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Market Scramble: Idemitsu feud shows M&A risks

TOKYO -- The fight between Idemitsu Kosan's management and the founding family has weighed the stock down even amid higher oil prices, spotlighting the risks of planned mergers and acquisitions.

Idemitsu closed Monday down 4.11% at 2,005 yen ($19.56) after dipping under the 2,000 yen threshold for the first time in about two months. It has fallen as far as 13% since last Wednesday, the day after the founding family voiced opposition to a proposed merger with competitor Showa Shell Sekiyu, compared with the 4% average drop by petroleum-related shares as a whole.

Institutional investors have placed large short-sale orders through such brokerages as UBS and Mizuho Securities, market data shows. Idemitsu stands in stark contrast to the Nikkei Stock Average, which gained for a sixth straight session Monday.

"Investors are selling because they don't trust the management," said Hidetoshi Shioda of SMBC Nikko Securities. U.S. investment giants BlackRock and Vanguard also cut their Idemitsu shareholdings, according to QUICK and FactSet Research Systems.

Crude oil has recovered to about $50 a barrel after plunging to the $20 range in February. But a lack of communication between Idemitsu and the founding family over the merger plans has kept investors from betting on improved earnings.

Foreign companies have also faced obstacles to proposed M&A deals. U.S. pharmaceutical titan Pfizer gave up on acquiring Irish rival Allergan this April. Marriott International nearly lost to a Chinese competitor in a bidding war for Starwood Hotels and Resorts Worldwide, which operates such chains as Sheraton.

Companies' stock prices tend to suffer when deals fall through. U.S. office supplies retailer Staples plunged 15% around the time its proposed merger with competitor Office Depot was blocked. The market was unhappy with the lack of dialogue between the companies, as well as with their shareholders.

"Many Japanese corporations will likely experience something similar to the Idemitsu saga," said Takatoshi Itoshima of Commons Asset Management. Furniture seller Otsuka Kagu, security company Secom and convenience store operator Seven & i Holdings are all known for their strong earnings. But their stocks turned volatile during recent drama involving management or major shareholders.

Companies whose founding families hold large stakes used to be known for stable management. Many, including Idemitsu, often outperformed the Nikkei average. But more businesses are working to improve governance through such steps as appointing multiple outside directors.

"The tide for better corporate governance will not get rolled back," said Shunsuke Kobayashi of the Daiwa Institute of Research.

Market players are still hopeful for Idemitsu. Some 2.4 million shares changed hands Monday, more than double the average trading volume over the first six months of 2016. The company's future depends on sending a clear message as to who holds the ultimate decision-making power and creating a transparent management system.

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