Japan's Companies Gird for Attack

After years of opening up to foreign investment and takeovers, the world's No. 2 economy is getting back to fending them off. Many companies are reviving cross-shareholdings, in which business partners or even competitors buy stakes in each other to make takeovers harder. They're dusting off an American antitakeover defense out of the 1980s, the poison pill. Government ministries have joined in, attempting to ring-fence industries they deem strategic. The new bulwark-building marks a major reversal for Japan. The nation has long been one of the most closed among major economies. But in the 1990s, during a decade of economic stagnation, international investors began pouring in. Japan allowed signature corporations to fall into foreign hands, including Nissan Motor Co. and Long-Term Credit Bank of Japan, since renamed Shinsei Bank Ltd. Under former Prime Minister Junichiro Koizumi earlier this decade, the country allowed foreign companies to buy Japanese companies with their own shares. Foreign ownership of shares soared, to 28% in 2006 from 4% in 1988. Now the opening appears to be narrowing again. In a controversial recommendation this month, the Ministry of Economy, Trade and Industry said that The Children's Investment Fund LLP, a United Kingdom-based hedge fund, shouldn't be allowed to increase its stake in Electric Power Development Co., a formerly government-owned utility, beyond its current 9.9%. In a speech shortly afterward, European Union trade chief Peter Mandelson told Japanese officials and businessmen that Japan "remains the most closed investment market in the developed world." Distrust of outside investors is bleeding into popular culture. Last year, public broadcaster NHK ran a drama series called "Vulture," about a Japanese fund manager who acquires indebted companies for a U.S. investment firm. Its tagline: "Is that man the devil or a savior?" Behind Japan's renewed fortress mentality: Many companies here look ripe for takeovers. Though profits are up, shares remain cheap. On average, Japanese stocks are now trading at about 15 times earnings, down from a price-to-earnings ratio of more than 50 just five years ago, according to Nikko Citigroup Ltd. Nearly two-thirds of Japan's listed companies trade at a price-to-book ratio of less than 1, according to consulting firm UWiN Corp. That means their assets could be sold for more than the cost of buying the whole company. That spells opportunity for growing ranks of activist shareholders and private-equity funds here. Over the past five years, foreign firms including TPG and Kohlberg Kravis Roberts & Co. have set up shop in Japan. Between 2002 and 2007, the value of private-equity buyouts has almost tripled to $11.1 billion, according to data tracker Dealogic. The activity is modest compared with the U.S.'s $434 billion in buyouts last year. Hostile takeovers, meanwhile, have been practically nonexistent in Japan. Dealogic says there were five such attempts last year, together worth a modest $477 million. None were successful. Yet the fear is real. In a society that until recently counted on lifetime employment, some managers worry that acquirers will ax jobs. Others suggest that outside investors' pursuit of profits could clash with ideals such as honoring a founder's vision. 'Greedy, Adulterous' In a speech earlier this year, Takao Kitabata, a vice minister of Economy, Trade and Industry, posed the question, "Are corporations the property of stockholders?" Shareholders are "stupid, greedy, adulterous, irresponsible and threatening," he said. "They are the type of people who just sell the stock if they get mad." Japan isn't alone in its protectionist tendencies: Governments including the U.S., Germany and Australia have lately proposed or erected barriers to foreign investors. And Japan's shift isn't universal. Many top officials continue to argue for openness to outside investors. Some companies are lowering their guard: Mail-order company Nissen Holdings Co. and contact-lens retailer Nihon Optical Co. have let their poison-pill protections elapse. "Adopting takeover defenses doesn't give us the right image in the market," says a Nihon Optical spokeswoman. The country's renewed willingness to coddle corporations comes at a time when it arguably needs to shake them up. Japan's per-capita gross domestic product was the lowest in the Group of Seven rich nations last year. In the early 1990s, it was the highest. Making matters worse, more Japanese are retiring each year than are joining the work force. To avoid falling living standards, Japan needs to raise its work force's productivity. It must also generate more wealth with its vast savings -- about $15 trillion, mostly earning near-zero interest in bank accounts. .... http://online.wsj.com/article/SB120951658668054687.html?mod=todays_us_page_one