• Wave of unsolicited offers expected in Japan
• Meti pushes “major paradigm change”
• Price to determine winners in competitive bids
• Advisors now willing to work for unsolicited bidders

The recent success of unsolicited takeover bids in Japan, which follow the government’s August 2023 Corporate Takeover Guidelines, foreshadow an expected wave of “unsolicited” offers in a country where hostile takeovers have long been taboo, said a Tokyo-based M&A lawyer.

Speaking at his recent seminar, Mikiharu Mori, partner of Tokyo International Law Office, attributed the flurry of recent unsolicited bids to the government’s 2023 guidelines that set out the code of conduct for corporate takeovers and focused on best practice responses to unsolicited offers.

The new guidelines, which were formulated by the Ministry of Economy, Trade and Industry (Meti), encourage boards to give “sincere consideration” to a “bona fide offer”. The guidelines, which expand upon Meti’s MBO and buyout M&A guidelines in 2019, state that it is important to take care not to “simply reject a proposal that may increase corporate value”.

“There is clearly a major paradigm change in corporate Japan. The government, which used to focus on defense measures, has shifted its emphasis with a goal of promoting and encouraging unsolicited takeovers,” said Mori.

The guidelines, together with the country’s progress in encouraging Japan Inc to unwind cross-held shares and the Tokyo Stock Exchange’s measures urging companies to focus on their cost of capital and share price, have produced a fundamental change in attitude among companies and a new appetite for unsolicited takeovers, he said.

The seminar came prior to news this week that Seven & i Holdings [TYO:3382], the JPY 5.0trn (USD 34.3bn) market cap retail group, has received a confidential, non-binding and preliminary takeover proposal from Alimentation Couche-Tard [TSX:ATD] in what would mark Japan’s largest ever takeover by a foreigner.

The approach follows four unsolicited takeover attempts that have taken place in the past year, two of which have led to the targets being taken over.

In July 2023, electric motor manufacturer Nidec [TYO:6594] launched a USD 16.6bn unsolicited full-takeover bid for Takisawa Machine Tool [TYO: 6121] at JPY 2,600 per share, which came at a premium of 112.94% to the average six-month closing price. Takisawa initially rejected the approach but subsequently accepted the offer.

In December 2023, Japan’s M&A market was shocked when Dai-ichi Life [TYO:8750], Japan’s major life insurer, threw itself into a takeover battle with M3 [TYO:2413], a Sony-backed medical information provider. The target is Benefit One, a provider of employee benefits 51.1% owned by employment agency Pasona Group [TYO: 2168].

Dai-ichi’s ultimately successful JPY 2,123 per share rival bid was aimed at buying out minorities and taking the company private. The bid trounced M3’s JPY 1,600 per share offer, which was only for a 55% stake in Benefit One and was designed to keep the target listed.

Premiums and minority interest’s paramount

Mori said the commonality between the two successful unsolicited offers was that both bidders were willing to pay a substantial premium and also structure their deals to take into account the interest of minority shareholders.

“These two successful unsolicited transactions by Japan’s blue-chip companies emerged last year and early this year have changed the world of Japanese tender offers, where hostile takeovers used to be seen as taboo,” said Mori. “The two deals would certainly have a huge impact on future M&A by Japanese companies,” he added.

Then there is the third factor, which related to synergies, said Mori. The key is whether an unsolicited bidder can make an acquisition proposal that would enhance the corporate value of a target company.

In March, Brother Industries [TYO: 6448], a Nagoya-based manufacturer of business machines, announced it had decided to launch a competing tender offer to acquire Roland DG [TYO: 6789], a Shizuoka-based computer and peripheral equipment maker, at JPY 5,200 per share.

The JPY 5,200 per share bid trumped an earlier management-buyout proposal from US-based private equity Taiyo Pacific Partners, which made a binding offer of JPY 5,035 per share.

Roland DG, however, expressed concern about Brother Industries being a competitor of one of its suppliers for industrial printers’ critical parts. If Roland became a subsidiary of the Nagoya-based business machine manufacturer, its relationship with this supplier may deteriorate.

In response, Roland DG in April raised its PE-backed MBO offer price to JPY 5,370, well above Brother’s JPY 5,200 per share, prompting the Nagoya-based business machine manufacturer to withdraw from the race.

Information asymmetry

In this situation, Mori said unsolicited acquirers must have a strong justification or a nobler purpose for their takeovers to be successful. Unsolicited bidders must undoubtedly cope with an acute lack of information because of the inability to carry out due diligence. They usually have little data about the target company to help them assess synergies.

This situation showed that Brother Industries had a problem of “dis-synergies”. And in the final analysis, it was the price that ultimately determines the winner when there is a competing bid.

Other conditions for the success of unsolicited bids include a diversified shareholder structure with a high foreign ownership ratio, the ability to find financial and legal advisors as well as the ability to obtain regulatory approvals without cooperation of a target company, said Mori.

In the past, unsolicited bids have been viewed as controversial and so bidders have been unable to find advisers. But now, encouraged by the Meti’s new guidelines, an increasing number of law firms, which used to be hesitant to act as advisors because of reputational concerns, are willing to work as advisors on unsolicited offers, Mori said.

In July, corporate Japan witnessed the first unsolicited takeover attempt by an activist fund when Singapore-based 17.65% shareholder 3D Investment Partners revealed a plan to take television commercial producer Tohokushinsha Film [TYO:2329] private via a JPY 600-JPY 650 per share tender offer, although details of the proposal have not yet been announced.

The Tokyo-based television commercial and film producer immediately set up a special committee of non-executive board directors to examine the proposal from 3D Investment, in line with Meti’s new guidelines, instead of unilaterally rejecting the bid.

The company said the board will respect the special committee’s decision as much as possible.

“The presence of external directors is increasingly important in corporate Japan’s M&A,” said Mori.