Let me say this at the outset. I am an advocate of M&A. I believe it is only natural to develop a business through M&A in order to buy time. In fact, I am involved in such work myself.
I also maintain that “buying neighboring land during a famine” is a standard theory of business expansion. A look through history should quickly show that this is obvious. Conversely, when companies with cash did not pursue acquisition strategies during past recessions, it made me wonder whether they understood management at all.
Nevertheless, something feels wrong about the current battle to acquire Nippon Broadcasting System.
This is not an issue of different cultures between internet companies and broadcast media. Recent reporting has focused on whether the stock acquisition rights issued by Nippon Broadcasting System to Fuji Television are illegal under the Commercial Code (*2), but there is a prior question that should be asked: was Livedoor’s method of purchasing the shares lawful?
The Financial Services Agency has indeed commented that it was “lawful.” However, most reports omit the premise behind that statement. The premise is this: “It was lawful if Livedoor did not exchange information in advance, directly or indirectly, with the seller and conduct a block trade using the market as the trading venue, but instead it is true that, entirely by chance, such a massive volume of shares was traded instantaneously at a time when there is ordinarily little trading—in other words, that the ‘miracle’ (in Mr. Horie’s words) actually occurred.”
Of course, “miracles” do not occur in the real world. The set of circumstances described above is almost empty. It is tantamount to saying, “It is lawful if 1 + 1 = 3 is correct.” Highlighting only the words “it is lawful” can only be described as the media’s favored “freedom to say anything at all” (Natsuhiko Yamamoto).
Unlike the media, an authority such as the Financial Services Agency is not permitted to make careless statements. Therefore, in the absence of evidence of an illegal transaction, it has no choice but to phrase its position as above. Yet, as the current proposed legal amendment makes clear, the agency is not endorsing the practice. Nippon Broadcasting System has filed a complaint, but an investigation presumably had already begun even without it. As with many cases of illicit stock trading, however, evidence will probably be difficult to uncover (*1).
My discomfort rests on this point. In the terms of an ordinary crime, the circumstantial evidence in this case is pitch-black. The suspect has no alibi. Yet there is no physical evidence whatsoever and no confession. That is why reporting that praises it by saying, “It was a legitimate act; without this, things will never change,” makes me extremely uncomfortable.
I believe Mr. Horie should have made a proper TOB. He probably could have acquired almost the same number of shares that way. It is regrettable. In any event, it is reasonable to assume that Livedoor is in a fairly difficult position (*3).
Postscript: (3/7 14:45)
(*1) Regarding the circumstances surrounding this matter, Mr. Horie’s remarks at a press conference at the Foreign Correspondents’ Club are described in Isologue, which readers may also wish to consult. Essentially, his remarks could reasonably be taken to indicate that there had been prior discussions about the transaction with Southeastern.
(*2) The illegality of the stock acquisition rights: I agree that this is a delicate question. Based on past precedents, an injunction would probably be granted. However, was Fuji’s objective from the outset perhaps not to issue new shares, but to force Livedoor to disgorge funds in the form of a security deposit? (See Yashichi) It was also said from the beginning that if a provisional injunction were issued, Livedoor would no longer be able to allocate new shares for the purpose of gaining management control. In other words, it seems intended to constrain Livedoor in two ways.
(*3) Fundamentally, it seems unlikely that Livedoor will be able to influence Fuji Television’s management in either case. The Fuji/Nippon Broadcasting side has any number of options, such as finding a white knight or buying back its own shares.
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3/14 Postscript:
The security deposit considered in (*2) was surprisingly inexpensive at ¥500 million.
Regarding the illegality of Livedoor’s off-hours transaction, I think the argument by a Waseda professor in the Nikkei article dated the 12th hits the mark. It is quoted in the Yunen Theory.