In Japan, the homeland of Sony, Toyota and Toshiba, manufacturing is still widely regarded as the only honorable industry. Organic growth is esteemed above all, and many large companies still disdain the idea of mergers and acquisitions. To this day, there has never been a successful hostile takeover in Japan. Horie looked to smash these conventions. Rather than expanding slowly over many years, he discovered he could generate outsized growth by rapidly acquiring smaller, financially weaker prey, typically using Livedoor stock as the currency. He cobbled together an empire by purchasing no less than 50 firms, often with the help of so-called special-purpose entities, stock swaps, and other sophisticated financing techniques that are fairly routine in most mature economies, but are still regarded as alchemical in Japan. With the growth his acquisitions provided, Livedoor's stock took off, enabling Horie to buy more and bigger companies. Investment banks, always hungry for lucrative advisory work, helped out. Last year, when Livedoor attempted a hostile takeover of Nippon Broadcasting System, the radio arm of Japan's Fuji TV media colossus, Lehman Brothers arranged $750 million in financing to assist the bid.
Though that deal ultimately failed, Horie's ability to turn his tiny company into a behemoth with a market value as high as $8 billion helped spark a broader M&A boom. Rivals in Japan's go-go Internet industry learned that they too could grow by gobbling up corporate minnows. "A lot of people have followed the Livedoor model," says Tom Sato, founder of Tokyo IPO, a financial-information website. Softbank has executed 140 mergers or acquisitions; Rakuten, Japan's leading online-shopping site, has executed 55 of them; Yahoo! Japan has done 24. Although Japan still accounts for only 5.6% of the world's M&A market, dealmaking has become an increasingly profitable fashion. In 2005, there were 2,561 deals in Japan—a 43% increase in two years. Their combined value more than doubled to $167 billion over the same period.
While banks such as Nomura Holdings and Merrill Lynch tend to focus on large deals, like the $30 billion takeover that formed Mitsubishi UFJ Financial Group or the $3.5 billion marriage of cosmetics company Kao with Kanebo Cosmetics, the M&A mania has also spread to smaller companies. Terrie Lloyd, an M&A consultant with 23 years of experience in Japan, says he encounters more and more Japanese investors who are interested in buying a motley batch of companies, pasting them together into mini-conglomerates with dubious business merit, and flipping them via an IPO: "This is a new phenomenon in Japan."
But as Livedoor's woes show, a get-rich-quick, growth-by-acquisition strategy can be rife with risk. In Livedoor's case, driving up the company's stock price may have become a dangerous obsession. Unable to achieve fast enough growth through normal business operations, it allegedly misled the public in order to goose its stock, sell some of its shares, then pocket the proceeds as profits.
The Livedoor fiasco has highlighted inadequacies in Japan's accounting rules, which are not equipped to handle this brave new world of special-purpose entities, stock swaps and other financing arcana. But Tokyo is moving quickly to correct these deficiencies and restore confidence in its regulatory stringency. Among most major M&A players, however, confidence is not the problem. Nomura is reportedly adding 20 people to its 100-person M&A team. Lehman is expanding its M&A desk by a third, and Merrill Lynch and Mitsubishi UFJ Securities have said they too are bulking up.
Sideswiped by Livedoor's crash, shares in other merger-hungry firms like Rakuten, Softbank and Yahoo! Japan are still down between 9% and 15%, even though nobody has suggested they did anything illegal. But with the broader Nikkei 225 stock index almost fully recovered from the scandal, there's a sense that the speculative euphoria in Japan is still alive and frothing. After the previous decade of disappointing financial returns in Japan, no one—not the bankers, the investors or even the regulators—has much inclination to believe that Livedoor is anything but an isolated case, or much motivation to launch wider investigations. "A lot of people are betting that this market has a lot left in it," says M&A consultant Lloyd. "No one wants the party to end."