Activist investors in Japan: Governance gambit

The beginning of the end of Kuroda Electric arguably came in June 2017 when shareholders with ties to activist investor Yoshiaki Murakami overcame internal opposition to get their nominee a seat on the board. Six months after this exhibition of strength – as well as repeated calls for share buybacks and the exploration of M&A opportunities – the Japanese electronic components manufacturer had been sold to MBK Partners.

This was the second time MBK had completed a tender offer for a Japanese firm by acquiring shares from Reno, Aya Nomura (Murakami's daughter), and Office Support Corporation, following the acquisition of Accordia Golf in 2016. It also continued a trend mounting shareholder activism in the country, a phenomenon that has inconvenienced private equity investors as well as present them with opportunities.

Kuroda had managed to resist Murakami once before. In 2015, the activist investor made Kuroda his highest-profile target since returning to the industry following a conviction for insider trading. Murakami's proposal to appoint himself and three associates as outside directors, return all profits to shareholders over the next three years, and pursue M&A was voted down. The company wasn't as fortunate next time around, but then declining sales and flat profit can't have helped.

There were 27 shareholder activism campaigns in Japan last year, according to SharkRepellent and Activist Insight. This compares to 19 in 2016 and a paltry three in 2012. Increased focus on corporate governance has clearly helped in this respect. 

In recent years, the stewardship code has been enacted, outlining the responsibilities of institutional investors; the JPX-Nikkei Index 400 has been launched, which assesses candidates based on criteria such as return on equity, the use of independent directors, and transparent reporting; and the corporate governance code has come into force, with a view to better aligning the interests of corporate parents and public shareholders. In short, there are more ways to hold corporate Japan accountable.

Private equity investors recognize the opportunity this creates. Multiple GPs say they receive regular approaches from companies – either directly or through financial advisors – that are under attack and need financial support or wise counsel. Private equity can provide a solution by acquiring non-core assets from the targeted company, taking it private, or even partnering on a growth strategy. Whether it is through dividend payments, share sales, or stock price increases, the shareholders get their payoff.

Murakami made his name in the early 2000s when activist shareholders were more abrasive. Now they are dialing down the hostility, using the allowances made under the governance reforms to present their demands in a more reasoned way. "What they are asking for hasn't changed so much, but they are trying to be more modest," says one local GP. "They aren't going for proxy fights but approaching management for discussions and making requests for increased dividends. It's a step-by-step approach."

Activism may therefore generate more deal flow for private equity but exploiting perceived public market weakness works both ways. Tender offers for advertising agency Asatsu-DK and high-tech manufacturer Hitachi Koksuai Electric – by Bain Capital Private Equity and KKR, respectively – were both targeted by activist investors who claimed the price was too low. 

In the case of Hitachi Kokusai, KKR had to pull its bid as the shares soared past the offer price and a third-party committee warned that the terms could be disadvantageous to minority shareholders. The GP then sweetened the deal twice, partly in response to opposition from Elliott Management among others. It eventually paid a 30% premium to what was originally offered. 

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• Topics
• North Asia
• Buyouts
• Japan
• MBK Partners
• KKR
• Bain Capital Asia