How to buy a global $20bn company for nothing

Japan, declares tourist after tourist, investor after investor, is red hot. The yen is tumbling, the shopping is amazing, the stock market is flying, the sushi is cheap. It is also, perhaps, the only place in the world right now where you can buy a globally successful $20bn company for free.

And glorious though that notionally knockdown pricing sounds, it may yet spoil an important element of the party.

Like all good tricks, this so-far-hypothetical $20bn great gratis grab takes a bit of setting-up. For a start, to be the lucky buyer you have to be Toyota Motor — global carmaker supreme, Japan’s biggest company and embodiment of the reality that, while governance reform is happening apace, it is certainly not happening everywhere.

And second, you need to exist in a stock market that has, for decades, tolerated the self-evidently problematic phenomenon of listed companies’ “cross-holdings” of equity stakes in one another. Traditionally held as symbols of business friendship between companies, these stakes have acted as barriers against pushier shareholders and allowed poor management an ill-deserved cushion of complacency. True, the networks have been unwinding in recent years under government and shareholder pressure, but some pretty remarkable anomalies still exist.

Last week a large audience of visiting fund managers who had gathered in Tokyo took part in a thought experiment. Consider Toyota Industries — the world’s biggest manufacturer of forklift trucks and a major global player in weaving machinery. It is also, via the magic of cross-holdings, the single largest private sector owner of Toyota Motor shares. Toyota Industries’ 7.31 per cent stake in the parent (whose stock price has roughly doubled over the past decade) is currently worth $16.4bn, or roughly 85 per cent of the total market value of Toyota Industries.

But wait. Cross-holdings. Toyota Motor, in concert with its wholly owned subsidiaries, holds roughly a third of all the free-float shares in Toyota Industries. Presto! The stage is set for the (notional) deal of a lifetime. 

Toyota Motor could, in theory, make an all-share offer for the two-thirds of Toyota Industries it doesn’t already own at a magnanimous 30 per cent premium to the current market price. The Japanese government, on a hitherto fairly fruitless mission to provoke industrial consolidation, has even tried to encourage this sort of all-share deal by wrapping them in protections from capital gains tax. 

Were the hypothetical bid successful, Toyota Motor would not only become the proud owner of Toyota Industries, but also of $16.4bn worth of Toyota shares held by its new acquisition and just used to pay for the deal. The takeover (give or take some advisory fees) would have cost Toyota Motor precisely nothing.

The timing of this thought experiment was important — many of the fund managers were in Japan for the first time since 2019. There are several new “Buy Japan” narratives that have emerged in the interim, the return of inflation after a long absence high among them. With geopolitics making China less readily investable to some funds, the Japanese market was easy to present as more ripe for global investment attention than it has been in a very long time.

Even with the market at a 33-year high, the visitors were told, there is plenty of room for it to go higher. Many Japanese companies are highly profitable, stable and undervalued. The Tokyo Exchange is prodding companies to be more shareholder friendly. Activists are making significant inroads. And so on.

While all this may be true — and even capable of sustaining a rally for months to come — two very important factors remain absent. The first of these is that, while the advent of inflation should theoretically encourage Japanese households to move their assets from cash to equities, that has not remotely begun.

The second factor missing is a clear sense of why Japan’s market (where theoretical M&A opportunities abound) is not priced as one where a potential change of corporate control is reflected in share prices. Toyota Industries shares do not trade as if Toyota Motor is poised to take advantage of the opportunity, because nobody really thinks it will. Companies do not project any eagerness to engage in domestic consolidation either as buyers or sellers, and the implication is party-pooping.

Stock markets can still rise without being permanently frenetic arenas for takeovers, but they require at least a sense that they might be when obviously good deals arise. Investors, after a week of otherwise good news, will not have left with that.

leo.lewis@ft.com