2007年 02月 24日
Deal Breaker -- A Landmark Vote in Japan: Shareholders Just Say No --- Steel Company Merger Rejected in Proxy Fight; An American's Triumph
By Andrew Morse and Sebastian Moffett
23 February 2007
The Wall Street Journal
TOKYO -- When U.S. companies announce plans for a merger, shareholders occasionally derail the deal over price or other issues. In Japan, people couldn't remember that ever happening -- until yesterday.
An investment fund led by an American, Scott Callon, rallied shareholder support and won a vote to block a small Tokyo steel company from being taken over. Mr. Callon bested two of Japan Inc.'s biggest guns: the nation's top steelmaker, Nippon Steel Corp., which owns a majority of the would-be acquirer; and trading giant Mitsui & Co., which backed the deal as the small company's biggest shareholder.
"There has historically been a view among the business elite in Japan that they know how to run their company and other voices don't have to be heard," says Mr. Callon, a 42-year-old former Morgan Stanley managing director. Yesterday's shareholder vote, he says, means that "truly, the individual shareholders stood up."
Long-silent shareholders are gaining power in Japan, shaking up managers and raising hopes that the nation's economic recovery could pick up vigor. Instead of being owned mostly by banks and other friendly business partners as in the past, Japanese companies increasingly must answer to individual shareholders and independent investment funds.
Just 11% of Japan's $12.5 trillion in personal assets are in stocks and similar investments, compared with 31% of $40.5 trillion in the U.S. Much of the Japanese money sits in banks, which traditionally played a big role in financing big companies.
Recently, though, individuals have been edging into the market. The number of Japanese individual shareholders rose to 38.1 million in 2005 from 27.4 million in 1996, according to official data, and they now make up 20% of the market. Spurred by their buying, the market is booming. The benchmark Nikkei 225 Stock Average ended the day yesterday at 18,108.79, its highest close in nearly seven years.
Growing shareholder activism could shake up Japanese companies by forcing them to use their resources more efficiently. The Tokyo Stock Exchange is full of companies that trade for less than the value of their assets, such as cash and real estate, and could be revived by industry consolidation.
"There remains enough inefficiency in the Japanese economy that cleaning up just some of it will provide a boost to growth for many years," says Marc Goldstein, director of Japan research at Institutional Shareholder Services, a big proxy adviser.
In the past few months, some aggressive investors have made companies bow to their demands. Last October, a U.S. fund called Steel Partners Japan Strategic Fund bought 23.1% of the shares of a small instant-noodle maker, Myojo Food, then made a tender offer for the whole company. Myojo managers wanted to remain independent but they eventually agreed to sell out to Nissin Food Products Co., a much larger noodle maker. That allowed Steel Partners to sell its stake at a profit. It's now applying a similar strategy with Sapporo Holdings, a beer maker.
The trend of shareholder activism has also affected South Korea. Steel Partners and U.S. investor Carl Icahn bought about 10% of a South Korean tobacco company and got a director on the board through a proxy battle last year.
Mr. Callon says the small steel company, called Tokyo Kohtetsu Co., is a classic case of executives not heeding shareholder interests. Management of the company, which collects scrap steel and processes it for use in construction, wanted to sell out to a larger rival in Osaka for only a 6% premium. Mr. Callon says a much larger premium was in order given the potential cost savings from the deal.
Tokyo Kohtetsu executives disagree. They say their company could be overwhelmed soon by imports from China and has little leverage to strike a better bargain, although Mr. Callon doesn't think Chinese technology is strong enough to pose an immediate challenge. "We are too small," said Yoshiyuki Niino, the company's finance chief, sitting in a head office that has desks for just six people. The company has a single foundry 45 miles away. "We can't make the necessary investment in equipment to keep us competitive," Mr. Niino said.
Mr. Callon, the son of an International Business Machines Corp. employee, spent three years as a toddler in Japan and later mastered the language. He received a doctorate in Japanese politics at Stanford University and wrote a book concluding that the traditional Japanese system of cross-shareholding and government-big business ties was "coming apart."
He joined Morgan Stanley's Tokyo office in 1997. After a stint at another bank, he returned to Morgan Stanley in 2002 as a managing director in charge of equities in Tokyo. There, Mr. Callon, who is tall, thin and talks in rapid, high-energy bursts, spent a week meeting all of the nearly 100 people under him, a half-hour at a time.
In 2005, Mr. Callon's grandmother went into a coma. While the rest of the family gathered in San Jose, he stayed in Tokyo to work on business projects that would determine his team's bonuses. During that period, his grandmother died. "I wasn't making the right choices as a human being," Mr. Callon says he told his bosses. He quit, and last year started an investment fund with Sanae Shimizu, a former colleague.
The fund is called Ichigo, part of a Japanese saying that means "once-in-a-lifetime chance." It has just $25 million in assets under management -- a tiny amount by the standards of the fund world -- most of it from family, friends and former clients.
As early as April of last year, Mr. Callon and Ms. Shimizu identified Tokyo Kohtetsu as a potential investment. The company's shares were valued at under six times its annual net profit. Though it trades on an exchange for smaller companies, that's less than half the average price-to-earnings ratio for steel companies on the Tokyo Stock Exchange.
One reason was that heirs of the company's founder and the Ministry of Finance, which had received shares as payment for taxes, were steadily reducing their stakes. That created an overload of selling in the market, but didn't affect Tokyo Kohtetsu's core business. It was making money, had no debt and plenty of cash. With a market capitalization of under $100 million, it was off the radar screens of many institutional investors.
Before Mr. Callon's fund could officially open up shop and snap up a stake, Tokyo Kohtetsu made a move. It had been talking to Osaka Steel Co., a much bigger maker of similar products 250 miles away in western Japan. The two companies, which had customers nationwide, realized they could save money by delivering products from the plant closest to each client.
Last October, the two announced they would combine. The deal gave Tokyo Kohtetsu shareholders 0.228 shares of Osaka Steel for each of their Tokyo Kohtetsu shares. That translated to a 6% premium at the time and valued Tokyo Kohtetsu at around $70 million. (Later that value went up because Osaka Steel shares rose, as did Tokyo Kohtetsu's.) The companies said the price was fair, citing opinions obtained from major Japanese securities houses.
Mr. Callon didn't think so. Even in Japan, an acquiring company usually has to pay a 10% to 15% premium for its prey. In the U.S., a 30% premium is typical. Mr. Callon thought the premium should be higher than usual because of Tokyo Kohtetsu's low valuation and the clear cost savings. Besides the reduction in delivery costs, the combined company would have more clout in the market for scrap steel from cars or demolished buildings, and could squeeze lower prices from suppliers.
Challenging the deal would be tough. Mr. Goldstein of Institutional Shareholder Services and Goldman Sachs strategist Kathy Matsui say they don't know of any cases in Japanese corporate history where shareholders blocked a merger agreed on by the companies.
With the two parties to the deal declining to discuss how they arrived at the price, Mr. Callon thought he saw the hand of Japan Inc. Tokyo Kohtetsu's biggest shareholder, with a 29.1% stake, is Mitsui, the big trading company. Tokyo Kohtetsu's president previously worked at Mitsui for more than 30 years. Meanwhile, giant Nippon Steel owns 61% of Osaka Steel.
Mitsui and Nippon Steel are longtime business partners, and in financial terms that relationship is far more significant to Mitsui than its holding in little Tokyo Kohtetsu. In the year ended March 2006, 31% of Nippon Steel's total sales of $32 billion went to Mitsui or a joint venture between Nippon Steel and Mitsui.
"It's safe to say [Tokyo Kohtetsu and Osaka Steel] weren't acting independently," says Mr. Goldstein, who like other observers believes the big backers on each side influenced the deal.
Mr. Niino of Tokyo Kohtetsu said, "The merger and the merger ratio have nothing to do with the relationship between Mitsui and Nippon Steel." A Mitsui spokesman, Minoru Kasahara, declined to discuss why Mitsui was willing to accept the small premium for its shares. A Nippon Steel spokesman, Masato Suzuki, said his company received periodic reports on the takeover talks but the buyer and seller were the "main players."
Many of Tokyo Kohtetsu's smaller shareholders thought they were getting too little. Some protested the deal on Yahoo Japan Corp.'s bulletin boards. "The exchange ratio is atrocious," griped one who called himself Nigenoken.
As soon as Keniti Nagano heard the merger news, the 43-year-old trade-association employee became so angry that he asked his boss for a day off to attend the Tokyo Kohtetsu shareholders' meeting where the deal would be voted on. "I wanted to ask the president to explain this deal to me," said Mr. Nagano, who owns 90,000 shares, or about 0.5% of the company.
Mr. Callon printed out 50 or so postings from the Internet bulletin board and took them with him to a business trip in Singapore. On the plane, already exhausted from long work hours, he started reading the postings and was overcome with emotion. "It was a toxic combination of being so tired and so frustrated and so angry that I started crying," he says. He got up and went to the bathroom for a while until he had composed himself. "I realized we had to fight."
Mr. Callon decided Ichigo should buy shares in Tokyo Kohtetsu and try to alter the deal. If he gathered a significant block of shareholders against the merger terms, he figured management would agree to bargain for a better deal. "The strategy was to get them to talk," he says. "I wanted it to be like this is a difference among friends."
Ichigo amassed an 11% stake in Tokyo Kohtetsu in two months, but in mid-January meetings with Tokyo Kohtetsu and Osaka Steel executives Mr. Callon got nowhere. He says they cited the fairness opinions and called the price nonnegotiable.
A week later, Ms. Shimizu, Ichigo's lawyer and three assistants went to Tokyo Kohtetsu's headquarters to ask for the shareholder registry. Tokyo Kohtetsu wouldn't give them a copy, but did allow them to use a conference room for two hours to copy it. A senior Tokyo Kohtetsu executive watched over them as they scanned the documents with a portable optical character reader and wrote down some entries by hand.
On Friday, Feb. 2, Ichigo announced the proxy contest, saying it would seek votes to reject the deal at the shareholder meeting. It mailed proxy ballots to Tokyo Kohtetsu's 1,600 shareholders, 94% of whom are individual investors. The following Monday, he found 30 proxies filling his mailbox. Soon, 100 proxies were arriving each day.
Tokyo Kohtetsu first commented on the deal after Ichigo's announcement. Shunsuke Hirashima, the company's president, argued that the company was at risk. "In the near future, domestic makers of general steel are going to see imports from abroad, particularly China," wrote Mr. Hirashima on the company Web site.
By that point, Izumi Takaishi had already decided to vote with Mr. Callon. The 51-year-old president of a real-estate company had built up a stock portfolio worth some $400,000 over 25 years, including 5,000 shares in Tokyo Kohtetsu worth about $25,000.
When Tokyo Kohtetsu announced the merger terms, Mr. Takaishi was surprised by the low merger ratio. Never having been involved in a protest against management, he thought there was nothing he could do about it. "I thought it would be very difficult to change something that the company had decided," says Mr. Takaishi.
Then the Ichigo proxy arrived and, two days later, a form from Tokyo Kohtetsu that he says "didn't explain the merger enough." He returned the Ichigo proxy.
Last Friday, Ichigo made a final appeal to the managements of Tokyo Kohtetsu and Osaka Steel, sending the presidents of both companies letters asking for meetings. Mr. Hirashima called Mr. Callon to say he appreciated the overture, but wasn't going to change the terms of the deal, says Mr. Callon.
Yesterday, 42% of Tokyo Kohtetsu shareholders agreed with Mr. Callon, blocking the deal after the three-week campaign. Some Tokyo Kohtetsu shareholders who had pledged their shares to Mr. Callon's proxy solicitation traveled to the meeting to show support. Mr. Nagano, the trade-association employee, sat next to Mr. Callon throughout the proceedings, Mr. Callon said.
In a statement posted on its Web site yesterday, Tokyo Kohtetsu called the vote "truly regrettable" and added, "We believe a precious opportunity has been lost." The company said at this point it is not planning to renegotiate a deal with Osaka Steel at a better price.