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Fear in the air: Cross-shareholdings up, firms afraid to go public

Let’s talk about whether or not people here in Japan are listening to Warren Lichtenstein, the manager of the Steel Partners Japan Strategic Fund. Back on June 12, he was quoted in Bloomberg as saying, “After 15 years of recession, Japan is now waking to a completely different world. As long as we can find interesting opportunities to invest our capital to get good risk-adjusted returns, we will do it more and more.”

That certainly got some attention. So much attention, in fact, that we’re starting to see headlines like this: Equity Financing Tumbles As Firms Worry About Unsolicited Takeovers and Cross-Shareholdings Rose For 1st Time In FY06.

No doubt, these trends were in place well before Mr Lichtenstein spoke in Tokyo two weeks ago, but they are (at least in part) a reaction to what Steel Partners has been doing in Japan. Major banks have reportedly begun increasing their cross-holdings, perhaps in an attempt to secure that lenders keep coming to them.

To be fair, fear of being the target of an unsolicited takeover attempt is not the only reason that the amount of funds raised through IPOs is expected to fall 70% in the first six months of 2007. The Nikkei also attributes the drop to, “The prospects for higher interest rates, which is prompting [companies] to issue straight bonds earlier than initially planned.”

But which one got the headline?

Another thing Mr Lichtenstein said while in Tokyo:

Many so-called activists force changes at a company and then sell their entire investment to reap short-term gains. This is not Steel Partners’ investment style…Poison pills have not stopped unsolicited takeovers in the U.S. and won’t stop unsolicited takeovers in Japan.

The two ends of that quote could be taken separately, but they do belong together. Here is where it seems no one is listening. I watched this man on the camera here in Tokyo and he was good. He spoke calmly and clearly, exuded confidence, explained the fund’s actions and never appeared smug or arrogant. The single quote from a nameless ‘observer’ that Business Week could come up with: “It left a bad impression.”

Please. Let me take a wild guess here: This ‘observer’ expected to see someone resembling Matthew Perry disembark from the USS Mississippi and attempt to force Japan to accept his demands. But there was no need to do such a thing, and this ‘observer,’ feeling disappointed, felt the need to let out his or her feelings of insecurity by making a dismissive comment to the Western media.

Perhaps I’ve overstated it. So be it. Point is: It seems that corporate decision makers in Japan are making self-serving (rather than shareholder or customer-based) judgments, based on what they wish to be true, and not what Steel Partners is actually saying or doing. Is Steel Partners playing on their paranoia? Perhaps, but this is business; decision makers should know better than to take the bait and cripple their own value by deciding not to go public or become re-engaged in the mutually-destructive entanglement of cross share-holdings again. They should know better than to act out of fear.

And if they’re really worried about interest rates potentially rising, when do their risk management people expect them to be at 0% again?

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