Toshiba tussle shows Japan is on the brink of big changes
Judged solely by the big three indicators, Japan’s asset markets are on track to finish 2019 like a salaryman’s haircut: unremarkable, unruffled and untroubled by changing times.
The yen did not move much against the dollar this year, while 10-year Japanese government bond yields staged just a few modest wobbles. The Topix, meanwhile — up 17 per cent since January — settled for mid-table mediocrity among the big global equity benchmarks.
Viewed through the prism of less obvious indicators, however, 2019 looks iconoclastic: a boundary-testing, transitional year that has set things up for even more of an adventure in 2020.
The first of these indicators is drawn from a Nikkei Quick survey, which measures senior executives’ perceptions of whether their companies’ shares are overvalued or undervalued. This index spent most of the year pointing to a possible shift in the way that Japan’s chief executives view the purpose and power of their stock. During 2019, the percentage of companies that judged their shares to be undervalued hit a high of 67 per cent — the highest level since the start of “Abenomics,” the prime minister’s signature reform programme, in 2013.
Many investors will doubt that this means that meaningful change is afoot. Despite activists’ demands that executives take more of their pay in stock, so that their interests are more closely aligned with investors’, that is not going to happen widely or soon. Nor are we close to a radical shift in governance where Japanese boards suddenly bump shareholder interests above those of other stakeholders such as customers, banks or employees.
All the same, more company executives appear to be acting on the belief that their stocks are trading too cheaply. Corporations went on a ¥7.2tn ($66bn) share-buyback spree between January and the end of November, far outpacing previous years. This has been widely cited as an example of companies putting idle cash to work and a result of the behind-the-scenes victories of activists.
It feels like a vital cog has fallen into place, directly linking companies’ sense of undervaluation to corporate action. For now, that means share repurchases, but more daring actions also beckon.
These could involve a sharp increase in Japanese companies buying in or selling off their various listed and unlisted subsidiaries. Regardless of what pressure they may feel from the governance code or from any activists on their shareholder register, executives will take the plunge for three reasons: if the valuation of the target looks cheap; if they think they can make a big profit from a sale; and if they have been persuaded that their own valuations will rise when their companies become more streamlined and easier for investors to understand.
Hitachi has led the way on these sell-offs and buy-ins, but other sprawling conglomerates are following suit.
Take the case of Oi Electric, a maker of communication equipment. Since the beginning of December its share price has more than doubled, after months of moribund trading and in the absence of major positive announcements. One explanation is that investors are betting that the Yokohama-based company’s largest shareholder, Mitsubishi Electric, will be the next big conglomerate to start the subsidiary clean-up process, and that Oi is already in play.
This leads us to the third and perhaps most important indicator: last week’s bid by optical glass specialist Hoya for microchip equipment maker NuFlare — a listed Toshiba subsidiary for which Toshiba had itself made an agreed offer last month, as part of a big reorganisational effort.
Some have characterised Hoya’s $1.4bn counterbid, which is ¥1,000-per-share higher than Toshiba’s ¥11,900, as “hostile” — though not NuFlare itself, which has said it will tell the market what it thinks of the offer after analysing it.
But the unsolicited nature of the bid is the main thing. Brokers who have spent years pitching Japanese “value” stocks have been longing for such offers to become more common, and sense that their dream has finally come true. Hostile bids remain rare in Japan, but have happened several times in 2019 and feel particularly groundbreaking for having come from Japanese contestants. (Hoya, in fact, is a friendly co-shareholder with Toshiba in Kioxia, the former Toshiba Memory.)
If NuFlare decides to reject Hoya’s bid, it must explain to shareholders why it has recommended a much lower offer, and must do so in an era where Japanese management teams know they can get away with much less at their annual general shareholder meetings. In the meantime, Hoya’s approach forces Toshiba and others to show that they cannot buy out — or sell off — their subsidiaries on the cheap.
Much more of this, and the salaryman stock market could be left well behind.