https://www.wsj.com/articles/SB916864391106450500　

Jan. 21, 1999 12:01 am ET

By Nicholas Benes, president of Japan Transaction Partners, an investment bank specializing in merger and acquisition advisory services.

In recent weeks, a growing number of pundits and investment gurus have been chanting the same mantra, “Japan is bottoming out.” The stock market has hit rock bottom, they say, and will soon begin a long and prosperous climb toward pre-bubble levels. The economy is poised for near-term recovery, they enthuse, and most large Japanese corporations will be driven to “do the right thing” soon. If only it were so.

As the president of an investment bank that specializes in merger and acquisition advisory services in Japan, I regret to report that the ossified thinking of Japan, Inc. continues to prevent the rational decision-making that is needed to boost the stock values of Japan’s struggling companies. The following fictional but highly typical story is dedicated to all those who believe otherwise:

Stuck in traffic at 7:30 a.m. in his chauffeured car, Hiroshi Murakami puts down his Nikkei newspaper and closes his eyes. At 52, he is one of the youngest board members at Takashima Sangyo and the head of the finance department. His company is just like many other well-known listed Japanese firms in the late 1990s. It is confronted by deregulation, global competition, the credit crunch and recession.

He takes a deep breath and reflects on his career and its increasing stress. Just over a year ago he began wondering whether Takashima would survive with anything like its former prestige. Today, he’s wondering what to do about an offer by a foreign company to acquire Takashima. The offer was proffered just yesterday.

Mr. Murakami joined Takashima fresh out of Tokyo University. He climbed the corporate ladder rung by rung, learning early to keep his mouth shut and stay away from contentious topics. He understood that the key to getting promoted was to avoid taking career risks; to never suggest anything new and different unless you already knew it would be supported by top management. Outwardly, he was a perfect “Takashima man.”

But inwardly, he hated it. An excellent English speaker, he was sent to the Stanford Business School early in his career, and learned about an entirely new world involving net present value, IPOs, takeovers, mergers, and stock options, most of which did not exist in Japan. Upon his return to Tokyo, however, Mr. Murakami reverted to the Basic Corporate Rule, and stifled his more creative ambitions. His boss assigned him to Takashima’s prestigious finance department, where he steadily rose through the ranks. In 1991, the year after the bubble burst, he was appointed to the board of directors.

He soon discovered that Takashima was in much worse shape than he had ever imagined. Revenues and profitability were shrinking, significant unrealized losses had built up on the stock portfolio, bad-debt losses were mounting, and the banks were reticent to make new loans. The finance department drew up budget cuts and restructuring plans.

But every unit was accustomed to a constantly growing budget and the rhetoric that Takashima “invested in the future” to maintain market share. Besides, wasn’t economic recovery just around the corner? Mr. Murakami was caught in the middle of all the painful corporate politics that ensued–negotiating budget cutbacks, “voluntary retirement” programs, and layoffs (often disguised as ostracism or transfer to affiliates).

The board took forever to make tough decisions, and then would pare them back or delay them to save face and avoid painful announcements. Mr. Murakami repeatedly reminded top management that this would just bloat Takashima’s future problems. But if the measures were too major, the president would have to “take responsibility” and step down. This acted as a natural brake to making too much progress at once, and dampened Mr. Murakami’s willingness to push the point any further.

He thought about the future of Takashima from the perspective of his younger subordinates. The company could not honor its promise of lifetime employment to all of them. Foreign competitors were becoming more active in the Japanese market, which had just been deregulated. Many of them were piling in with superior products and know-how honed in more competitive markets. They did not carry Takashima’s excess baggage–overemployment, overcapacity and low profitability. If any of Takashima’s domestic competitors went bankrupt, these foreign firms would be the logical (or even the sole) buyers, and might suddenly emerge with better positioning and a major market share. But it wasn’t as if you could say that too openly or loudly. It wouldn’t sound supportive of the common cause. It would sound defeatist.

Mr. Murakami knew well that Takashima’s entire market was in metamorphosis, and that the company required major surgery. It was not at all clear that Takashima could restructure itself far enough or fast enough to keep up with all the changes. Certainly not at the rate they were going, a fact which the rating agencies and more perceptive stock analysts pointed out. Takashima’s credit rating had been downgraded several notches in the past few years, raising its financing costs.

Foreign stock ownership had crept up since the bubble, rising from 8% to 18%, led mainly by “value investors” whose calculations showed that Takashima’s stock was trading at 20% less than the company’s net liquidation value. During the same period, Japanese institutions quietly began selling Takashima’s stock, paring back their holdings from 28% to 20% at an increasing rate of dribble-out. While this was not cause for immediate alarm, the writing was on the wall–the company would start to be a feasible takeover target in three to four years, if it didn’t go under before that. Its protective circle of wagons was disbanding.

Recently, several shareholder derivative suits were launched at Takashima. Mr. Murakami wondered when these litigious domestic players would hook up with the foreign “value investors” and work in unison. When the topic came up at a recent board meeting, he mentioned that logically, the only thing to do was to raise the stock price. But he couldn’t follow up with his true thoughts–that this would require drastic cutbacks, asset disposals, and divestment of non-core groups and affiliates. To do so would see him branded a renegade. Other directors would jump on him and ask, “What exactly are you proposing? What do we sell first? Is there a specific offer from anyone? You know full well that we can’t look for buyers ourselves. We can’t let the world know that we are throwing in the towel on those divisions. People would think that Takashima is going bankrupt!”

In short, they would make him seem disloyal. He might just as well ask for the resignations of the directors in charge. So, no further discussion. Just a slightly bigger investor-relations budget, which accomplished nothing.

Deep down, he knew that the stock market was right. The low share price reflected the market’s consensus that Takashima’s management would likely squander its present asset strength through slow and insufficient action. The market knew that in terms of managerial decision-making, Takashima was still trying to swim with its clothes on, praying for the market to change.

The board members were all smart men, so they could easily comprehend the inescapable forces closing in on Takashima. But their clannish system was just not capable of making the necessary big changes quickly. To do so would upset the internal consensus, and would require the resignation of certain directors. These unlucky men would lose not only their reputations and future posts as “advisors,” and possibly also their retirement bonuses, but also the most important “brass ring” of all: the next few wonderful years of life as a pampered director.

They all had slaved their entire lives to enjoy these posts, even if they were underpaid. And precisely because they were underpaid, they needed the next few years of income to support their families and prepare for comfortable retirement. Only an idiot would ever endanger the status quo, until either paid or forced to do so. It was unthinkable–far better to support each other in retaining their positions. Things were not at the point requiring “surrender” yet.

Yesterday, an investment bank had approached him with a proposal. It represented one of Takashima’s largest foreign competitors, which wanted to buy 51% of the company. The strategic fit was excellent and huge shareholder value would be created on both sides. Mr. Murakami asked if they had spoken to anyone else at Takashima; they had not. He told them in a hushed tone that the president’s answer would almost certainly be “no” if they had to have “control” (51% or more). That was obvious in Japan, because the president wouldn’t want to be blamed by other board members for forsaking the company when there was still a remote chance that it could survive on its own.

But the foreign company had given its advisors clear instructions to end the discussion unless “control” clearly was available. The bankers even seemed to think that if the price was high enough, this might help convince the president. To Mr. Murakami, this was ridiculous. They were missing the point entirely.

As the car pulls into the parking lot at headquarters, Mr. Murakami muses that if the investment bank had just been allowed to engage in a dialogue with the president about some less threatening level of investment, such as 25%, over time the president might be able to soften up the more resistant directors. The president might be unused to such discussions, but he probably wanted to do the right thing for Takashima. But Mr. Murakami could not go on record suggesting this, and of course there were no guarantees it would work. Moreover, his Stanford training told him that the Americans would never accept an outcome that did not leave them with control. And rightly so. Without it, they could not be certain of forcing through some of the more drastic and rapid changes that were needed to save the company.

By the time he reaches his office, Mr. Murakami has decided that there is simply no career upside in trying to push the merger through internally. Even if it might be the best way to assure the survival of Takashima, it is a hot potato. He will tell the president about the offer, but only in private, saying he “basically” turned them down.

“Together, we will let the proposal die,” thinks Mr. Murakami. “Better not to tell the rest of the board. To do that would look like we were proposing it. Better and safer to hope that Takashima can survive on its own for a few more years–or at least until I can retire.”

–From The Asian Wall Street Journal