It's not every day that a single investment has the opportunity to change the status quo in an entire nation. But Internet firm Livedoor and CEO Takafumi Horie might do just that -- altering some very basic assumptions about investing in Japan. It all hinges on whether Livedoor can successfully retain its recently purchased control of Nippon Broadcasting System (NBS).
A little background is in order here: NBS is a member of the large and powerful FujiSankei Communications Group, which includes a number of media-related operations. The crown jewel of the group, and the third party in the love triangle, is Fuji TV, the largest broadcaster in Japan.
As is common in Japan, members of the same group of companies hold shares in each other, which creates a complex ownership structure designed to keep management entrenched and outsiders out. In this regard NBS and Fuji TV are no different -- NBS owns 22% of Fuji TV, and Fuji TV owns 12% of NBS. But a funny thing happened with NBS shares. They were trading below the market value of their 22% ownership interest in Fuji TV. This meant that investors in NBS were effectively getting the radio business and a portion of Fuji TV for free. This has happened in the past with members of the Toyota
Whether value investors, NBS, or others spurred Fuji TV to make a tender offer for NBS shares is not clear, but Fuji TV does have an outstanding tender offer for NBS shares. And while that tender offer was in place, Livedoor decided to purchase shares, as well, and recently announced a 35% ownership stake.
In a classic example of maintaining control, as opposed to doing what's best for shareholders, NBS has moved to dilute all shareholders by more than doubling their share count and offering all the newly issued shares directly to Fuji TV. Not only is this highly questionable from a Japanese legal perspective, it is a huge slap in the face to all investors, not just Livedoor. In a sensible move, Livedoor has gone to Japan's judicial system to block the dilution of its ownership and is continuing to acquire more NBS shares.
Why is this so important? In short, Livedoor has the chance to set a precedent. In a country where large companies and established relationships rule the day, Livedoor has bought its way into the club. And in my mind there's nothing wrong with that; it's the way an open market is supposed to work.
On the flip side, if the courts allow Fuji TV and NBS to squeeze Livedoor out, it will call into question what value the Japanese markets have to offer investors. Sure, Canon
For more on international investing, check out:
- Bill Mann's The Challenges of International Investing.
- Dangers of International Investing, also by Bill Mann.
- Selena Maranjian's Is It Time to Invest Abroad?
Fool contributor Nathan Parmelee does not own shares in any of the companies mentioned.