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Economy

Japan Inc learning to live with activist shareholders

Kuroda Electric takeover underscores growing presence of aggressive players

The Tokyo headquarters of Kuroda Electric, which aims to reconstruct itself under MBK ownership.

TOKYO -- Japanese companies are facing the increasingly visible presence of activist shareholders, and entering an era in which they have to co-exist with assertive shareholders whether they like it or not. Behind the takeover bid by Asian private equity firm MBK Partners for Kuroda Electric, successfully completed on Dec. 15, was vociferous pressure on Kuroda from a group led by Yoshiaki Murakami, a well-known activist investor who used to head the so-called Murakami fund.

Among other assertive shareholders active in Japan, Elliot Management of the U.S. has raised its bid price for Hitachi Kokusai Electric. Meanwhile, Hong Kong-based Oasis Management is demanding that Alps Electric raise its acquisition price for Alpine Electronics.

The Murakami group has about a 40% stake in Kuroda Electric, an electronic parts trading company. The group pressured Kuroda, urging it to buy back its own shares and to merge with another company, as well as proposing at a shareholders meeting that the company employ an outside director recommended by the Murakami group. Kuroda strongly resisted the pressure, describing Murakami's attitude as showing a "cohesive attitude against the management," and calling the tone of its comments "coercive beyond normal dialogue."

Yet it was difficult for Kuroda to ignore the aims of the large shareholder. Then, MBK offered a helping hand to cornered Kuroda. While contacting the Murakami group, MBK lifted its takeover offer for Kuroda to a level the group wanted, successfully winning the group's assent to the tender offer bid. Kuroda will be delisted after a resolution at an extraordinary shareholders meeting.

The Murakami group is expanding the scope of its investments. On Dec. 15, the value of shares in UKC Holdings doubled from the previous day after the semiconductor trading company reported that the Murakami group had acquired a more than 5% stake. The group already has large shareholdings in two other semiconductor traders -- over 24% of Excel and more than 35% of Sanshin Electronics.

Murakami argues that semiconductor traders should aim become mega-distributors through mergers, and this has fueled speculation about the realignment of the semiconductor trading industry. It is understood that the Murakami group has also bought a large number of shares in shipping companies including Nippon Yusen and Toei Reefer Line, an operator of tuna carriers. It is estimated that the sale of its Kuroda Electric shares to MBK will earn the Murakami group 30 billion to 40 billion yen ($264 million to $352 million), excluding tax payments. How the group will use these proceeds will be closely watched.

Strategic Capital, a Japanese investment firm, made shareholder proposals, including dividend increases, at this year's shareholder meetings of office supplies distributor Uchida Yoko and textiles group Chori. In late October the firm started buying more shares in machinery trader Kyokuto Boeki, pushing up its stake in the trader to about 10% in one month. Strategic Capital also owns a large amount of shares in midsize construction company Asanuma. Yoshifumi Aratake of Mitsubishi UFJ Morgan Stanley Securities predicted that amid increased activity by activist shareholders, the number of shareholder proposals at next year's shareholders meetings will surpass even this year's record level.

In the 2000s when the Japanese became more aware of the presence of activist shareholders like Steel Partners of the U.S., such shareholders often made drastic demands, such as the total reshuffle of the management, sharply antagonizing companies and other shareholders. Today's activist shareholders, however, "make soft proposals like enhancing shareholder returns," said Aratake. A call to raise a takeover bid price can also lead to larger benefits for small shareholders. The revised stewardship code, which emphasizes the fiduciary responsibility of asset managers, makes it hard for institutional investors to shrug off requests by activist shareholders if the requests are rational.

"True, some assertive shareholders attach a greater importance to short-term capital gain than to improvement in corporate value," noted Shingo Ide, chief financial engineer of NLI Research Institute. Companies and investors need to foster the ability to work out the true intentions of activist shareholders behind their assertions.

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