Japanese mergers prove to be ineffective
By Desmond Hutton
Bloomberg News Service
TOKYO — Nobuaki Murayama needn't look far to see why Mizuho Financial Group Inc. and other products of Japanese mergers haven't reduced jobs or boosted profit.
"There are seven Mizuho branches within 300 meters (984 feet) of our office," said Murayama, a money manager at Cigna International Investment Advisors Co., who works 10 minutes from Japan's Imperial Palace. "They haven't done anything about restructuring."
More than a year after three Japanese banks linked to create the world's largest lender by assets, Mizuho said in January that its loss would be almost nine times bigger than previously forecast. It's one of dozens of mergers or acquisitions that haven't produced the job and cost cuts executives predicted.
"In Japan there's a greater comfort level with the 'M' rather than the 'A,' " said Steven Thomas, managing director of mergers and acquisitions at UBS Warburg (Japan) Ltd. "A merger of equals is not always the way to cut costs and dispose of assets."
Another example is Japan Airlines System Corp., which hasn't fired any of its 52,000 workers since the nation's biggest and third-biggest carriers joined in October. Japan Airlines System shares are down almost a quarter since the merger, while the Nikkei 225 Stock Average is down 15 percent.
Battered by rising bad loans, shares of Mizuho's predecessor, Mizuho Holdings Inc., lost 60 percent of their value from when they began trading in September until the group was renamed in March. Mizuho Financial Group shares have fallen 8.7 percent since they started trading on March 13. The $16 billion loss Mizuho forecasts is the largest ever for a Japanese company.
Other companies will probably merge or sell off unprofitable businesses this year as banks, laden with more than $440 billion of bad debt, respond to government pressure to crack down on deadbeat loans, UBS's Thomas said.
More Japanese mergers — their numbers rose 62 percent to 451 in 2002 while dropping by half in value to $39.3 billion — may prove a boon for investment banks seeking new business amid a global slowdown. Yet the world's second-largest economy may still slip into its fourth recession in 12 years, economists say.
Like Mizuho, Japanese companies that plan to merge often end up creating holding companies that encompass both earlier bodies.
Some "merged" companies preserve individual structures, a face-saving solution to potential job losses in a country where lifetime employment has long been the norm. Pilots at Japan Air System Co., for example, have said they have no plans to throw their lot in with colleagues at Japan Airlines Co.
Outright acquisitions by foreign companies such as Renault SA's purchase of a stake in Nissan Motor Co. in 1999 have been more successful, investors said. Overseas companies often draw up cost-cutting plans while the merger is still under negotiation.
"One reason mergers don't work as well as in the U.S. is you can't achieve cost savings easily by merging two organizations and firing a lot of people," said Jun Makihara, a former Goldman Sachs Group Inc. partner who now runs Neoteny, a Tokyo venture-capital company. "Foreigners are also viewed as willing to make quicker and tougher decisions with respect to costs."
Japanese merged companies often retain their individual corporate cultures long after the unions are completed. Take Nippon Steel Corp., created through a merger between Yawata Steel and Fuji Steel in 1970. More than three decades later, the company still rotates the presidency every four or five years between executives from Yawata and Fuji.
Japan Airlines System, which is seeking more time to repay debt accumulated in the merger, says it plans to reduce its workforce — but only by hiring fewer people than it loses to retirement. That will bring down employee numbers by less than 6 percent during the next two years.
"Putting mergers together in Japan, where in most cases they're mergers of the weak, creates weaknesses higher up the tree," said David Roche, former global strategist at Morgan Stanley who is now chief executive of London-based Independent Strategy. "What the Americans do when they merge, theoretically, is they get out the surgeon's knife. Japan mergers create weaknesses to the power of two."
Nissan is one example of an acquisition that paid off for investors. Under Chief Executive Officer Carlos Ghosn, the company sacked 21,000 workers, 14 percent of its staff, four months after Renault SA bought a 36.8 percent stake in June 1999, a stake it has since raised to 44 percent. Then it completed its staff reductions a year ahead of schedule. The carmaker also reduced production capacity by a quarter.
Nissan expects a third straight record profit in the year ended March 31, 2003 and was 2002's best-performing auto stock. In February, Standard & Poor's raised Nissan's credit rating one level to BBB, two levels above noninvestment grade.
"If you're inside the company, sometimes it's difficult to see things in an objective way," said Edwin Merner, president of Atlantis Investment Research Corp. which manages $600 million. "Nissan is partly an example of that. It took an outsider that they didn't know but at least felt neutral about."
