong with Anglo-American corporate governance—which bosses of Japanese firms will no doubt do quickly—while starting a rudimentary and time-consuming effort to copy some of the good bits.

A better way to spur progress would be to let the battles that Livedoor and others have begun play out further, all the while urging boards of directors to shape up. Fuji TV, for example, should not have been surprised by Livedoor’s takeover bid. Minority investors in Fuji TV had complained for years about its cross-shareholding arrangement with NBS, and yet were rudely ignored. Thanks to Livedoor’s tactics, however, Fuji TV has recently decided to more than double its dividend from ¥2,000 ($19) to ¥5,000. This has terrified other Japanese managers, who are loth to concede that their cash flows belong to their shareholders. But if METI’s plan succeeds, expect much of corporate Japan to try to ignore the fiduciary bits, swallow the poison pill and drift back into a pleasant slumber.

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