Misery acquaints a man with strange bedfellows.
Like Trinculo and Caliban in The Tempest, the boardroom members of Japan are these days finding themselves alongside unusual companions.
Many could scarcely believe their eyes when news broke Wednesday of a potential management buyout of Seven & i Holdings Co. Not because of the potential purchase of the operator of 7-Eleven, which seems a predictable move as the company seeks to fend off the advances of Canada’s Alimentation Couche-Tard Inc. It was the identity of one of the potential rescuers that had jaws agape: Itochu Corp., the largest of Japan’s Warren Buffett-backed trading houses.
Itochu is surprising as it already owns FamilyMart, Japan’s second-largest convenience store chain, which it controlled for years before buying outright in 2020. For it to want to help save its larger rival would be like Tesla Inc. bailing out General Motors Co. It’s hard to grasp Itochu’s endgame: maybe to get insight into how 7-Eleven runs things, or is it a case of the devil they know rather than a mysterious Canadian rival? Perhaps, after years of combini consolidation, it’s eyeing an audacious play for control of the market, albeit one that would surely be opposed by regulators with the sector seen as a vital lifeline in times of disaster.
Expect lots of ink postulating how this is a typical case of Japan Inc. closing ranks against the barbarians at the gate. But if it materializes, Itochu teaming up with others to help 7-Eleven would be something quite different. Seven & I has a longstanding relationship with another trading house, Mitsui & Co., just as convenience chain Lawson has its roots with Mitsubishi Corp. Adding a twist is that each now has a mutual shareholder in Buffett.
Down the road in Yokohama, strange things have been underway for some time. Nissan has been tentatively expanding an unlikely alliance with the famously independent Honda Motor Co., co-developing software and electric cars. This week, Nissan shareholders were shocked to learn there was a new partner: the secretive Singapore-based hedge fund Effissimo Capital Management, which has taken a stake in the troubled automaker.
On the surface, this seems like a standard play for Effissimo, which was founded in 2006 by two former managers working for Yoshiaki Murakami, the controversial father of Japanese activism. It has similarities to its campaign for Toshiba Corp., which Effissimo held for years before cashing out when the troubled firm was eventually sold to private equity.
Nissan likewise has been struggling for an age. Before his 2018 arrest, former Chairman Carlos Ghosn made little secret of his goal to merge it with Renault SA. But with that friendship dimming in Ghosn’s absence, Nissan needs new allies. And with the automaker’s shares languishing near levels they traded at when Ghosn was first tapped to turn it around in the late 1990s, Effissimo’s purchase makes sense. Having bought cheap, it can sit back — perhaps waiting for things to get bad enough for the government to step in and, say, orchestrate a full merger with Honda, as it reportedly proposed five years ago.
Things are changing in Japan, but the government is still unlikely to let one of its major automakers go bust without a fight — and with Effissimo’s deep ties to the economy and trade ministry, the fund would also be privy to knowledge of such movement.
Others, however, say the stake has more to do with Effissimo’s long-standing and sizable holding in assembler Nissan Shatai Co. There are suggestions that Shatai could be marked for delisting by 2026, as its free float is too small. Strategic Capital Inc., a smaller activist fund also led by a former Murakami ally, has called for Nissan to absorb Shatai, which has essentially one customer — which provides 98% of its revenue.
It doesn’t stop there: Activism is abounding in Japan, with Tokyo Stock Exchange reforms leading to all kinds of buyouts, spinoffs and splits. Just this week, Oasis Management revealed a stake in Mercari Inc., one of Japan’s most successful tech startups; the fund has yet to outline its demands.
All this activity makes for exciting headlines for the financial press . But the value to society is more up for debate. Activists who can shake up a country where boardrooms have often been accused of being too complacent should be welcomed; the mostly neutral or positive press coverage of proposed deals, even of Seven & I’s, suggests there is appetite for change.
But we should be wary of preoccupying management with endless demands that benefit only short-term shareholders. Ultimately, who benefited from Toshiba’s lengthy breakup and delisting? The firm was recently reported to cut thousands of jobs, and the memory unit it sold in 2017, now known as Kioxia Holdings Corp., is falling behind Samsung Electronics Co. and SK Hynix Inc. as it prepares for a long-delayed initial public offering.
Hostile takeovers, activist investors and foreign bids for national treasures are all relatively new to Japan — and the country doesn’t yet have a proper framework in place to deal with and evaluate them, to separate the long-term investors from the opportunists. Proposals have been made for a takeover review panel like Australia’s; given the country’s record of deals dragged out for years, benefiting only bankers and lawyers, that might not be a bad idea.
When discussing deregulation, Japan often references the “Big Bang” reforms under Margaret Thatcher in the UK. But it should also be cautious of the downstream impact; look at what subsequently became of many once-great British companies, whether public services or national icons. In the UK now, there is talk of the need to protect companies from private equity, as my colleague Merryn Somerset Webb has written. Japan shouldn’t wait for an equivalent of the Kraft Foods Inc. takeover of chocolate maker Cadbury before it changes its own rules.
Japan’s potential for deals is exciting and possibly profitable. But looking back at past deals that didn’t happen — Microsoft Corp.’s interest in Nintendo Co. wasn’t just a schoolyard rumor, but would it have been a good match? — and it’s right for some in the country to suggest not every overture is worth pursuing. Too many national champions sold would have Japan saying, like The Tempest’s Prospero, our revels now are ended.
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Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.
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