Doing Business With the Japanese : Investment: Polly Peck’s purchase of Sansui was a milestone. But institutional barriers still put big, healthy Japanese firms out of the reach of foreign investors.
In America’s quest for a “level playing field” with Japan, few pieces of turf appear as steeply inclined in Japan’s favor as foreign investment.
As the cumulative total of all Japanese direct investment in the United States doubled in two years to $53 billion in 1988, U.S. investment in Japan rose by $2.7 billion to only $6.3 billion.
Foreign investment in Japan is the equivalent of only about 0.3% of the gross national product--and that percentage is falling. In West Germany, the country with the next lowest foreign investment, that percentage is 10 times greater.
All of the foreign bank branches operating in Japan combined own only 3.8% of Japan’s banking assets. On the other hand, Japanese-owned banks account for more than 25% of California’s banking assets.
And as Japanese firms acquire such hallmark American properties as Columbia Pictures and a majority stake in the Rockefeller Group, not a single Japanese firm listed on the Tokyo Stock Exchange is yet owned by foreign interests.
Last Friday, however, a small crack appeared in what critics call an invisible wall of barriers against foreign investment here.
Executives of Polly Peck International and Sansui Electric Co. announced that the British conglomerate would acquire a 51% controlling interest in the famous but ailing Japanese audio products firm next January for $111.4 million.
The purchase will make Sansui the only Japanese company listed on the Tokyo Stock Exchange to be controlled by foreign interests, a development that, until it was announced, appeared impossible.
The acquisition was heralded by Japanese officials who have been besieged with complaints about Japan’s unwillingness to offer reciprocity for its own overseas acquisitions through similar opportunities here.
Investment has become the No. 1 issue in U.S.-Japan economic disputes.
While pledging to keep the doors open to Japanese, Trade Representative Carla A. Hills, Deputy Treasury Secretary John E. Robson and Ambassador Michael H. Armacost have cited Sony’s $3.4-billion purchase of Columbia Pictures within the past month as an example of the kind of acquisition that American firms are unable to make in Japan. Armacost has delivered three speeches entirely devoted to investment.
Polly Peck’s success in taking control of Sansui clearly falls far short of the significance that the British conglomerate’s chairman, Asil Nadir, attributed to it.
“All the beliefs that Japan is not receptive to an intelligent approach have been demolished,” he declared, adding that the deal shows that Japan “is totally open.”
Armacost acknowledged that official government restrictions on investment have been “significantly reduced.” But “informal barriers persist, and they are formidable,” he said.
The major barriers now, the ambassador said, “are a consequence of the close corporate relationships that complicate many foreign investors’ entry into the Japanese market.”
Indeed, the very nature of the Tokyo Stock Exchange rules out even the possibility of a hostile takeover.
Whereas all of the shares on the New York Stock Exchange are estimated to change hands every three years, 70.5% of the equity in 1,978 firms listed on Japanese stock exchanges is owned by so-called stable shareholders and is virtually never traded. The banks, insurance companies, affiliated firms and members of the same business groups that serve as “friendly shareholders” hold the stocks not as an investment but rather to cement other business relationships.
Sansui itself was no exception. But it made Polly Peck’s purchase possible by agreeing to issue 39.13 million new shares and sell them all to the British firm to give it a 51% holding.
By contrast, T. Boone Pickens Jr. has been trying since last March to gain a foothold in Koito Manufacturing Co., a supplier of automotive lighting to Toyota Motor Co., which had been its No. 1 “stable shareholder” until Pickens entered the picture. Pickens bought shares not through ordinary dealings on the stock market but rather from a Japanese auto sales firm in transactions that have given him 26% of the total Koito stock.
His purchases were a first, too. Never before had a foreign company purchased a major share in a Japanese firm--at a reported price of $840 million--without prior consent of the company’s management.
Pickens, however, has yet to win agreement to his demands for representation on Koito’s board and stands little chance of gaining majority control of the firm, as he himself has acknowledged. “Stable shareholders” hold more than 60% of Koito’s shares, with the top nine (after Pickens) controlling 41.3%.
Change, however, has occurred over the years in Japan. Once, foreign firms were limited to owning minority shares even in companies that they themselves established in Japan and often were required to make key technology available to their competitors in exchange for government approval of investments.
Restrictions on establishment of new 100% foreign-owned corporations were removed years ago.
Today, the chief market problem standing in the way of acquisitions of established firms is the steep prices of Japanese stocks. Foreign analysts say American companies simply cannot afford to buy most Japanese firms. The stocks of Japan’s top banks, for example, are worth several hundreds of billions of dollars.
But it is also a problem of the mind--a psychological resistance to control by foreigners.
Polly Peck sweetened its acquisition by agreeing to retain Sansui’s current management. It also made clear that its aim was not a “money game.” Rather than sell off any Sansui assets, Polly Peck said it would use Sansui to enter new fields of manufacturing as well as to gain a foothold in Japan’s consumer market. Nor was the deal a total takeover.
Foreign analysts have complained that the mergers and acquisitions that do occur in Japan have amounted to little more than rescue operations of companies on the verge of bankruptcy--like Sansui.
The electronics company is so deep in debt that without the infusion of capital its removal from listing on the stock exchange was a foregone conclusion.
Indeed, the process that led up to the deal helped illustrate the closed nature of Japanese business. Polly Peck, Japanese newspapers reported, was rebuffed when it attempted to buy a license to produce videotape recorders from Japan Victor Co. and, therefore, turned to Sansui, which held a Victor license that it was not using.
Moreover, Sansui itself was reported to have rejected an acquisition bid made by Samsung of South Korea earlier this year.
The deal does represent two breakthroughs. One was the advance blessing given by both the Finance Ministry and the Ministry of International Trade and Industry. Although their approval was not legally required, few analysts believe that the deal would have gone through without it. The second change was Sansui’s willingness to be taken over by a foreign firm.
The precedents sent important signals of acceptability to the business world for future reference.
In 1986, when the Heiwa Mutual Bank that operated 101 branches in the Tokyo area teetered on the brink of bankruptcy, the Finance Ministry blessed a merger with the Sumitomo Bank, although Citibank of New York was reported to be interested in acquiring Heiwa.
Reports differ as to whether Citibank turned down an offer from the Finance Ministry to acquire Heiwa, or whether the ministry rejected a bid by Citibank. No one from either side is willing to talk about the affair.
Security Pacific National Bank of Los Angeles made known years ago its hope to buy a Japanese bank. But so far, all locally founded banks remain in Japanese hands.
In an editorial urging both the government and businessmen to make Polly Peck’s acquisition a starting point for new opportunities for foreign investors in Japan, the newspaper Asahi pointed out that purchases of major, healthy Japanese firms by foreign companies, despite a lack of official barriers, remains “virtually impossible.”
Foreign acquisitions, in fact, do occur in Japan--but in numbers and scope that are negligible.
According to Yamaichi Securities, five American firms and 11 European companies have acquired Japanese firms in the first nine months this year. But none of the firms was big enough to be listed on the stock exchange.
By comparison, Japanese firms acquired 294 overseas companies and engaged in 178 domestic mergers in the same period.
The total of 483 mergers and acquisitions at home and abroad through September has already exceeded the number for the same period in 1987 and, at an annual rate of 644, was running ahead of last year’s 555, Yamaichi said.
Japanese acquisitions of foreign firms doubled in one year to reach 204 cases in 1986 and then shot up to 315 in 1988, the securities firm said.
Here, where custom, not policy, imposes restrictions, investors who accumulate shares in companies without being invited to do so are usually interested in “greenmail.” Independent-minded Japanese corporations often accede to it, buying back the holdings of an unwanted partner at exorbitant prices.
Analysts do foresee an increase in friendly mergers and acquisitions, at least among Japanese firms. Moves to promote mergers among supermarket chains have gained strength this year, although none have occurred. Hostile takeovers, however, are another matter.
In September, for example, Rokuro Ishikawa, chairman of the Japan Chamber of Commerce, blasted what he called American-style takeovers as “nothing but a minus to the economy.” Norio Oga, Sony president, also spoke out in favor of revising laws to ban leveraged buyouts. Eishiro Saito, chairman of Keidanren (the Japan Federation of Economic Organizations), urged that a prohibition against corporations buying their own stock be removed to reinforce the fortress against unwanted takeovers.
Prospects appear linked closely with how much pressure the United States is prepared to exert on Japan.
That could be substantial, according to Peter F. Drucker. The management expert from Claremont Graduate School just last month predicted that within five years the United States would impose restrictions on foreign investment--possibly exempting Canada, but governing both Japanese and European capital.
