(Bloomberg) -- It seemed like an extraordinary display of patriotism and unity: Japan’s biggest companies would come together to save their own, whether ailing carmaker Nissan Motor Co. or besieged convenience store giant Seven & i Holdings Co.
Roughly six months later, ambitious plans to merge Nissan with Honda Motor Co. and take the operator of 7-Eleven convenience stores private have both fallen apart, leaving them grasping for solutions and potentially even more vulnerable to foreign takeovers.
The failure to find a fix that would keep two of the country’s most famous brands under Japanese control marks an unprecedented opening in its corporate landscape, and shows how hastily-conceived rescue plans can succumb to market forces.
Investors are already building positions in other struggling companies, from skincare giant Shiseido Co. to pharmaceutical firm Astellas Pharma Inc. and train operators Keisei Electric Railway Co. and Keikyu Corp., betting that after decades of protectionism and management resistance, it’s now open season on Japan’s biggest corporations.
“Historically, Japanese companies floated lofty ideas about merger of equals,” said Kei Okamura, a portfolio manager at Neuberger Berman in Tokyo. “Shareholders, employees and the board didn’t challenge them. More companies are being challenged — the stock market is challenging them, the investors are challenging them, and the board is starting to challenge them.”
The rapid collapse of the plan to take Seven & i private reflects how personal egos and domestic competitiveness ultimately outweighed the nationalistic desire to fend off Canada’s Alimentation Couche-Tard Inc., whose pursuit of the Japanese retailer emerged last August.
The heirs of Masatoshi Ito, founder of Seven & i, had originally teamed up with Itochu Corp., which runs the rival FamilyMart franchise, for a competing ¥9 trillion ($60 billion) management buyout plan that would trump Couche-Tard’s $47 billion proposal. But while the consortium found backers like PE giants Apollo Global Management Inc. and KKR & Co., the Itos and Itochu ultimately could not agree on who would control the privatized entity, people familiar with the matter said.
The effort fell apart due to the uneasy personal dynamics of the top figures involved with very different styles and visions, the people said, asking not to be identified discussing private conversations.
Concerns about foreign ownership also underpinned the hasty plan for Honda and Nissan to join hands, announced in December. Taiwanese iPhone maker Hon Hai Precision Industry Co. — also known as Foxconn — had floated plans to acquire a stake in the company last year, adding urgency to find a domestic white knight instead.
But Honda’s desire to fold in the weaker Nissan as a low-valued subsidiary met stiff resistance, including from Nissan shareholder Renault SA, which wanted a premium for selling its stake. Nissan is now drawing up plans to replace Chief Executive Officer Makoto Uchida, according to people familiar with the matter.
“Gone are the days where you can have legacy relationships dominate the conversations when making these decisions,” Okamura said. “More boards are standing up for themselves, especially external directors that are saying these deals don’t make sense, we have to discuss them more in depth, where are the synergies coming from? These questions are being asked.”
Entering Talks
With the management buyout off the table, Seven & i Chief Executive Officer Ryuichi Isaka may have little choice but to finally enter negotiations with Couche-Tard. The owner of the Circle-K chain of convenience stores has yet to gain access to the Japanese company’s finances, months after proposing a takeover.
Nissan also finds itself in desperate need of a lifeline and is now seeking a new partner — Chief Executive Officer Makoto Uchida has said it would be difficult to survive without one. Hon Hai remains interested in a partnership with the carmaker, chairman Young Liu said last month.
Japan has an abundance of cash-rich companies that trade at extreme discounts. But the insularity and protectionism of its corporate environment has always acted as a major deterrent. Few major foreign takeovers have succeeded, and domestic companies in the past could turn away suitors by simply ignoring them.
Private equity firms like Blackstone Inc. and CVC Capital Partners were interested in participating in a buyout of Toshiba Corp. in 2023, but talks were reported to have stalled due to the complexity and political nature of the deal, with the electronics firm eventually snapped up by a consortium led by a domestic fund. Rice-cooker maker Zojirushi Corp. even adopted a “poison pill” defense against a potential takeover from a Chinese firm in 2022.
Corporate governance reforms, and institutions like the Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange aimed to push back at this complacency, making acquisitions easier and putting pressure on companies to pay more attention to shareholder returns.
“As a result of these reforms, companies that had been neglected by their poor management, and companies that should have been under more pressure but weren’t, suddenly came under pressure”, said Tomonori Ito, professor of business and finance at Waseda Business School and former co-head of investment banking at UBS in Japan.
The high-profile collapse of efforts to find domestic solutions for Nissan and Seven & i also raises the possibility of Japan itself entering the fray. Prime Minister Shigeru Ishiba’s government may feel the need to openly step in to prevent situations that could result in the large-scale loss of jobs in the country — essentially trying to blunt the impact of reforms unleashed by bureaucrats themselves.
“There is the idea that if it’s a deal between Japanese companies, the process of the cost cuts, including layoffs, will be somewhat lukewarm and done loosely,” said Ray Fujii, a partner at L.E.K. Consulting in Tokyo and a former banker at Lazard Freres. “When foreign entities takes over, cost cuts will be ruthless, which is a sign of accountability to shareholders.”
Until that happens, the opportunity in Japan for global businesses has never been bigger.
“If overseas companies are interested in acquiring certain technologies and people, this is a really good time to approach Japanese companies,” said Neuberger Berman’s Okamura.
--With assistance from Natsuko Katsuki and Reed Stevenson.
