The best advice for a Japanese chief executive right now, confides an investment banking head in Tokyo, is to plot out a move so radical that nobody imagines you would ever consider it: the sale of seemingly indispensable assets, a full break-up, a transformative deal — something that goes way beyond anything you’ve already said you will do to raise corporate value.
Then put that idea in the company safe, mark it “emergency use” and keep the combination handy. The chances are rising that it will be needed before the end of 2025. Corporate Japan has been rumbled, and everyone needs a plan.
The recommendation, which the banker says he has dispensed to various worried CEOs since September, caps a year in which the environment for Japanese listed companies has fundamentally changed, at a pace that few would have considered plausible as recently as 18 months ago. Corporate governance abuse, woeful allocation of capital and the chronic playing down of shareholder interests are much harder to hide. The market is newly scary in ways that include the state-sanctioned concept of “takeover without consent”.
Japan will close 2024 second only to the US for shareholder activism and dealmaking by private equity. The escalating clash between KKR and Bain Capital over Fuji Soft is a stunning showcase of what can happen when an activist fund with a decent sized stake decides to initiate a sale process for the whole company and private equity decides to go gladiatorial over the outcome.
Mainstream investors are also being encouraged to take a tougher line on Japanese companies, and by the establishment itself. In November, the Tokyo Stock Exchange published an extraordinary document citing the experience of frustrated fund managers and setting out, in sometimes embarrassing detail, “cases where companies are not aligned with investors’ perspectives”.
The government’s M&A guidelines were meanwhile updated in mid-2023 to encourage greater transparency by companies on offers they have received, and to propel some much overdue domestic consolidation. Entrenched managements cannot simply ignore approaches as they did in the past.
The $47bn takeover approach by Canada’s Alimentation Couche-Tard for Japan’s biggest convenience store operator, Seven & i Holdings, has proved that no Japanese company is off limits unless national security is threatened. Nissan’s preliminary merger talks with Honda may well have been accelerated by the perception that a delay would have given time for a foreign buyer to pounce.
While Japanese companies have fretted to their advisers about how to deal with the desk-thumping demands of an aggressive activist, how to mollify more directly critical pension funds or how to remain independent in the face of a legitimate, deep-pocketed buyer, brokers and bankers have been busily constructing lists of precisely which weakly valued, poorly governed names represent the most vulnerable targets.
“Now, nobody’s safe and that’s the way it should be . . . Japan is a dirt-cheap, highly liquid, target-rich environment,” says CLSA strategist Nicholas Smith.
The reality for Japanese companies, in the face of this sudden omni-challenge from activists or buyers, is that there are really only a couple of ways to reliably defend themselves. Some minnows may put their faith in a poison pill, some may hope that they are swaddled in the protective casing of national security. Everyone else just needs to be a lot more profitable and a lot more valuable than they are now.
The good news is that the presence of all that private equity and its eagerness to buy (and even fight over) quality Japanese businesses mean that fate is currently providing a solution. Offloading non-core businesses and streamlining companies into simpler entities has never been a more available option.
But not all will have time to do that before the activist, the hostile buyer or a combination of both decides to strike. And when they do, one of the clearest grounds for attack will be the failure of the current management to focus sufficiently on raising the company’s valuation and profitability. When the activists sneer at the timidity of the midterm plan, or the buyer exploits the conglomerate discount your corporate structure invites, it is time to activate the plan in the safe: a revaluation rip-cord to see off the assailant with a bold, ready-to-deploy demonstration of radical thinking.
It is a fine theory and, in the very short term, good advice. It will not be long, though, before every investor’s first question to Japanese management is, “What have you got in the safe?”