Japan rethinks its opposition to hostile takeovers
Looming Nitori bid for Shimachu could reshape the landscape for M&A
In a crowded field, the discount furnishings group Nitori can make a fair claim to having Japan’s catchiest advertising jingle: eight lilting notes and a cheeky assurance that you get something more than the price you pay.
That line worked beautifully when used to peddle good-value coffee tables and laundry racks. The question is how amicable the jingle will sound now that Nitori has become the belligerent in a potentially landmark hostile takeover bid for the DIY chain Shimachu. Specifically, this gambit will test just how much the Japanese stock market believes that corporate control should ever be about something more than price.
There are two reasons why Nitori’s role as aggressor here might, on the face of it, seem surprising.
The first is the way the company has presented itself. Even as it has expanded to more than 560 stores across Japan, it has sought to remain the loveable firm from the northern island of Sapporo. The 76-year-old founder, Akio Nitori, has been carefully sculpted to media as an avuncular and ideal version of the hard-grafting, never-give-up Japanese businessman who built something great from the provinces.
Even more striking is the arena in which this drama will play out. According to a recent paper by legal expert Stephen Givens, no classic unsolicited tender offer against a major target has ever succeeded in Japan, even though hostile bids have been commonplace elsewhere in the world since the 1980s. Why that is the case, and whether that taboo has been broken by a number of prominent hostile attempts since 2019, are two questions that investors want answered as Japan hovers on the brink of fundamental upset.
Nicholas Smith, a strategist at CLSA, argues that the Japanese market is still priced as if hostile takeovers do not exist. About half of companies in the Topix index are trading below their book value, and more than a dozen have market capitalisations below their levels of cash. Instincts and disciplines that arise from the fear of unsolicited bids, and that define governance patterns and corporate behaviour elsewhere, don’t appear in Japan’s weirdly peaceable and non price-sensitive ecosystem.
The most common explanation for this is the complex networks of shares that Japanese companies hold in one another, which means that deep ranks of “allegiant” shareholders can be depended upon to stand against any hostile bid. There has also been a history of government or media backlash against hostile bid attempts and official endorsement of poison pills and other defences.
But there are now plausible signs that Japan could develop a more rough and tumble market for corporate control. Even though companies have long appeared to be allergic to hostile bids, they may instead have been keeping their teeth and claws out of sight until it was acceptable to bare them.
Corporate cross shareholdings are slowly unwinding and are being replaced by institutional investors who have clear mandates to assess takeover bids — whether hostile or friendly — on price. There have been a number of unsolicited takeover attempts in the past two years that, while not succeeding as planned, have begun to normalise the idea. Indeed, the companies behind two recent actions are respected names, the trading house Itochu and the industrial giant Hoya.
Nitori’s unsolicited bid for Shimachu, which it will launch this month, may draw a counterbid. It is designed to come in 30 per cent higher than an agreed offer from another Japanese DIY store operator, DCM. A tussle between household names, triggered by an unsolicited offer and fought with cash, would make it immeasurably easier for other hostile attempts to follow elsewhere in the market.
For Nitori arrives not just with hard cash, but also a wad of respectability that may further erode the public perception of unsolicited bids as inherently un-Japanese.
For all of Mr Nitori’s parochial charm, his board includes a former chairman of the formidable Keidanren business lobby and the former chief executive officer of the country’s largest non-bank financial conglomerate, Orix.
The credo that Japan’s market is on the cusp of a revaluation depends, to its adherents, on a large, breakthrough hostile bid actually being seen to work. There is good reason to suspect that Nitori’s could be the one.