TOKYO — Global investors, including Warren Buffett, have identified Japan as a market full of undervalued companies. But a recent case in which management used a poison pill to stop an aggressive stock buyer – backed by the Supreme Court – shows why newcomers are struggling to unlock Tokyo’s opportunities.
The case concerns the company that built Japan’s first rotary press in 1906. More than a century later, Tokyo Kikai Seisakusho Ltd.
, whose name means “making machines,” still focuses on making machines that print newspapers. Unsurprisingly, he is in trouble.
This year, an investment firm headed by Anselm Wong, a Malaysian resident of Japan, acquired an almost 40% stake in Tokyo Kikai, saying it needed a reshuffle in the digital age. Management fired back, describing Mr. Wong as a threat to the value of the company.
In October, Tokyo Kikai shareholders, minus Mr. Wong’s company, approved a poison pill defense that allowed management to dilute Mr. Wong’s stake and prevent him from gaining control. He fought in the Supreme Court of Japan, which ruled in November that the poison pill was justified.
Defeated for now, Mr. Wong has pledged to reduce his holdings and not try to take a controlling stake. The company is not implementing the pill defense at this time. Still, Wong plans to keep 32.7% of Tokyo Kikai and push for change.
“I still don’t understand why we are penalized for buying stocks in the open market,” Wong said. “Are they trying to send the message to foreign investors that if you come to our country, you can’t control our businesses? “
Tokyo Kikai hailed the Supreme Court ruling. His lawyer said the court was correct in identifying Mr. Wong’s company as an “aggressive intruder” against whom Tokyo Kikai had a right to defend itself. The goal from Mr. Wong’s side was “very vague and based on such a lack of transparency that we were quite worried about their real goal,” attorney Yo Ota said.
Proxy consulting firm Glass Lewis, which generally frowns on poison pills, backed management in the case. He cited the Tokyo Stock Exchange’s conclusion that Mr. Wong’s company, Asia Development Capital Co.
, had falsified his books for years. Mr. Wong said that the problems occurred under the previous management and he cleaned them up.
People on both sides of the issue said the case exposed obscure rules governing change of control in Japanese companies, meaning in practice that the winner of disputes is often the party seen as sympathetic by judges and government officials.
“No matter how little logic the defenses against Japanese takeovers, this case has made things complicated,” said Nicholas Benes, who heads an institute that trains independent directors at Japanese companies. If management doesn’t like someone, he said, “then you can kick them out of a shareholders’ meeting, which is totally against the law regarding the equal treatment of every shareholder.”
While Tokyo Kikai is a relative minnow in the stock market, valued at less than $ 100 million, it is an example of the kind of opportunity some global investors are seeing in Japan at a time when the United States seems highly valued. More than 1,000 companies listed in Japan have a market value below their net assets, a sign that a management reshuffle could push up the share price.
Buyout companies such as KKR & Co. and Blackstone Inc.
have been active in Japan in recent years, usually focusing on friendly deals for subsidiaries or assets that large Japanese companies wish to offload. Blackstone spent over $ 2 billion last year on a Takeda Pharmaceutical consumer health unit Co.
And in 2020, Mr. Buffett’s Berkshire Hathaway Inc.
spent billions of dollars to acquire a 5% stake in five major Japanese trading companies.
But full take-over bids in Japan often run into problems, especially those involving politically sensitive companies such as Tokyo Kikai with its media relations. In most companies, the majority of directors are concurrently company executives, who have an inherent conflict of interest when a potential buyer comes forward because they want to keep their jobs.
Japan also lacks simple rules such as the UK’s which requires an investor buying 30% or more of a company to mount a take-over bid for the whole company.
CLSA strategist Nicholas Smith said Mr. Wong’s actions would have raised concerns in any global stock market, but said regulators elsewhere would be better equipped to respond. Mr Wong’s company suddenly emerged over the summer as a holder of over 30% of Tokyo Kikai’s stock, and at one point the stock soared to more than 10 times its share. value at the start of the year.
Mr Smith said regulators had the tools to ask for a waiting period so that Mr Wong’s intentions could be assessed, but did not use them and forced the courts to intervene.
“This is not an attempt to lift the drawbridge on takeover bids, but rather a warning that regulators will need to act faster and become more involved in regulating markets, ”Smith said. The Financial Services Agency, the main securities law enforcement official, declined to comment on the Tokyo Kikai case or say whether it revealed any issues worthy of the agency’s attention.
Tokyo Kikai attorney Mr Ota said the judges gave little guidance on which standards to use when evaluating potential buyers. “The Japanese courts have been very reluctant to do this kind of review, so they are just trying to rely on the judgment of the shareholder,” he said.
Mr. Wong said his company is a legitimate investor like any other trying to unlock value, and he said the printing press maker needs to go beyond manufacturing machines.
“They should use their relationship with the media and try to transition to a digital marketing business as the paper market is shrinking,” he said. “But they focus on the product rather than the needs of the customer. “
Write to Suryatapa Bhattacharya to [email protected]
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