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Stocks

Market Scramble: Filling the gaps left by cross shareholders

TOKYO -- Corporate Japan, heeding calls for stronger corporate governance, continues to unwind mutual shareholdings. But their difficulty in finding replacement buyers has begun to weigh on the market.

The conundrum facing Recruit Holdings is a case in point. Dentsu, Dai Nippon Printing and other major Recruit shareholders announced in late August that they were offloading a cumulative stake equivalent to over 10% of outstanding shares. This has compelled President Masumi Minegishi and other top officials to go on an investor relations drive earlier this month. 

Recruit executives spent more than three weeks visiting over 100 potential buyers, even ones based outside Japan. People within the company described that period as a "road show of death" due to the packed schedule.

And the company promised lofty business targets. Not only is Recruit looking to be the world's top job recruiter in terms of placements by 2020, the company is also aiming for a 15% return on equity.

"I sensed their strong desire to cultivate new shareholders by offering detailed business strategies," said a source at an institutional investor.

It used to be that banks were the ones to push for reduced cross shareholdings. What makes Recruit a special case is that "nonfinancial companies proposed unloading shares," said a source in the financial industry.

Cross-held shares have fallen to 15% of all outstanding shares in the Japanese stock market, research from Nomura Securities shows. The growing adoption of corporate governance reforms "will continue to advance the unwinding of mutual shareholdings among holdouts," said Kengo Nishiyama at Nomura.

In June, Mitsubishi Electric, Mitsubishi Corp. and Mitsubishi Heavy Industries dumped a portion of their stakes in sister company Mitsubishi Research Institute. In August, Suzuki Motor and Subaru maker Fuji Heavy Industries ended their capital tie-up. Nissin Food Holdings and two other firms announced the same month they would liquidate some of their cross-shareholdings in Ono Pharmaceutical.

Brokerages welcome the shifting tide -- and the earnings windfall. When companies unload cross-held shares, they often buyback their own shares, which in turn requires additional fundraising. "That trifecta in brokerage fees generates more revenue than minor mergers and acquisitions," said a person familiar with those matters.

But where will the companies find buyers for their newly orphaned equities? Goldman Sachs Japan started a business about two years ago where the firm recommends Japanese stocks unbound by cross-shareholdings to Western long-term investors. But a source at the investment house said there haven't been a lot of takers despite high levels of interest. Whether that's because Japanese companies are averse to outspoken foreign investors or the demand was not there to begin with remains an open question.

Goldman's Hiromi Suzuki said Japanese companies need to improve capital efficiency. Firms listed "on the first section of the Tokyo Stock Exchange have accumulated 99 trillion yen ($964 billion) in cash on hand, but that sum is not being put to effective use," she said. "They should put more of those funds to work not just in investor returns, but also in capital investments, corporate acquisitions, research and development and other growth investments."

Japanese companies in turn are also aware of investor impatience surrounding capital efficiency. Shinichi Okada, vice president at JFE Holdings, has recently been meeting with officials in charge of exercising voting rights at asset management companies, both here and abroad. "We frequently meet with investors in good times and bad," said Okada. "That is the first step toward gaining understanding."

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