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Renault-Nissan -- Why not a proper merger?

For the sake of shareholders, Nissan should try marriage before seeking divorce

| Japan
Nissan executives should have the courage to try to build an AB InBev of cars.   © Reuters

With Renault reviving Carlos Ghosn's plans to unite Renault and Nissan Motor under common ownership, now is the time for Nissan management (and the Japanese government, which is hovering in the background) to explain what exactly is wrong with the proposal -- and take full account of the interests of an oft-forgotten group, Nissan's shareholders.

Last year's palace coup to purge Ghosn and scuttle his proposed merger under a holding company structure had its roots in the resentment felt by many Nissan employees as the Brazilian-born executive claimed credit for "saving" their company.

After an initial period of polite deference to their new foreign masters after 1999, Nissan's Japanese employees noticed and disliked many things: Renault's inferior engineering and quality; unequal "alliance" contracts skewed in favor of Renault; foreign executives installed in positions of prestige on the top floor of headquarters in Yokohama; chairman Ghosn's hubris and gaudy lifestyle.

It is hard not to sympathize with Nissan's urge to be rid of its French masters and turn the clock back to 1999, especially as Ghosn is now in detention and facing charges of alleged financial misconduct.

Unfortunately, the world is not quite that simple. Renault needs Nissan to survive and is highly unlikely to sell its Nissan shares. In the short term and perhaps forever, Renault and Nissan are stuck with each other. Like couples caught in a bad marriage where divorce is not an option, they must work together for the sake of the children -- or in this case, their shareholders.

To move forward, the people who work for Renault and Nissan should integrate and balance their respective cultures in a way that has rarely been achieved in cross-border mergers, at least in those involving Japanese parties.

The field is littered with failed cross-cultural mergers. As one example, at the same time Renault acquired Nissan, Germany's Daimler took control of Chrysler of the U.S. in what was dressed up a "merger between equals." Despite mandatory training in "cultural sensitivity and understanding," Daimler could not hide its contempt for Chrysler's American blue collar taste and style, leading to an abrupt divorce within a decade. In Japan, Daimler's partial acquisition of Mitsubishi Motors, and Ford Motor's of Mazda Motor, fared little better.

Objectively, of the cross-border marriages in the car industry, the Renault-Nissan "alliance" probably ranks among the more successful -- even if it feels far from a triumph right now.

Going in the other direction, foreign acquisitions by Japanese companies have ended unhappily more often than not, again for cultural reasons. Within two years after Nomura Holdings acquired the remains of Lehman Brothers in the 2008 financial crisis, Lehman's best investment bankers had moved elsewhere, frustrated at risk-averse Japanese bosses who plotted strategy with each other in Japanese behind closed doors.

In global industries like automobiles, the model for success is usually federal -- one in which regional units maintain a degree of autonomy but are led by a centralized, multinational and multicultural, management team. The world's largest beer company, Anheuser Busch InBev, is a testament to this formula. The company is the product of successive mergers between companies in Europe, South America and North America, reflected in a board of directors that resembles a United Nations committee in its diversity. Its products are a combination of global brands like Budweiser and local brands geared to local tastes. No doubt there are frictions among executives from different cultures, but judging by results it seems to work.

It is hard to imagine Japanese managers fitting easily into such multinational companies. It starts with the reality that top Japanese executives can rarely communicate with their fellow directors in English. And the lack of English is just a symptom of the deeper homebound mentality of Japan. Japanese executives are perfectly comfortable dealing with fellow Japanese from the same background, but in a global environment are at a profound disadvantage compared to those who have spent their lives in diverse, multicultural societies of the kind that exist in Europe, North and South America.

A company on the scale of Toyota Motor, Japan's largest vehicle maker, may be able to survive under dominant Japanese management, but automobiles with partial global footprints will be under increasing pressure to consolidate with complementary rivals.

Nissan's Japanese executives tried to stop a merger with Renault because they believe it would make permanent their subservience to European masters. But Nissan management, for its own sake and that of its general shareholders, should carefully re-evaluate the merits of a merger in which they would be equal members of a truly multinational management team.

Renault Chairman Jean-Dominique Senard, left, and Nissan CEO Hiroto Saikawa: Nissan's Japanese executives should establish real relationships with non-Japanese executives.   © Reuters

Nissan's executives have an obligation not to overlook a major benefit of a merger to Nissan's general shareholders: by putting both companies under unified ownership, it will solve once and for all the inherent conflict of interest in Renault's 43% controlling stake in Nissan, which has allowed Renault to skew the terms of the alliance agreements to its own advantage, and to the disadvantage of general shareholders.

Moreover, it is a mistake for Nissan executives to take as a foregone conclusion that the resulting company will be dominated by European Renault executives. Post-merger, at current valuations, 54% of the resulting company's shareholders will be former Nissan shareholders other than Renault -- 80% of them Japanese. The remainder of the shareholders will be non-Japanese, mostly institutional investors who are focused not on tribal turf wars but on their investment's value. There is no reason why the merged company's shareholders will prefer Renault executives or reject proportional representation between Renault and Nissan executives. Nissan executives should muster the necessary vision and courage to try to build an AB InBev of the car industry.

Bringing Renault and Nissan under common ownership will not only consolidate a global footprint but will resolve the conflict of interest inherent in the current shareholding structure.

Doing the right thing for Nissan and its shareholders will require Nissan's Japanese executives to go beyond their normal comfort zone and establish real communications and relationships with non-Japanese executives. And if it turns out the marriage is ultimately not meant to be, Nissan management may come to realize that a marriage of convenience to Renault overseen by an independent board of directors may yet be the best path to an eventual divorce.

Stephen Givens is a corporate lawyer based in Tokyo.

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