Hostile takeovers used to be so rare in Japan that most companies could comfortably assume they would never happen. A powerful taboo kept the vast majority of listed businesses untouched by these unsolicited approaches. Corporate valuations generally assumed the absence of takeover risk, and the successful attempts only happened on a minuscule scale.
As a result, the need for lawyers to get creative in takeover defence strategies was almost non-existent.
But then, in 2019, Japan updated its mergers and acquisition guidelines to recommend that companies set up special committees to examine incoming bids, rather than rejecting them out of hand. With this development adding to pressures created by Japan’s first corporate governance code in 2015, the old taboos have begun to lift faster than many expected. Now, other changes under way suggest a greater acceleration from here.
Japan’s experience is also being closely watched elsewhere in the region, say M&A professionals, with certain patterns suggesting there is an emerging market in Asia for unsolicited takeovers.
Where there is such rapid change, says Yo Ota, a veteran M&A partner at law firm Nishimura & Asahi, there must also be rapid innovation. While many investors may be cheering the emergence of a more assertive Japanese market for corporate control, some companies will worry about becoming the target of bids that are potentially injurious.
With the old hostile takeover taboo no longer a reliable insulation, they must turn to more inventive lines of defence.
Some of the tactics used by Ota have included the tailored “poison pill” — issuing stock warrants to existing shareholders. This proved successful in helping industrial robot maker Toshiba Machine ward off a hostile approach from an activist fund earlier this year and it looks likely to become a favourite of conservative corporate Japan as it adapts to a new world.
This new appetite for hostile takeovers in the region indicates a fundamental change in attitude among companies, their investors, M&A professionals, media and government. In addition to foreign and domestic investment funds, a growing number of blue-chip Japanese businesses have dropped their concerns over the reputational risk of mounting a bid that the target initially declares hostile.
Japanese companies such as optical product maker Hoya, travel company H.I.S. and trading house Itochu have, within the past two years, decided that the hostile bid is now a legitimate tool for corporate growth. One pivotal moment came in late 2020 when furniture retailer Nitori launched a $2bn unsolicited bid for rival Shimachu. It successfully trumped a friendly offer for a third competitor and completed the first openly hostile bid by one listed Japanese company for another in more than 35 years.
That deal, predicts Kensaku Bessho, head of the M&A advisory group at Mitsubishi UFJ Morgan Stanley, will be a meaningful catalyst for change in the Japanese market because, as he puts it, “people did not see this deal as an evil or hostile bid”.
The rise in unsolicited or outright hostile takeover bids for listed companies — there have now been at least 17 since 2017 — is in part a delayed outcome of the 2015 governance code and its accompanying stewardship code.
These two documents have had several visible effects, most notably an increase in shareholder activism that has made Japan the world’s second-largest market, after the US, for ongoing activist situations, according to brokerage CLSA.
Greater scrutiny from shareholders, and pressure on previously laissez-faire investors to force managements to maximise corporate value, have put a spotlight on the 630 subsidiary companies listed on the Tokyo Stock Exchange. Parent companies holding large stakes in these listed “children” now feel more obliged either to buy them back into the fold or sell them off completely.
Other changes make it more likely that attempts at hostile takeover will increase.
Until recently, as CLSA strategist Nicholas Smith noted in a recent report on hostile M&A, it was difficult for a potential hostile bidder — however respectable its pedigree — to find a leading securities house or M&A law firm to act as adviser. That, says Smith, changed when Toshiba launched its 2018 hostile bid for NuFlare and was advised by Daiwa Securities. A year later, Japan’s largest securities house, Nomura, was comfortable advising Itochu in its hostile bid for the clothing company Descente.
Demographics are also stirring the market for corporate control as older chief executives with protective instincts for their companies hand over to a generation more open to being involved in M&A, whether as buyer or seller.
But, as part of the emphasis on corporate governance and shareholder value, says Ota, many companies have also come under pressure to jettison the so-called “pre-noticed” poison pill defence mechanisms that once provided blanket cover from unsolicited bids.
With those defences gone, and with M&A much more emphatically likely, companies require new methods to defend themselves.
Ota’s strategies have, for now, shown some of the early possibilities. As the market evolves, however, the need for defence measures to catch up with the pace of new hostile strategies will demand even faster innovation.