A New M&A Era in Japan: Fairness and Transparency Trumps Friendly or Hostile

In 2023, Japan’s Ministry of Economy, Trade and Industry (METI) introduced “The Guidelines for Corporate Takeovers” to enhance fairness in M&A while securing shareholder interests. The purpose is to set guidelines for principles and best practices to create transparent and fair rules for M&A transactions, thus creating corporate value.

An important element in the new guidelines is the introduction of the term “Unsolicited Bids.” In the past, unsolicited bids in Japan were regarded as hostile, but now we expect companies to feel confident approaching M&A with a more strategic mindset and evaluating potential targets with synergies, alignment of goals and long-term value creation in mind.

METI expects a fair and transparent process, whether a bid is welcomed or not. These guidelines aim to achieve a balanced approach that benefits both companies and shareholders. In this article we look at METI’s intentions and provide some examples of recent transactions that would have been less likely to occur in past years. It should be noted that the initiatives introduced by METI and the Tokyo Stock Exchange (TSE) have a much broader impact than on just M&A. Many companies are now being proactive in improving ROE and returns for shareholders, sometimes to avoid the attention of potential bidders and/or activist investors.

There is a code of conduct that stipulates that a company must report a bid proposal to the board and the board must consider it. Increased transparency in connection with acquisitions is expected. To ensure fairness during acquisitions, a special committee composed of independent directors should be established. Both the acquiring company and the target company must disclose information in a timely manner. Transparency helps to build trust with shareholders and ensures that relevant stakeholders are well-informed.  At the same time, companies should engage with shareholders to seek their opinions and address their concerns. Ultimately, however, the board and special committees need to balance stakeholder interests. While shareholder value is significant, issuers also need to consider the impact of a transaction on employees, customers and the broader community. A company needs to find a balance between short-term gains and long-term sustainability.

The timing of METI’s guidelines, in addition to the TSE measures to urge companies to be conscious of the cost of capital and share price, and to disclose plans for sustainable growth and enhanced corporate value, is significant.

Japan is facing several macro headwinds, including a shrinking labour force, the need to provide for an increasingly aging population, and issues of national security. In the face of a shrinking labour force and tight labour market, METI is encouraging industries to consolidate to improve competitiveness and to put excess capital to work by investing in R&D and capex. This is a significant change from the post-Bubble years when job protection was a priority.

A long period of economic stagnation and lack of investment has created a strategic risk for Japan. In many cases, Japan has superior technology, but the lack of economic growth and overly conservative corporate culture has left companies relatively unprofitable and vulnerable to takeover by geopolitical rivals. Now Japan wants to create national and even global champions by reducing the number of competitors, enabling improvement in profit margins and ROE. As a result, the reorganisation of conglomerates is encouraged, including the resolution of parent-child listings which are clearly not in the interests of minority shareholders.

In the past, banks were large shareholders in Japanese companies and their interests were not necessarily aligned with minority shareholders. Banks have now reduced these shareholdings, creating a fairer market for ordinary shareholders. More recently, after the FSA’s investigation into price fixing in the non-life insurance market, the largest four companies announced they would accelerate the unwinding of cross-shareholdings which are estimated to be between Y6tr-8tr.

The reorganisation of the domestic oil refining industry via mergers is a case study of what can happen, and the role of activist investors cannot be ignored. Less efficient facilities have been closed, reducing excess capacity and improving returns while also freeing up valuable real estate assets. In contrast, the paper industry has resisted change, although this might be changing.

Looking at individual transactions, a few stand out:

• In 2022, the machine-tool company Takisawa rejected a business alliance with Nidec. In 2023, Nidec turned hostile and purchased Takisawa. Chairman Nagamori categorised this transaction as setting the path for future TOBs.
• In November 2023, M3 was in discussions with Pasona about buying a large stake in Benefit One. The following month, Dai-Ichi Life launched an unsolicited bid for 100% of Benefit One at a significantly higher price than M3’s bid. Pasona took advantage of a law allowing a parent company to sell a stake in a majority-owned subsidiary back to the subsidiary and not pay tax as it is treated as an internal company transfer. Once Pasona had done this, Dai-Ichi Life purchased 100% of the shares of Benefit One. Interestingly, last week, President Kikuta of Dai-ichi Life indicated that he is open to conducting unsolicited bids in the future as part of the growth plan.
• In March 2024, Brother Industries launched an unsolicited bid for Roland DG. The bid price of Y5,200 exceeded a proposed MBO at a slightly lower price. This situation is ongoing, but the current share price of Roland DG is trading at a 6% premium to the bid by Brother Industries. Interestingly, although the cost of the target rose on the announcement of the unsolicited bid, at the time of writing, the bidder’s share price has increased more than the target.

The above are a few examples of unsolicited bids. We would expect to see more transactions like these but also more friendly M&A transactions as companies respond to the wishes of METI, the TSE, and shareholders.  Companies should be open to M&A as, if done fairly and in a transparent manner, it will often lead to more efficient companies benefiting all stakeholders. As Chairman Nagamori explained, when Nidec purchased Takisawa, often the employees and business partners are happy, whereas some in management may feel their positions are threatened. This is no reason to reject change.