How to buy a $20 billion global company for nothing

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

And as glorious as the knockdown price sounds in theory, it can still spoil an important element of the party.

Like all good tricks, this hitherto hypothetical $20 billion big free draw requires a bit of preparation. For starters, to be the lucky buyer, it needs to be Toyota Motor, the ultimate global automaker, the largest company in Japan, and the embodiment of the reality that while governance reform is happening fast, it certainly isn’t. happening everywhere.

And second, it must exist in a stock market that has, for decades, tolerated the obviously problematic phenomenon of “cross-holdings” of equity shares of publicly traded companies with each other. Traditionally seen as symbols of corporate friendship between companies, these holdings have acted as barriers against the most aggressive shareholders and have allowed poor management an ill-deserved cushion of complacency. It’s true that the networks have been falling apart in recent years under government and shareholder pressure, but some rather notable anomalies still exist.

Last week, a large audience of visiting fund managers who had gathered in Tokyo engaged in a thought experiment. Consider Toyota Industries, the world’s largest forklift manufacturer and a major global player in weaving machinery. He is also, through the magic of cross-shareholdings, the largest single private sector owner of Toyota Motor stock. Toyota Industries’ 7.31 percent stake in the parent company (whose share price has roughly doubled over the past decade) is currently worth $16.4 billion, or about 85 percent of the total value of Toyota Industries. Toyota Industries market.

But wait. Cross holdings. Toyota Motor, together with its wholly owned subsidiaries, owns approximately one-third of all the free float shares of Toyota Industries. Presto! The stage is set for the (theoretical) deal of a lifetime.

Toyota Motor could, in theory, make an all-stock offer for the two-thirds of Toyota Industries it doesn’t already own at a magnanimous 30 percent premium over the current market price. The Japanese government, in a hitherto rather unsuccessful mission to bring about industrial consolidation, has even tried to encourage this type of full-ownership agreement by wrapping them in capital gains tax protections.

If the hypothetical offer were to succeed, Toyota Motor would not only become the proud owner of Toyota Industries, but also $16.4 billion worth of Toyota shares held by its new acquisition that would only be used to pay for the deal. The acquisition (give or take some consulting 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 from high enter them. With geopolitics making China less easily investable for some funds, the Japanese market was easy to present as more ripe for global investment attention than it has been in a long time.

Even with the market at a 33-year high, visitors were told, there’s plenty of room for it to rise. Many Japanese companies are highly profitable, stable, and undervalued. The Tokyo Stock Exchange is putting pressure on companies to become more shareholder-friendly. Activists are making significant strides. Etc.

While all of this may be true, and even capable of sustaining a rally in the coming months, two very important factors remain missing. The first of these is that while the advent of inflation should theoretically encourage Japanese households to shift their assets from cash to stocks, that hasn’t even remotely started.

The second missing factor is a clear idea of ​​why the Japan market (where theoretical M&A opportunities abound) is not priced where a potential change of corporate control is reflected in share prices. Toyota Industries shares don’t trade as if Toyota Motor is ready to jump at the chance, because no one really thinks it will. Companies project no desire to participate in national consolidation, either as buyers or sellers, and the implication is party poop.

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

leo.lewis@ft.com