You know a deal has gone into uncharted territory when the bank advising on it feels obliged to make a public statement justifying its decision to provide that advice in the first place. That, and many other things, have made the protracted battle for Hokuetsu Paper Mills a controversial landmark in Japanese corporate behaviour.
The bank in question is Nomura, which is advising Oji Paper on a bid for Hokuetsu. Last month Nomura's division CEO for global investment banking, Takashi Yanagiya, made a short statement explaining the factors the bank considers when deciding whether to be a company's financial adviser, "including whether or not the deal will contribute to an increase in value for the company's shareholders, other stakeholders, and the company itself, as well as whether it will contribute to the healthy development of the industry and the overall capital markets."
What sort of bid could make a bank feel it needed to justify its behaviour like this? One of questionable economic rationale? Or one in an ethically shaky industry, like gambling or uranium? Nothing of the sort. The proposed deal is widely felt to be good for shareholders, in an industry as plain as they come: paper. The reason Nomura has had to explain itself like this is because Oji's bid is a hostile one; in Japan, hostile bids just aren't the done thing.
Founded 130 years ago, Oji is a Tokyo-based paper group and a mainstay of its industry. It presents itself as a model of modern corporate thinking, releasing a corporate code of conduct two years ago and implementing detailed forest recycling policies. Hokuetsu Paper Mills is almost as venerable, formed in 1907 to make paperboard from rice; today it makes coated and specialized printing papers and white boxboard from four mills, the largest of them a state-of-the-art facility in Niigata. It is a tough industry: high raw materials prices are denting margins, domestic demand appears to have levelled off in a mature industry and competition is getting more intense, with cheaper imports. Hokuetsu, being smaller, is seen as the more vulnerable of the two.
In February, Oji approached Hokuetsu to discuss a merger, sending a detailed proposal on July 3. Hokuetsu didn't like the idea; three weeks later it announced it would issue shares equivalent to 24% of its outstanding stock to Mitsubishi, at ¥607 per share – this at a time when Hokuetsu's shares were trading at ¥635.
The following Sunday, Oji announced a formal tender offer, proposing to buy 50.1% of Hokuetsu's outstanding shares at ¥860 per share – a hefty 35% premium – if Hokuetsu cancelled its share issuance to Mitsubishi.
The media and the market liked the idea of the Oji bid. It's a rare vote of confidence when the bidder's share price goes up on the back of a tender offer, and Oji's did, climbing 2.3% on the first subsequent day of trading. The deal would create one of the five largest paper companies in the world, has clear synergies, and is perceived as particularly useful for the smaller party, Hokuetsu. It involves no redundancies at the target, and is a cash offer.
On the other hand, few in the market could understand the rationale of the sale of Hokuetsu stock to Mitsubishi as a takeover defence. "Hokuetsu will be expected to produce a more rational explanation for why it chose to make a third-party allotment at a 7% discount when it had received a proposal for business integration at a premium to its share price of more than 30%," noted UBS. Daiwa said: "As a listed company [Hokuetsu] should place the interests of its shareholders above everything else."
Daiwa warned that Hokuetsu's share price could fall 30% if the tender offer was unsuccessful. "Considering the 60% difference in current shareholders' return between the case where the [tender offer] is successful and where it is not, it seems likely that the majority of Hokuetsu's current shareholders will, from the point of view of economic rationality, be hoping that the [tender offer] is successful."
Corporate value
On August 2, Hokuetsu set out its reasoning for opposing the Oji offer. It said the offer "presents a substantial risk of undermining the corporate value of Hokuetsu as well as the common interests of shareholders". Specifically, it argued that the advantages of management consolidation "are advantages solely for Oji", noting that Hokuetsu's own labour union had rejected the Oji offer; and suggesting that a takeover would therefore lead to employees leaving and productivity falling. There is much talk of the "Hokuetsu spirit", of pride and worker motivation, and also a prickly complaint that the bid had "been made in a forcible manner". Oji, in turn, set about writing to Hokuetsu shareholders – a quarter of them foreign, and none of them consulted about the takeover defence – urging them to challenge Hokuetsu's management.
The following day, the plot thickened. Nippon Paper, the country's second-biggest paper producer, announced that it was buying 8.49% of Hokuetsu, putting it into alliance with Mitsubishi. Nippon Paper's president, Masatomo Nakamura, fronted a Tokyo press conference and, by way of explanation, said a Oji-Hokuetsu union "may disturb peace and order in Japan's paper industry". He also said he had no intention of merging with Hokuetsu.
He was unable, though, to explain to analysts' satisfaction why it made any sense to purchase such a stake in a smaller rival, knowing that its shareholding would be diluted with the Mitsubishi deal. Few see any merit in a three-way alliance involving no formal merger in an industry that needs consolidation; Deutsche Bank, for one, commented that a Oji-Hokuetsu merger would be the best outcome, not only for both companies but for the whole industry.
As Euromoney went to press, the story was still unfolding, and is unlikely to reach any clarity until Oji's tender offer concludes on September 4. Its success or failure will pit international institutional investors and hedge funds against the old guard: insurance companies and commercial banks with long-standing relationships with Hokuetsu and no strong desire to rock the boat. It will be interesting to see how Mizuho's relationships come out of this: it is a lender to both bidder and target.
In the meantime, Tokyo bankers are looking at events with a mixture of alarm and amusement. Hokuetsu's behaviour has not met with much approval, particularly its poison pill defence. "If they are ever to effect this poison pill they will be massively criticized," says one banker. "We have from the beginning told companies that poison pills will not work for a strategic buyer with good intentions and good business plans. It's totally inappropriate. And in this case it's being introduced without shareholder approval. It's a very bad strategy they've taken."
Credit Suisse, adviser to Hokuetsu, declined to comment on the transaction, but it is understood poison pill defences have grown in popularity in Japan, partly as a consequence of Livedoor, the ill-fated internet company recently suspended from the Tokyo Stock Exchange over allegations of mis-stating accounts. Livedoor and its contemporary, Rakuten, had been making waves in Japan with ambitious takeover bids for broadcasters Fuji TV and TBS over the previous 18 months, scaring many more conservative institutions into shoring themselves up against flippant bids.
For other bankers, the approach of Nippon Paper is more perplexing than anything Hokuetsu itself has done. "The Mitsubishi investment was announced in advance and clearly has a lot of logic behind it," says another banker in Tokyo. "Hokuetsu needs capital to invest, Mitsubishi is willing to invest that capital and take a minority position. But Nippon Paper investing a large chunk of money in buying shares without any understanding with the target [the purchase is said to have been independent of Hokuetsu], because they wish to block the tender offer, is a very unusual move in any market."
Whatever the result, things have changed now. "Just the fact that Nomura and law firms like Nishimura and Ohno are advising Oji on the hostile side shows that these transactions are no longer taboo," says an M&A banker. "We are having discussions with several parties and I think a lot of companies are likely to go hostile in future. They want to make it as friendly as possible but, if necessary, friendly to the shareholders, not the current management."
Comfort zone
Many Japanese industries are mature to the point of stagnation so that organic growth is not going to be enough, so they have little choice but to acquire. And if the recalcitrance of target management gets in the way, they are going to be increasingly willing to push it aside.
It won't be easy, though. "It's not easy for a Japanese company to do M&A in the first place, let alone in a way outside its comfort zone," says a banker. "There will be more, and we are seeing interest in potential activity, but is this going to be the mainstay of Japanese M&A going forward? I don't think so."
There's already signs of it catching on, though. Since the Oji Paper bid, men's wear retailer Aoki Holdings has said it will launch a ¥13 billion tender offer for Futata, a smaller rival from Kyushu in southern Japan. The offer, at a 75% premium to Futata's share price at the time, has already been opposed by Futata's largest shareholder. No hostile bids from Japanese blue chips for hundreds of years, then two come along in a week. Watch this space.
By Chris Wright of Euromoney magazine