Analysis-Activist threat pushes Japanese companies to unwind cross-shareholdings

By Sam Nussey and Miho Uranaka

TOKYO, March 9 (Reuters) – Pressure from activists, or the fear of being targeted by them, is pushing Japanese companies to accelerate governance reforms by unwinding the cross-shareholdings that have underpinned relationships for decades.

Major firms including Toyota Motor and Nintendo have moved to unwind cross-shareholdings, Reuters has reported, with the “Super Mario” maker later announcing a sale.

The practice of companies owning stakes in each other is unusual in the West but common in Japan where it provides management with a buffer of stable, supportive investors.

Critics say the practice reduces transparency, muddies valuations and insulates management from the voices of shareholders.

As regulators and the Tokyo bourse push firms to dissolve cross-shareholdings, companies seen as laggards risk being targeted by activists.

Five years ago Japanese companies would ignore activists, said Pella Funds Chief Investment Officer Jordan Cvetanovski.

“Today, however, it feels as though companies have all read the same memo – they understand what they need to do and they are doing it,” Cvetanovski said. “I have never seen such a rapid shift in mindset across an entire market.”

Demonstrating the rise of activists, Elliott Investment Management scored a landmark win this month, forcing Toyota to sweeten its bid for Toyota Industries amid criticism over transparency and fairness to minority shareholders.

Toyota plans to engineer the sale of some $19 billion of its shares by banks and insurers in a demonstration of its seriousness about governance, Reuters has reported.

The large scale move from such a prominent firm could prompt others to follow suit, analysts said.

“Anybody who has had an activist in the house wants to look better,” said Nicholas Benes, founder of the Board Director Training Institute of Japan and a proponent of Japan’s corporate governance drive.

The country saw a record number of activist campaigns last year, according to Jefferies, while the unwinding of cross-shareholdings is gaining momentum.

Companies announcing the sale of their shares by other companies include electronics manufacturer Ibiden and frozen food firm Nichirei.

Elliott target Kansai Electric Power is considering selling shares of construction firm Kinden, said a person familiar with the matter, declining to be identified as the information is not public.

Kansai Electric declined to comment.

“The activists are great but they’re not the ones driving this, they’re in the sidecar – the fuse on the governance revolution was lit by Abe,” said CLSA Securities strategist Nicholas Smith, referring to former Prime Minister Shinzo Abe.

The government of Prime Minister Sanae Takaichi, widely seen as an Abe acolyte and who won a sweeping election victory last month, will put pressure firms to put cash piles to work in hiking wages and investing in their businesses, Smith said.

DEFENSIVE MEASURE

Nintendo late last month announced the $1.9 billion sale of its shares by banks including Kyoto Financial, as well as a stock buy-back scheme.

Kyoto Financial has held shares in Nintendo since the 1960s.

Nintendo approached Kyoto Financial about the sale, said Hideki Onishi, general manager at the bank’s corporate planning division.

Kyoto Financial has a policy of cutting cross-shareholdings by more than 100 billion yen ($630 million) by March-end 2029 and, with requests from the market, has somewhat accelerated the pace, Onishi said in an interview.

The bank plans to present its future policy for reducing cross-shareholdings in its next mid-term plan which will start from April, Onishi said.

While cross-shareholdings have offered mutual support in business ties, they have also served as a defensive measure for management against takeover bids.

“Using the stable shareholder structure as a shield – as seen five or six years ago or in the 2000s – and fighting to the bitter end is becoming harder,” said Yasuhiro Kikuchi, head of the shareholder and capital strategy advisory department at Mizuho Securities.

Meanwhile, companies will continue to be under pressure to improve near-term shareholder returns while the government also aims to ensure focus on medium- to long-term growth strategies.

“With heartfelt respect, activists are the garbage collectors – they eject bad managers and bad practices, doing the heavy lifting while the ministries are supporting and directing to get the job done,” said CLSA’s Smith.

($1 = 158.8700 yen)

(Reporting by Sam Nussey and Miho Uranaka; Editing by Christopher Cushing)