By Maki Shiraki, Daniel Leussink, David Dolan and Anton Bridge
TOKYO, Jan 29 (Reuters) – Toyota’s plan to take an affiliate private looked unremarkable at first. Instead, the bid for Toyota Industries, or TICO, ignited a battle between activist investors demanding top dollar and a Japanese corporate culture that prizes stakeholder harmony over shareholder returns.
This month, Toyota sweetened its bid by 15% to around $27.8 billion but failed to quell the uprising. Elliott Investment Management said the revised 18,800 yen-a-share offer undervalued TICO by almost 40% — and potentially much more as a standalone entity.
The U.S.-based activist fund, which holds 6.7% of TICO, has attacked the bid as opaque and said it falls short of basic governance standards. Since Toyota announced its initial 16,300 yen-a-share offer in June, Elliott has led the charge for a higher price.
The standoff pits Paul Singer’s fund, known for extracting big paydays from Argentina and Peru, against the world’s largest automaker and its chairman, Akio Toyoda. The 69-year-old grandson of Toyota’s founder has a personal stake in the outcome: He’s investing about $6.5 million to boost his TICO holding from 0.05% to 0.5% and tighten his grip on the maker of forklifts, engines and RAV4 SUVs.
The pushback threatens to upend Toyota’s plans to revamp a key affiliate. Elliott has urged investors not to take the offer price, arguing TICO would be worth more independent — a gambit that could force Toyota to pay significantly more or kill the deal outright.
This account of how a routine buyout turned into a corporate battle is based on regulatory filings and interviews with more than two dozen people, including investors and Toyota group executives. It shows how the transaction has become a test case for dealmaking in Japan — and whether the principle of “sanpo yoshi,” which prizes benefits to all stakeholders and society, can withstand pressure from shareholder activists.
“Over the years, Toyota has tended to annoy investors because it doesn’t really care about shareholders,” said Stephen Codrington, CEO of research firm Codrington Japan.
Toyota rejects that view. A representative said the group sees shareholders as important and their support as critical to growth. In an interview with Reuters just before the bid was raised, Masahiro Yamamoto, the automaker’s chief risk officer, said it was incorrect to portray talks with shareholders as confrontational.
A representative for Toyota Fudosan, the real-estate unit leading the buyout, this week defended the offer, saying it reflected TICO’s intrinsic value and represented a premium to historic market prices.
A TICO representative said it had taken steps to ensure the bid was transparent, including consulting outside directors and independent firms, and received three fairness opinions.
An Elliott spokesperson declined to comment in response to written questions from Reuters.
‘HE WHO SPEAKS THE LOUDEST WINS’
Founded in 1926 as Toyoda Automatic Loom Works, TICO later added an automobile division, spun off as Toyota Motor in 1937. Toyota says it wants to take TICO private to remove the burden of short-term profit targets as the group pivots to connected cars and advanced software.
After the deal was announced, TICO shares settled near the offer price, signaling confidence Toyota would succeed.
But overseas investors, alarmed by what they saw as opaque financial disclosure and shoddy treatment of minority shareholders, complained to the Tokyo Stock Exchange (TSE) over the summer that the transaction went against its drive to improve governance, two people briefed on the matter said.
The TSE had never experienced such “fury” from investors, said one of the people. The exchange declined to comment on the complaints, which haven’t been previously reported.
In September, TICO shares began to tick higher as investors bet Toyota would bump the price. That conviction deepened when Elliott disclosed its stake in November.
Still, Toyota executives gave no sign of budging.
Following investor complaints, Kenta Kon, a director at Toyota Fudosan, told other executives that raising the price to appease some shareholders would create a dangerous precedent, according to two people. Kon contended that such a move would amount to “He who speaks the loudest wins,” these people said, unfairly rewarding some stakeholders because they created a fuss.
In an interview, Kon, who is also the automaker’s chief financial officer, told Reuters he didn’t recall using that expression. The group had been “careful to ensure that we do not prioritize anyone unfairly,” he said.
As TICO’s shares kept rising, a buoyant market also lifted the value of its cross-shareholdings in other Toyota companies, which investors said made the offer price look less attractive.
“They’ve tried to buy Toyota Industries on the cheap, and now they have to face a bull market in the cross-shareholdings that Toyota Industries holds,” said Hugh Sloane, co-founder of Sloane Robinson Investment Management in London, who holds shares in TICO. He doesn’t plan to tender his shares, he said.
In mid-December, TICO executives wrote to Toyota Fudosan urging it to increase the offer, citing the rising share price, a regulatory filing showed.
Toyota Fudosan eventually settled on 18,800 yen, which TICO accepted as final, according to the filing. TICO shares closed at 19,585 yen on Wednesday.
GOVERNANCE OVERHAUL
Another rationale for the TICO deal is to unwind its holdings in other Toyota companies and better align the group with TSE governance changes intended to improve shareholder value. Yet the backlash has eclipsed previous governance complaints against Toyota.
In August, the Asian Corporate Governance Association advocacy group raised concerns about the buyout in a letter to TICO and Toyota signed by some two dozen investors. They cited inadequate financial disclosure and said Toyota group companies shouldn’t be classified as minority shareholders, as that lowers the voting threshold Toyota would need to clinch the deal.
The Toyota Fudosan representative said the group companies were independent, listed firms that made their own decisions. TICO released more financial details this month.
Not everyone views Japan’s efforts to prioritize shareholders as entirely positive. Japan risks having its manufacturing prowess eroded by U.S.-style “short-termism and financialization” where quarterly earnings take precedence over long-term investment, said Ulrike Schaede, a professor of Japanese business at University of California San Diego.
One executive at a Toyota group company said those complaining about price were chasing quick returns, at odds with the longer-term view typically taken by Japanese companies.
A person familiar with Elliott’s thinking said the fund had approached the deal with a focus on corporate value and that had resonated with other investors.
The Toyota representative said the group recognizes investors may have different investment horizons.
Inside the Toyota group, there is a “sense of concern” about Elliott, one person said, adding the automaker hadn’t expected the fund to start raising its stake last month.
Elliott has been a shareholder in TICO for more than a year, two people said. It first confirmed a 3.3% holding in November, which it has since doubled.
In a filing that month, the activist fund flagged that it could increase its stake to 20% or more.
(Reporting by Maki Shiraki, Daniel Leussink, David Dolan and Anton Bridge; Additional reporting by Miho Uranaka, Sam Nussey and Makiko Yamazaki; Editing by David Crawshaw.)
