Japan avoids takeover
The threat of acquisition is driving Japanese companies to focus on shareholder value and attracting...
The threat of acquisition is driving Japanese companies to focus on shareholder value and attracting foreign investors back to Japan in the process.
Denis Clough, manager of Schroder's Japan Growth Fund, said the increasing threat of takeovers both from Japanese and foreign companies was producing results from Japanese entities more in line with shareholders' expectations than five years ago.
The 57 Japanese companies that had reported financial results as of 8 May produced an average increase in operating profits of 55%, and a pre-tax profit rise of 98%.
This growth has helped the Japanese broad index jump by about 20% in the past year, but Japan has followed the global trend of growth concentrated in telecoms, media and technology.
Clough said Japanese managers used to be interested in growing the size of the company, maintaining market share and employment levels rather than its attractiveness to shareholders.
He said: "Those were some of the reasons not just for the stock market doing badly, but Japan's whole economy doing badly."
Another was Japan's relatively high cross-holding ratios, or the proportion of public company equity held by other listed businesses, apart from quoted fund management companies.
"This was one of the things allowing management not to care about shareholders because half their shares were held by other companies in the same position, and if they ignored the share price, they could all get away with it."
Yet figures from Goldman Sachs show Japan's cross ownership level has fallen from about 52% in 1991 to about 40% last year, and Clough said consolidation among Japan's banks and pressure on corporations to grow profits will cause further unwinding.
Mark Fawcett, American Express Asset Management's chief investment director for Japan, said the other driver was growing willingness among younger Japanese to buy equities directly.
Japan fell behind America in personal investment in equities, with 55.2% of Japan's household assets held in currency and deposits, 28% in insurance and pension reserves and only 7.6% in equities.
The proportion of household financial assets held in low-risk deposits was 170% of the valuation of Japan's market. Americans, on the other hand, held 43.5% of their household assets in shares, 32% in insurance and pensions and only 11% in currency. Japan is also catching up with America and Europe in the rate of merger and acquisition activity. By 1999 Japan's M&As had risen to about 5% of the stock market value, while Europe's had remained stable at about 13% since 1995.
Clough said the Japanese market was also very undervalued, as about 51% of more than 1,000 Japan's listed companies had shares selling at less than the book value, or less than the value of its real assets.
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