In September, Nippon Telegraph and Telephone Corporation (NTT) announced that it would buy out minority shareholders in its mobile phone spin-off, DOCOMO, INC., making DOCOMO a wholly owned subsidiary and delisting it from the Tokyo Stock Exchange. This enormous M&A deal—NTT is offering 4.3 trillion yen ($41 billion USD) for the roughly one-third of DOCOMO it did not already own—is the largest tender bid in Japanese corporate history. It also offers a view into the changing nature of corporate finance in Japan.
Some might wonder why NTT is going to the trouble. After all, it already controls a majority of DOCOMO. Why does it need to spend so much for the rest?
The answer involves three important and intersecting considerations for any business: finance, business strategy, and the relationship between government policy and free capital markets. Let’s break it down by asking three questions:
1. Why is NTT doing this deal now?
2. Are the benefits really worth 4 trillion yen?
3. What does DOCOMO’s delisting say about Japanese capital markets?
Here’s how the deal will change the structure of the NTT Group:
NTT is a special-purpose holding company listed on the Tokyo Stock Exchange, but one-third owned by the Japanese government. The group comprises five major businesses. Two of them—NTT DOCOMO and the data communications company NTT DATA—are also listed on the exchange and partly owned by outside investors. The other three businesses are unlisted and fully owned by NTT. (Until 2018, the real estate subsidiary NTT Urban Development Corporation was also listed, but NTT took it private in a buyout similar to the NTT DOCOMO deal.)
The figure above shows the operating income of the holding company and its component businesses for the fiscal year ending March 31, 2020, as well as the most recent market capitalization of the three listed companies. Notice the following:
(a) DOCOMO dominates the group. Its operating income accounts for 55% of the total, and its market capitalization is 12 trillion yen—more than the 8.7 trillion yen of its parent company.
(b) The 4 trillion yen cost of buying out minority shareholders in DOCOMO is financed by banks loans. In other words, the deal replaces capital that NTT DOCOMO had raised from the stock market with debt carried by the holding company.
(c) The group is worth less than the sum of its parts. This is a problem that can occur when both a parent company and one or more subsidiaries have their own stock listings. It is sometimes called a “conglomerate discount” or a “twisted” capital relationship. If left unchecked, it can leave a group vulnerable: anyone can purchase the parent relatively cheaply, and in so doing effectively acquire control of its subsidiary, which has larger market capitalization. Such situations are dangerous from the point of view of capital structure and corporate governance.
Attempts at twisted takeovers have happened before: in the mid-2000s, the internet start-up Livedoor tried to acquire Fuji Television Network by first buying a majority stake in Fuji’s much less valuable parent company, the radio station operator Nippon Broadcasting System.
Some businesses create new holding companies specifically to untangle twisted capital structures. For instance, Seven & i, the holding company of one of Japan’s biggest retail groups, was set up to fix the imbalanced parent-subsidiary relationship between the Ito-Yokado supermarket chain and its more valuable subsidiary Seven-Eleven.
In the case of NTT, the government owns more than one-third of the company (as it must by law), while foreign investor ownership is limited to 20%. That makes an opportunistic twisted takeover unlikely. Nonetheless, NTT has been looking for a way to fix an odd capital structure in which DOCOMO has become larger than NTT itself.
The acquisition has a more straightforward financial upside, as well. Roughly a third of DOCOMO’s profits now erode to outside shareholders. By taking full ownership, NTT will add an additional 280 billion yen of profits to its own accounts, which should be enough to cover the interest owed on the 4 trillion yen borrowed to finance the deal.
Is all this really worth it?
The acquisition looks expensive, but it’s necessary for NTT. DOCOMO’s market capitalization before the buyout announcement was around 9 trillion yen, a reasonable valuation compared with rivals KDDI (6.2 trillion yen) and Softbank (5.7 trillion yen). Both of those companies carry heavy debt loads, while DOCOMO is virtually debt free.
But profits in the mobile communications industry look set to fall as a result of Prime Minister Suga’s policy of lowering phone charges—not to mention the need for large capital investments in 5G networks.
At the same time, NTT is working to integrate its fixed-line and wireless businesses. The company has announced plans to develop what it hopes will be a world-leading new network that incorporates optical technologies: Innovative Optical and Wireless Network (IOWN). To move forward with this strategy, the group needs to be integrated, and the dual parent-subsidiary listing needs to be eliminated.
Management of the dual-listed group is constrained by conflicts of interest. Their job is to maximize value for each shareholder, but what’s best for a subsidiary isn’t necessarily what’s best for the group as a whole. How to share research and development costs, for example, can be tricky to sort out.
This is why there are almost no parent-subsidiary listings in the US, where shareholders often sue companies they feel aren’t acting in their interests. Parent companies are not allowed to manage publicly listed subsidiaries at the expense of minority shareholders—especially subsidiaries with foreign investors, who tend to take a more active role in company management. DOCOMO’s stock price has lagged behind its global and domestic peers, leading to disappointment and dissatisfaction among minority shareholders.
The steep premium on the acquisition—about 40%—looks like an unavoidable eviction fee for NTT, which will now be able to manage its mobile phone business as it likes without the need to please other shareholders.
Of course, that may not console investors of NTT. NTT’s share price dropped immediately after the takeover bid announcement, which suggests that holders of the parent company’s stock think the 4 trillion-yen price tag is too high. This highlights conflicting interests: DOCOMO shareholders are delighted with the buyout, but NTT shareholders are upset.
What does delisting imply?
DOCOMO has fostered an independent corporate culture from NTT. But the company, which dominated the early mobile-phone era in Japan with the first internet-connect handsets (the now-defunct i-mode), has lost ground in the smartphones age. Its competitors were created by brash entrepreneurs: Kazuo Inamori of KDDI and Masayoshi Son of Softbank.
DOCOMO’s delisting is, in one sense, a symbolic turning point in the evolution of the Japanese stock market.
Perhaps no company encapsulates the history of the Japanese equity market as neatly as NTT. The government privatized the company in 1986, at the peak of Japan’s post-war economic growth. By 1989, it was the most valuable publicly traded company in the world. (Today it isn’t even in the top one hundred, which is dominated by American and Chinese internet companies.)
Later, NTT was split up to promote competition in the telecommunications industry. When DOCOMO went public in 1998, it was the first large global equity offering by a Japanese company. Its market capitalization reached 40 trillion yen at one point due to the explosive popularity of i-mode and the general euphoria of the late-90s dotcom bubble. (DOCOMO, too, is now out of the global top one hundred.)
The delisting of NTT DOCOMO now, twenty years later, can be seen as a change in direction. The company has shifted from relying on open global capital markets to relying on the government and banks for funding. It is, in some ways, reminiscent of the Japan Inc. style of public-private cooperation that supported Japan’s economic growth until the 1980s.
The government, as NTT’s largest shareholder, looks set to use its position to lower mobile phone bills—a move that will please users and stimulate the economy at the cost of distorting the free market. It will also be backing the NTT Group’s IOWN strategy for the next generation of 6G networks.
The fiercest competition in the global telecommunications industry is between US companies (which are supported by deep capital markets) and Chinese companies (supported by the state). The NTT Group is a blend of the US and Chinese models: a listed company with the government as its largest shareholder, but partly owned by smaller market investors. This hybrid approach may be the company’s best chance to survive an increasingly competitive global environment.
This article was originally published in Japanese on Chikenroku.