Japanese family mergers rising dramatically, contrary to minority shareholders' interests, analysts say15 November 2006

An increasing number of Japanese companies are turning their subsidiaries into wholly-owned units to create operational flexibility, executives and analysts say.
“When you look at the number of subsidiaries delisted because of their merger with parent companies, it has really increased dramatically,” said a Tokyo Stock Exchange official. According to the TSE database, the number of such companies totaled 39 for the January-September period, up from the 27 for the whole of last year. “Many parent companies have decided to take greater control over these units, especially, to make use of the subsidiaries’ cash more freely. Also, they often find group management more difficult if their units have to worry about the interference of both parent companies and shareholders,” said the TSE official.
The lure of delisting subsidiaries has already prompted NEC Infrontia, SBI Group companies, SMBC Friend Securities, Nisshin Fire and Marine Insurance, Mitsubishi UFJ Securities, Sumisho Lease and STB Leasing among others to withdraw from public markets.
The SBI Group, for instance, initially had financing difficulties when it was a subsidiary of Softbank. “It was necessary to raise funds via its subsidiaries, IPOs and equity financings at the time. But now, the group is on its own and capable of issuing bonds,” said Katsuhiro Shimada, a spokesperson at SBI Holdings.
At a meeting with analysts in November, last year, Yoshitaka Kitao, CEO of SBI Holdings, said he had decided to delist SBI Partners and Finance All because the group wanted to make the two companies’ businesses its core thereby accelerating their growth and absorbing 100% of their revenues.
However, the question is whether this sudden flight of subsidiaries away from public markets will make shareholders happy. Many companies indeed have been under fire from minority shareholders because premiums were not high enough, and companies withdrew from the public market all of sudden after staying for only a short period of time.
NEC System Technology, for instance, was listed on the Tokyo Stock Exchange for only 20 months, while Finance All and STB Leasing withdrew from the stock market only three years after their listing.
“The companies listed their subsidiaries because they needed money. But now, the companies are delisting their units because they have accomplished what they wanted. What an unscrupulous attitude!” complains a fund manager at Fuji Investment Management.
Tomoya Kitaoka, a strategist at Nomura Securities, said these family mergers could be contrary to the interests of minority shareholders. “The problem is that there is no mechanism for minority shareholders to participate in their decision-making processes and express their opinions,” said Kitaoka. “Of course, shareholders could seek legal settlements, but it is up to a court to decide the level of cash compensation. There is no assurance that minority shareholders could get a big premium,” added Kitaoka. The sharp rise in Japanese family mergers has prompted the TSE to establish a study group headed by Hideki Kanda, professor of Tokyo University to come up with some measures. The TSE does not currently allow a company to go public if it plans to undertake a merger within two years after its listing. “We are aware that this issue is a serious problem and have already set up a study group. However, nothing has so far been decided. In fact, we have almost come to a conclusion that we cannot think of definite measures that could prevent companies from doing this,” said the TSE spokesperson.
“We could tighten the disclosure of a parent company whenever its unit goes public. At the same time, it is necessary to monitor deal-hungry securities companies that must constantly create new business opportunities,” said Professor Kanda. “In the final analysis, shareholders could put pressure on boards to adopt their recommendations and file lawsuits.” Such lawsuits, however, are uncommon in Japan. But several Japanese companies came under increased pressure from shareholders at AGMs in June to approve measures that corporate governance advocates long have favors, including an increased number of external directors on public-company boards, said Tasuku Suzuki, an analyst at Daiwa Institute of Research. “What we really need is to create an infrastructure to protect minority shareholders,” said Nomrua’s Kitaoka.

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