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September 2005 -- The hostile acquisition attempt of Nippon Broadcasting System (NBS) by Takafumi Horie’s Livedoor Inc. has brought to the forefront fundamental changes in Japan’s mergers and acquisitions (M&A) sector.  Although Livedoor’s bid was ultimately unsuccessful, the attempt brought to Japan’s forefront issues such as corporate transparency, shareholder rights, and continued deregulation.  The widespread interest is such that toymaker Takara Corporation will launch an M&A-themed board game, Game of Life M&A in Japan.   

M&A Activity Continues Grow in 2005
Japan has led Asia in M&A activity for the last 8 years, with M&A deals reaching US$108.5 billion in 2004 according to Ernst & Young. 2005 looks to be a banner year for M&A, with the first half of deals reaching over $108.9 billion, more than twice the $49.8 billion recorded in the same period during 2004.  Perhaps more importantly deal volume is up, indicating that firms are becoming comfortable utilizing M&A’s as a strategic component of their operational strategy.

As Japan’s M&A landscape continues to shift, shareholding patterns are also shifting.  Cross-shareholdings among corporations and banks fell on a value basis from 18.5% in 1987 to 7.6% in 2003, while long-term shareholdings fell from 45.8% to 24.3% according to the Nissei Research Institute.  At the same time foreign shareholdings have been increasing with foreigners owning almost 24% of all Japanese shares according to the Tokyo Stock Exchange

Shareholders Activism on the Rise
Tied to the increase in M&A activity, the concept of shareholder rights in Japan is also undergoing a makeover. This year has seen several significant defeats for management proposals including takeover defense measures by industrial robot-maker Fanuc and Tokyo Electron and Electric Corp.    Around 1,500 shareholders attended the Fuji Television Network meeting, more than double the number from the previous year, with some demanding the resignation of executives in response to the handling of the unsolicited Livedoor bid.

The decrease in cross-shareholding coupled with the increase in foreign shareholding has often been used to explain the current surge in shareholder activism.  Yet this explanation fails to take into account the fact that a majority of the activists are themselves Japanese.  “Foreign shareholders are partly responsible, but a large part of it is the Japanese investors such as the Pension Fund Association,” explains Marc Goldstein, director of research services at Institutional Shareholder Services (ISS) Japan.  “For example, only 22% of Yokogawa Electrics shareholders are foreign.  The fact that Yokogawa Electric’s defensive measures were defeated means that Japanese shareholders are saying no.”