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Nikkei highly critical of Japanese government’s decision to block The Children’s Investment Fund

Now that Japan’s government has effectively blocked TCI from upping its stake in J-Power from 9.9% to 20%, a slew of negative reactions to such action is bound to be published, and some pressure is expected to be put on Japan’s government to allow the nation’s current stunted form of capitalism to develop on its own.

The Nikkei got the ball rolling today, in an opinion piece titled Govt ‘Selection’ Of Shareholders Costs Japan Dearly. Some selections:

[M]arket insiders are wary of an acceleration in Japan selling by overseas investors. “TCI had offered an alternative plan restricting its voting rights even if it was allowed to increase its stake,” said Kengo Nishiyama, a strategist with Nomura Securities Co. “The government failed to give a convincing explanation of why the plan was not acceptable.”

…Each time a foreign activist fund’s attempt to take over a Japanese company has been blocked — a typical case is the aborted bid by Steel Partners to take over Bull-Dog Sauce Co. — or calls to control foreign investment in sensitive sectors have emerged, foreign investors have rushed to sell Japanese equities, regarding Japan as remaining closed to them…

…It is unusual for the government to get involved so directly in private-sector investment activities.

(I’m not so sure about that last statement; this just seems like a particularly egregious example.)

“Japan must now face the question of whether management of a company or the government has the right to choose shareholders,” said Yoshihiro Ito, director of Okasan Capital Management Co. The effective selection of stockholders through cross-shareholdings — a practice that is reviving in Japan — listings of both parents and subsidiaries, and government intervention will distort the stock market and cost companies dearly.

Bull-Dog Sauce is a case in point. The company has spent a total of more than 12 billion yen, or about 70% of its sales, to purchase cross-shareholdings and other securities in the past five years since Shoko Ikeda became president.

The government needs to be extremely cautious and have a clear justification to intervene in private-sector investments. Otherwise, it could seriously damage the national interest.

The word “could” seems a bit light in this sentence; The LDP has been damaging national interest for decades. One question they will be faced with in the future is whether the population will believe that their actions are in the voting public’s best interest or if they are more akin to amakudari back-scratching. Although this may not seem like a bread-and-butter issue at first glance, it certainly looks as if the public is going to have more of a “choice” on these matters in the coming years, if you’ll pardon the pun.

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:

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Steel Partners Japan Proposes Tender Offer for Bull-Dog Sauce Company

US-based buyout/activist fund Steel Partners is staying busy. Late last week they delivered a letter to the management of Bull-Dog Sauce Company stating that the fund intends to acquire all existing shares in Bull-Dog that they do not currently own. Steel Partners is offering ¥1,584 per share, which would be a 20% premium over Bull-Dog’s closing share price a week ago.

Steel Partners, which currently holds 10.15% of Bull-Dog shares, is the company’s largest single investor. Bull-Dog holds about 27% share of Japan’s sauce market, and last year’s profit rose by 24.6 percent.

Let me just say that I love Bull-Dog sauce and I like what Steel Partners is doing in Japan, so this seems like a good match. Of course, the memory of Steel Partners’ unsuccessful bid for Sapporo Breweries is still fresh. In that case, management managed to convince shareholders to fight the acquisition because 1) Steel Partners had no experience running a brewery, or 2) Steel Partners is foreign, or 3) Both.

In his letter to Shoko Ikeda, the President of Bull-Dog, Steel Partners’ Warren Lichtenstein wrote:

Over the years, Steel Partners has been referred to as a “hedge fund.” We prefer to be called and refer to ourselves as a private investment partnership. More recently, we have been labeled “Activists.” In reality, Steel Partners have always been “Relationship/Active Value Investors.” Many so-called “activists” force changes at a company and then sell their entire investment to reap short term gains. That is not Steel Partners’ investment style. Steel Partners has always been and will continue to be a long-term investor, typically holding positions in companies from three to five years or longer.

We’ll be very curious to see what happens with Bull-Dog. At a press conference last week, Senior Managing Director Masaomi Tamiya told reporters, “We think the current management is the most appropriate. We doubt Steel Partners could manage us.”

Bull-Dog currently has no defensive measures in place in order to thwart unsolicited takeover bids, which makes us wonder who could forward as a white knight in this situation?

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