Mergers in Japan neglect the hard part: cost cuts

  • Business
  • Saturday, 05 Apr 2003



TOKYO: Nobuaki Murayama need not look far to see why Mizuho Financial Group Inc and other products of Japanese mergers have not reduced jobs or raised profit. 

“There are seven Mizuho branches within 300 metres of our office,” says Murayama, a money manager at Cigna International Investment Advisors Co who works 10 minutes from the Imperial Palace.  

“They haven't done anything about restructuring.” 

Mizuho was formed more than a year ago from the merger of Fuji Bank Ltd, Dai-Ichi Kangyo Ltd and Industrial Bank of Japan Ltd, a deal that created the world's largest lender by assets.  

Another example is JAL, which ahs not fired any of its 52,000 workers since the country's biggest and third-biggest carriers joined in October.

Mizuho said in January that its loss would be almost nine times bigger than previously forecast. 

“In Japan there's a greater comfort level with the 'M' rather than the 'A,'“ says Steven Thomas, managing director of mergers and acquisitions at UBS Warburg (Japan) Ltd.  

“A merger of equals is not always the way to cut costs and dispose of assets.” 

Another example is Japan Airlines System Corp, which has not fired any of its 52,000 workers since the country's biggest and third-biggest carriers joined in October.  

Battered by rising bad loans, shares of Mizuho's predecessor, Mizuho Holdings Inc, slid 87 per cent from the time they began trading in September 2000 until they were de-listed in March.  

Shares of Mizuho Financial Group, which took their place on March 12, are down 16 per cent from their trading debut. The US$16 billion loss Mizuho forecast is the largest ever for a Japanese company. 

Like Mizuho, Japanese companies that plan to merge often end up creating holding companies that encompass both earlier bodies. 

Some “merged” companies preserve individual structures, a face-saving solution to potential job losses in a country where lifetime employment has long been the norm. Pilots at Japan Air System Co, for example, have said they have no plans to throw their lot in with colleagues at Japan Airlines Co. 

Outright acquisitions by foreign companies such as Renault SA's purchase of a stake in Nissan Motor Co in 1999 have been more successful, investors say. Overseas companies often draw up cost-cutting plans while the merger is still under negotiation. 

“One reason mergers don't work as well as in the Uinted States is you can't achieve cost savings easily by merging two organisations and firing a lot of people,” says Jun Makihara, a former Goldman Sachs Group Inc partner who now runs Neoteny, a Tokyo-based venture capital company. “Foreigners are also viewed as willing to make quicker and tougher decisions with respect to costs.” 

Merged Japanese companies often retain their individual corporate cultures long after the unions are completed.  

Take Nippon Steel Corp, created through the 1970 merger of Yawata Steel and Fuji Steel.  

More than three decades later, the company still rotates the presidency every four or five years between executives from Yawata and Fuji. 

In the days after the merger that created Japan Airlines System last year, executives handed out name cards with their old company logos covered with sticky decals.  

Flight attendants still wore uniforms with their own carrier's logo alongside the holding company's a year after the merger was announced. 

The new carrier dropped the flying crane that has emblazoned the tail of Japan Airlines planes since 1956. Yet a spokesman, Geoff Tudor, says it would take as long as six years to repaint more than 270 aircraft. 

As Japan hovers on the brink of another recession, unnecessary workers are the last thing companies need. Productivity is at 69 per cent of US levels, says Frank Packer, an economist at Nikko Salomon Smith Barney Ltd. 

The three banks that joined to form Mizuho said in August 1999 that they expected to cut 6,000 employees, or about 17 per cent of their combined payroll of 34,818, during the first five years. 

A Mizuho spokesman says the number of full-time workers at the three main banking units – Mizuho Financial Group Inc, Mizuho Bank Ltd and Mizuho Corporate Bank Ltd - fell to 29,840 last September from a combined total of 34,818 when the merger was announced in August 1999. That figure will fall to 24,000 by March 2005, he says. 

But for the company as a whole, the number of workers – including overseas employees and those at subsidiaries – rose to 50,151 as of Sept 30, 2002 from 45,972 on March 31 of the same year, according to the company's filings to the government. 

The spokesman declined to comment on the number of branches that Murayama noted around his central Tokyo office, and would not say whether any were slated to be closed. 

Mizuho, which had a combined 645 branches across Japan in March 1999, said last November it planned to close 185 branches by March 2004 – more than the 150 branches it slated for closure when announcing the merger.  

Japan Airlines System, which is seeking more time to repay debt accumulated in the merger, says it plans to reduce its work force – but only by hiring fewer people than it loses to retirement.  

That will lower employee numbers by less than 6 per cent during the next two years. 

“Putting mergers together in Japan, where in most cases they're mergers of the weak, creates weaknesses higher up the tree,” says David Roche, former global strategist at Morgan Stanley who is now chief executive of London-based Independent Strategy. 

“What the Americans do when they merge, theoretically, is they get out the surgeon's knife. Japan mergers create weaknesses to the power of two,” he says. 

Nissan is an example of an acquisition that paid off for investors. Under chief executive Carlos Ghosn, the company dismissed 21,000 workers, 14 per cent of its staff, four months after Renault SA bought a 36.8 per cent stake in June 1999, a stake it has since raised to 44 per cent.  

Then it completed its staff reductions a year ahead of schedule. The carmaker also slashed production capacity by a quarter. 

Nissan, which expects a third straight record profit for the latest business year, was the best-performing auto stock in 2002. In February, Standard Poor's Corp. raised Nissan's credit rating one level to BBB, two levels above non-investment grade. 

“If you're inside the company, sometimes it's difficult to see things in an objective way,” says Edwin Merner, president of Atlantis Investment Research Corp. “Nissan is partly an example of that. It took an outsider that they didn't know but at least felt neutral about.” – Bloomberg 

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