What Are the Characteristics of Companies Prone to Become a Hostile Takeover Target? (Japanese)

This paper examines the characteristics of companies prone to become the target of a hostile takeover by investment funds or of "shareholder activism" by comparing companies targeted by two investment funds - MAC Asset Management Inc. (better known as the Murakami Fund) and Steel Partners Japan - and other companies randomly selected from those in the same industrial sector. The results of empirical analysis suggest that undervalued companies that are cash flow rich (i.e. rich in cash, deposits and readily-cashable securities) and have a low debt ratio and a low interlocking shareholding ratio tend to become takeover targets. This finding supports the free cash flow hypothesis, which argues that the presence of excessive free cash flows causes agency problems, and is consistent with a conclusion that companies targeted by hostile takeovers in the United States in the 1980s had been undervalued and cash flow rich. Based on these, it is considered highly probable that the pressure of shareholder activism, such as takeover threats by the Murakami Fund and Steel Partners, will help accelerate the early exit of failing companies and increase the corporate value of surviving companies in Japan where the cross-shareholding has yet to be fully dissolved, in the same way that the wave of hostile takeovers in the 1980s contributed to the boosting of corporate values in the U.S.