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Mega buyouts can support, not hinder Japan Inc's reform despite Toyota deal
This is a great time to be a mergers and acquisitions banker in Japan. The latest hot mandate is a potential ¥6 trillion ($42 billion) leveraged buyout of auto-supplier Toyota Industries Corp. Going private would mark a retreat from a long-standing cohabitation between the founding family and public-market investors just when Japan is trying to make its stock market more attractive for local and international capital. Is that bad news for the reform effort? Not necessarily.
Toyota Motor Corp. Chair Akio Toyoda has proposed a buyout of Toyota Industries, which was founded by his great-grandfather, Bloomberg News reported on Friday. Toyota Motor is considering whether to participate, according to the Financial Times. The $295 billion carmaker and its affiliates hold 38 per cent of Toyota Industries, according to data compiled by Bloomberg.
A buyout would be ambitious even if Toyota Motor rolled over its stake. A recent attempt to take 7-Eleven owner Seven & i Holdings Co. private — a deal of a similar size — foundered on a failure to secure financing earlier this year.
Why are such difficult transactions being considered? In Seven & i's case, the bid came from a founding family member and was designed to prevent a takeover by Canadian suitor Alimentation Couche-Tard Inc. Here, there's no specific immediate threat. Still, the backdrop is hard to ignore. Japan's mission to modernize its capital markets is producing radical change; strictures on takeovers have been relaxed, shareholder activism is on the rise and management teams are under pressure to run companies to create value for shareholders rather than bosses. Cross-shareholdings are a key target. You don't need to own your suppliers, and businesses generally thrive when they can freely serve all shareholders equally without one investor setting the agenda.
There's scope to clean up the relationship between the parent and subsidiary here, as analysts at Bernstein point out. Hence pressure could build for Toyota Industries to sell a minority stake that it has in Toyota Motor. A buyout would preempt that, instead increasing Toyoda's influence at the carmaker.
To the extent these projects are family affairs, increasing paternal restiveness is part of a trend. Recall that members of the founding family behind Takeda Pharmaceutical Co. were among shareholders who opposed the drugmaker's $62 billion offer for Shire Plc in 2018, a bold transformational deal that went ahead. The traditional course for Takeda's boss would have been to run the company with no ambition beyond handing it on to the next management team in broadly the same shape. As it happens, the deal's naysayers can feel vindicated by the subsequent underperformance of Takeda's stock.
Contrast this with many US firms, where founder control is entrenched through dual-class share structures conferring super-voting powers. Families like the Murdochs have the best of both worlds — enjoying the benefits of a listed traded stock while calling the shots and rebuffing activists.
The Japanese authorities may worry that stock-market reform is now backfiring, pushing companies into private equity ownership and thereby reducing the choice of quality stocks for ordinary investors. But whatever the motivations behind them, buyouts should be a typical feature of every stock market.
The question isn't whether such transactions are a thumbs-down to Tokyo's Topix 500 index, but whether selling shareholders get paid well on the way out. So long as they make good money, investors will in turn be willing to bet on the new listings that come along to fill the hole. And Japan Inc. can chalk that up as a win.
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