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Business deals

Veteran Japanese activist fights off Bain over cremation company

Blocked management buyout could shake up country's M&A market

Former bureaucrat Yoshiaki Murakami established the first activist fund in Japan, Murakami Fund, in 1999. (Photo by Kaisuke Ota)

TOKYO -- Activist investor Yoshiaki Murakami has foiled an attempt at a management-led buyout at a midsize Tokyo-based printing services company, and overseas investors are cheering.

The management-led buyout, or MBO, of Kosaido was backed by Bain Capital when it came onto Murakami's radar. In an MBO, a company's existing managers acquire a large part or all of the company, either from its parent or shareholders.

The battle over the company’s fate could shake up Japan's mergers and acquisitions market, long seen as closed by overseas players. MBOs typically succeed in Japan, despite undervaluing the company being purchased. The fact that managers can push through deals favorable to themselves can scare off risk-conscious investors.

"Overseas investors have extremely low assessments of Japan's MBO playing field," said Masakazu Hosomizu, a partner at U.S. asset management company RMB Capital. When looking at MBOs in Japan, foreign players often call them "done deals," or say a company is being "stolen again," Masakazu added.

Bain and Kosaido President Tsuneyoshi Doi jointly started a tender offer in January to buy all of the company’s outstanding shares for 610 yen ($5.44) each, 44% higher than its stock price just before the MBO was launched.

But the company's net asset value was 1,114 yen per share, so the MBO appeared to be an attempt to buy all Kosaido shares at only a fraction of their true value then delist the printing service.

Murakami claimed that the offer price "substantially undervalued" Kosaido and purchased 13% of the target's shares.

When the management’s offer price was subsequently raised to 700 yen, Murakami began a buyout bid at 750 yen.

The tug of war was "a rare case in Japan in which the market mechanism functioned for price formation," an M&A official at an investment bank said.

Kosaido's share price remained higher than the tender price throughout the MBO period, which closed on April 8. The number of tendered shares represented 22% of all shares, lower than the minimum target of 50%, Kosaido said.

Murakami's tender offer will be valid until Thursday. Its chances of success are low, considering Kosaido shares are currently trading higher than 750 yen.

But Murakami has no intention of managing Kosaido, according to documents he has disclosed. Many market players postulate that his takeover bid is a maneuver to raise the price of Kosaido shares.

On a consolidated basis, Kosaido's profit largely comes from its funeral services subsidiary, Tokyohakuzen, rather than from printing services. Tokyohakuzen runs six crematoriums in Tokyo; it cremates more than 70% of those who die in the capital’s 23 wards.

Murakami may have noticed Tokyohakuzen’s value, and then taken advantage of the management’s low offering price.

Regardless of his motive, Murakami’s success in blocking the MBO may offer some peace of mind to wary overseas investors.

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