Has the Era of Hostile Deals Finally Arrived?

Looking at how shareholders and management interact leading up to and during AGMs (annual general meetings) is a good indicator of the direction and pace of the improvements in Japan’s corporate governance and stewardship. In recent times, we have been seeing an increase in pressure from shareholders, which is gradually and systematically leading to better corporate governance and higher returns. But the arrival of two hostile bids that have recently come into play represents a more critical development than anything that could take place during AGMs.

H.I.S. Co., Ltd., a well-known travel agency with hotel operations, launched an unsolicited tender offer this month of Unizo Holding, with the objective of boosting its stake in the company from 4.5 percent to 45 percent. They offered 3100 yen per share, which is a 56 percent premium to the then current price, but a 10 percent discount to book. Both companies engage in the hotel business, which can lead one to presume that the move is being made in response to the current scarcity of hotels for sale, a factor that is slowing H.I.S.’s growth plan.

H.I.S. had attempted to meet with Unizo over the past four months but was continually rebuffed, which resulted in H.I.S. responding with an unsolicited tender offer in the market. The outcome of this offer is yet to be seen, but it represents a significant shift in Japanese business conventions, and could prompt other corporate acquirers to follow suit and launch hostile bids.

Late June also saw the first takeover attempt in Japan’s $130bn REIT sector. Star Asia, which has a Tokyo-listed REIT, submitted a proposal for a merger with their smaller rival, Sakura Sogo, of which Star Asia owns 3.6 percent outstanding units. To facilitate discussions of the potential merger, Star Asia also demanded an extraordinary meeting of Sakura unit-holders. On June 28th, the request was approved by the Kanto Local Finance Bureau (KLFB) which allowed the request to convene a unitholders meeting.

Star Asia’s plan is to replace Sakura’s executive director with its CEO, and replace Sakura’s asset manager with Star Asia. Against this, Sakura Sogo REIT announced that it was considering several strategic options, including a tie-up with MIRAI Corporation, which is to be voted on in an extraordinary shareholder meeting. The outcome of this takeover attempt is also yet to be seen, but again is seen favorably in the context of the push for improved governance and shareholder rights.

Despite the term “hostile bid” sounding menacing, these overtures were not brought by contemptible hagetaka vulture funds looking for a quick buck, but by Japanese business leaders who are simply responding to their environment in a financially beneficial manner. The rise of the hostile deal in Japan is a result of economic, demographic, and cultural shifts in the country: shareholders are demanding higher returns, management is seeking growth, a lack of workers is holding back corporate expansion plans, listed companies are trading at a discount to book, and government/regulatory agencies are proactively supporting initiatives for better returns and greater efficiencies. With these changes, Japan is inching closer to a new economic era. Years ago, the idea of hostile bids between Japanese businesses would have been unthinkable. But returns have been too low for too long, which has historically forced shareholders to engage management positively and carefully. With many profitable companies still trading at deep discounts to assets, and in some cases cash, an era of hostile deals can make the prospect of even stronger returns going forward look bright.