Mergers in Japan: Why Bother?


Mizuho Financial Group was recently re-launched, from Mizuho Holdings, itself a product of a merger more than a year ago between Fuji Bank, Dai-Ichi Kangyo Bank, and the Industrial Bank of Japan. While the merger created the world's largest bank in terms of assets, Mizuho said in January that its loss would be some 9X bigger than previously forecast, at a whopping US$16 billion, the largest loss ever recorded for a Japanese company. Rather than create value for shareholders, the merger has destroyed massive amounts of shareholder value. Mizuho Holdings' stock price plunged 87% from the time it began trading in September 2000, and this was after stock prices of the three merged banks had been plunging for several years. Moreover, when Mizuho Financial was re-launched, it promptly lost another 16% in the value of its stock price, after shoving down a new capital issue of some JPY2 trillion down the throats of its banking clients.


Japan Airlines "merged" with Japan Air System, but has not cut any of its 52,000 workers, and it will take as long as six years to repaint more than 270 aircraft with the new Japan Airlines System name. Nippon Steel Corp., created through a merger of Yawata Steel and Fujit Steel in 1970, still rotates the presidency between the two original companies. When Mitsui Bank and Taiyo Kobe Bank merged in April 1990 to form Sakura Bank, operations such as personnel ran in parallel for several years after the banks were merged.


(TT's Take) Japanese company mergers often end up creating holding companies that encompass the earlier entities. But often, individual structures are preserved, and the mergers at least on paper are often "mergers between equals" a face-saving solution to potential job losses. What this does, however, is to put no one clearly in charge, and when both merged entities are weak, just creates a larger, weaker entity. Such mergers "create weaknesses to the power of two (or three as the case may be)" David Roche, Independent Strategy--in other words, mergers such as the Fuji Bank, Dai-Ichi Kangyo Bank, Industrial Bank of Japan are "teepee mergers", where the three entities are leaning againts the other to hold each other up, and to create the illusion of "too big to fail" at least as regards the government. Such mergers should not be mistaken, however, as in anyway enhancing shareholder value, or of creating a more viable entity.

Beginning of the End of Another Reformer?


Some "old guard" economic "critics" and market watchers have been suggesting for some time that Japan's stock market would actually rise by a couple of thousand points if PM Koizumi or his Financial Services and Economics Minister, Heizo Takenaka, were to resign. Indeed, old guard LDP politicians who have been butting heads with Mr. Takenaka on financial sector reforms have long been suggesting that Mr. Takenaka was Japan's version of "Mr. Depression", the nickname given Herbert Hoover for his perceived "hands off" policies during the Great Depression in the US in the 1920s.


Now political analysts such as Jiro Yamaguchi, professor of politics at Hokkaido University claim that PM Koizumi has gone from bypassing his party's power brokers to pleading with them--with no success. Mr. Yamaguchi observes that cabinet member Tadamori Oshima's resignation as Agricultural Minister and the resulting confusion my signal the beginning of the end for Koizumi's administration. "It's something close to a terminal symptom," Yamaguchi said, adding that the Koizumi administration is only managing to keep its head above water because people's attention is focused on the ongoing war in Iraq.


Koizumi admitted that he sought cooperation from leaders of rival factions in his bid to find an appropriate man to take over from Oshima, but he failed to get it. Rival LDP factions are becoming increasingly critical of Koizumi for his reluctance to let the government spend its way out of the economic slump. After being snubbed by his top three choices, the prime minister had no choice but to depend on Yamasaki, his longtime ally within the party. Upon his request, Yamasaki chose Kamei, who belongs to Yamasaki's own faction.


Oshima's resignation could trigger further LDP infighting, which could prompt another Cabinet reshuffle. Takami Eto, who together with former LDP Policy Research Council Chairman Shizuka Kamei, heads the LDP's Eto-Kamei faction, has lead public demand for the removal of Cabinet members hailing from the private sector, including Foreign Minister Yoriko Kawaguchi and Heizo Takenaka. This movement went on hold, however, when the U.S.-led military campaign in Iraq began on March 20.
Japan's four opposition parties are stepping up criticism of Prime Minister Junichiro Koizumi following the resignation Monday of Tadamori Oshima as agriculture minister.
With nationwide local elections drawing closer, the opposition parties hope to make the issue of money and politics the focal point of the election campaigns


PM Koizumi's political ace-in-the-hole has been his option to dissolve the House of Representatives or both houses of the Diet during the ongoing Diet session, but
''I'm not thinking of dissolution during the current Diet session,'' Koizumi was quoted as saying in a meeting with LDP Secretary General Taku Yamasaki. Koizumi, who also heads the LDP, apparently intends to conduct the party's presidential election as scheduled in September, stressing there will be ''no dissolution until the end of the LDP presidential election.'' This notwithstanding, speculation remains over whether Koizumi will dissolve the lower house for a general election or seek simultaneous elections with the House of Councillors in June next year without dissolution.


(TT's Take Political positioning notwithstanding, it is very clear that PM Koizumi's tenure will go down in history as the worst of any Japanese Prime Minister for Japan's stock market. While many reams of paper and countless speeches have emphasized the positive points and necessity of his reform programs, the fact is that very little has actually been accomplished other than the polarization of the LDP between reform proponents and those who resist.