Facing a potential takeover by the foreign investment firm Steel Partners, Japanese tonkatsu sauce maker Bull-Dog was saved last week in a disturbing effort by the Japanese courts to prevent foreign money and ownership permeating into an important aspect of the Japanese cultural dinner table.
Steel Partners has made investments in over 30 companies in Japan over the past couple of years, with a number in the “washoku” industry, including the holy grail of the Japanese sauce portfolio, Kikkoman soy sauce. Since Steel Partners announced they owned over 5% back in 2005, the stock price has increased over 50%. But enough is enough, apparently.
The number of M&A and takeovers in Japan, both domestic and from abroad has grown drastically in recent years on the back of a reviving Japanese economy. And a hot topic of deliberation in financial circles has been the introduction of so-called “poison pills” to prevent takeover by undesirable suitors. A culture of arranged marriage is much more appropriate than a shotgun approach it would seem. Activating a poison pill assures that a target company can be protected against the unwanted advances of a hostile investor to take control of the company. When a company begins buying up shares and launches a takeover bid, the target company activates the poison pill, which in effect stops the takeover company in their tracks.
Casting my mind back to ECON101, although it was a while ago, wasn’t the idea of a free market just that, it was free, and equal rules and fair competition by all ultimately drives up the value of the economy and the companies which are a part of it? The legality of this method has been hotly debated, but the courts have now quashed this debate, allowing the use of poison pills in Japan. Depending on the suitor. Maybe.
The process went as such; Steel Partners offered a premium on the current share price in an open takeover bid. They were told this was not welcomed by the tough characters at Bull-Dog, but proceeded anyway with a hostile bid. Garnishing 80% of votes at the Shareholder’s Meeting, the pill was activated, and Bull-Dog diluted the value of shares held by Steel Partners, from just over 10% to 2.5%. They did this by issuing free equity warrants to all shareholders, including Steel Partners. 3 new shares for each 1 held. However when it came to exchanging these warrants for newly issued shares, Steel Partners only was excluded. This increased the number of shares four-fold, but Steel Partner’s share numbers didn’t increase, dropping their percentage to a quarter of what they had, and dropping them out of the take-over bid.
Bull-Dog was also required to buy back the useless warrants off Steel Partners, at a cost of approx. 2.3 billion yen. Add to this the approx. 700 million yen in legal and advisory fees, and that is a loss of 3 billion yen, or almost 15% of the companies total assets of 18 billion yen. Theoretically this actually decreased the value of the investments of those 80% shareholders who voted for it.
This is not only a travesty of value-destruction for and by the shareholders of Bull-Dog, but it has also signaled to foreign investors that Japan is still not a fair and transparent market to invest in, that the establishment is still more than happy to jump in to block actions from foreigners which they don’t like, and it also shows that Japanese investors are still more happy to receive their box of tonkatsu sauce during dividend season than support that company to make higher profits and increase the value of their investments. This is a strong blow for those who hoped the recovery in the Japanese economy would be accompanied by a new level of sophistication of the public after experiencing the crash of the bubble.
Poison pills are illegal in the UK, and rare on continental Europe. They are allowed in the US, but their legality was debated for over 5 years in the early 80’s. The first pill was approved at Board level in Japan only 2 years ago, and the high court has now set a disturbing semi-precedent by allowing their use. Their reasoning? Steel Partners is an “abusive investor”, an unsettlingly subjective judgment.
In other words, the magistrate has decreed that the Gaijin kid is not suitable for his daughter, and will heed her cries of help. However another young local kid from down the road were to ask for his daughters hand, maybe he would agree. That is his role as a paternal figure, to protect his daughters and do what is in there interest. Not to uphold a rule of law or free market economics. Another bleak sign on the already stunted path of globalization for Japan.