Japan is red hot announcing tourist after tourist, investor after investor. The yen is plummeting, shopping is great, the stock market is skyrocketing, and sushi is cheap. It’s also, perhaps, the only place in the world right now where you can buy a globally successful $20 billion company for free.
As glorious as the nominal price cut sounds, it could spoil an important element of the party.
Like all good tricks, this so far hypothetical $20 billion free bonanza requires some preparation. First, to be a lucky buyer you have to be Toyota Motor Corporation – the global automaker supremacy, Japan’s largest corporation, and embodying the reality that while governance reforms are apace, they’re certainly not everywhere conduct.
Second, you need to survive in a stock market that for decades has tolerated the unspoken problematic phenomenon of public companies “cross-holding” each other’s stakes. Traditionally seen as a token of business friendship between companies, the stakes have become a roadblock against pushy shareholders and a well-deserved buffer of complacency for bad management. Granted, these networks have been unwinding in recent years under government and shareholder pressure, but some very notable anomalies remain.
Last week, a throng of visiting fund managers gathered in Tokyo took part in a thought experiment. Take Toyota Industries, for example, the world’s largest manufacturer of forklift trucks and a major player in the global loom industry. Through the magic of cross-shareholdings, it’s also the largest single private-sector owner of a stake in Toyota. Toyota Industries’ 7.31% stake in the parent company (whose shares have roughly doubled in the past decade) is now worth $16.4 billion, or about 85% of Toyota Industries’ total market capitalization.
But wait. cross-shareholding. Toyota Motor and its wholly-owned subsidiaries hold approximately one-third of the free float shares of Toyota Industries. urgent! The stage is set for the (notional) deal of a lifetime.
In theory, Toyota could buy the two-thirds of Toyota Industries it doesn’t already own at a premium of 30% above current market prices. The Japanese government has so far been fruitless in its task of promoting industrial consolidation, even trying to encourage such all-stock deals by bringing them under capital gains tax protection.
If the hypothetical takeover is successful, Toyota would not only be the proud owner of Toyota Industries, but would also own $16.4 billion worth of Toyota stock from its newly acquired holdings, which would only be used to cover transaction costs. The acquisition (give or take some consulting fees) won’t cost Toyota anything.
The timing of this thought experiment is important – many fund managers are in Japan for the first time since 2019. Several new “buy Japan” narratives emerged during this period, with inflation returning to them after a long absence from highs. With geopolitics making some funds less willing to invest in China, the Japanese market could easily appear to be a better fit for global investment attention than it has been for a long time.
Visitors are told that even with the market at a 33-year high, it still has plenty of room to rise. Many Japanese companies are highly profitable, stable and undervalued. The Tokyo Stock Exchange is urging companies to be more shareholder-friendly. Activists are making major inroads. etc.
While this may all be true — and even be able to sustain gains over the next few months — two very important factors are still missing. The first is that while the onset of inflation should in theory encourage Japanese households to shift assets from cash to stocks, this is far from the start.
The second factor missing is a clear understanding of why the Japanese market, where M&A opportunities theoretically abound, is not priced in as a market where potential changes in corporate control are reflected in share prices. Toyota Industries stock isn’t trading like Toyota Motor is poised to take advantage of this opportunity, because no one really thinks it will. Companies have not shown any desire to participate in domestic consolidation as buyers or sellers, suggesting party poo.
Stock markets can still rise, but they won’t always be a frenzied place for buyouts, but they need at least a sense that obviously good deals are likely to appear when they do. After a week of good news, investors aren’t going to let it go.
leo.lewis@ft.com