24 June, 2013

Japan Bank Mergers & Acquisitions (Mizuho Financial Group)

Photo: A Mizuho Bank branch in Tokyo, Japan.  With special thanks to my friends Rupert and Don for taking this photo and allowing me to use it.

Mizuho Financial Group

Mizuho Financial Group was formed in 2000 by the consolidation of three major Japanese banks in deep financial distress brought on by the country’s decade-long economic slump.

Dai-Ichi Kangyo Bank

The oldest predecessor of Mizuho Bank was the Dai-Ichi Kokuritsu Ginko (“First National Bank”). It was founded in 1873 as the country’s first modern commercial bank. Like other nationally-chartered banks, Dai-Ichi Kokuritsu Ginko had a dual mandate of conducting banking business as well as issuing currency on behalf of the Japanese treasury. Its creation was part of the drive to modernize Japan’s economy after over two centuries of shunning the outside world and banning foreign trade. Merely five years before the bank’s founding, Japan had undergone a political revolution called the Meiji Restoration, and had just opened up its ports for the first time since the 1630s.

In 1896, Dai-Ichi Kokuritsu Ginko’s notes-issuing right was terminated with the passing of a new currency act in Japan. The bank was then re-incorporated as an ordinary commercial bank named Dai-Ichi Bank.

Meanwhile, the Nippon Kangyo Bank was created in 1897 to finance long-term agricultural and rural development by issuing debentures. Throughout the early 20th century, Nippon Kangyo focused mostly on the rural and agricultural regions across the country, whereas Dai-Ichi’s operations concentrated within metropolitan Tokyo and Osaka. Both banks had no connection with the historic zaibatsu conglomerates of Mitsubishi, Mitsui, Sumitomo and Yasuda, each of whom controlled their own bank to provide preferential-rate financing to companies within their own cliques.

Ironically, merely 50 years after opening up itself to foreign trade, Japan by the late 19th century had shifted towards an imperialist foreign policy. Korea, which had historically been a protectorate of China, became the focus of Japan’s attention. The brief but “game-changing” First Sino-Japanese War between 1894 and 1895 saw the embarrassing defeat for China and Japan gaining increasing political control over the Korean Peninsula. In addition, China also ceded the island of Taiwan to Japan.

Japan’s ambitions to conquer its neighbours once again came to head in 1904, when it engaged in the Russo-Japanese War over Manchuria and complete control of Korea. To many experts’ surprise, Japan defeated Russia in 1905 and quashed Russia’s ambitions in China and the Far East. More importantly, Japan firmly established its military might 0n the world stage.

Gaining the control of the Korean Peninsula, however, did not mark the end of Japan’s imperialistic expansionism. From 1931 onward, Japan began to invoke China, leading to intermittent border skirmishes. Then in 1937, a full invasion of China was launched, which following Japan’s surprise attack on Pearl Harbor, became part of greater World War II. In total, more than 33 million people died as a result of the military conflicts between the start of the Second Sino-Japanese War and the end of World War II.

During World War II, the Japanese government had forced a merger between Dai-Ichi Bank and Mitsui Bank to create the Teikoku Bank in 1943. Nippon Kangyo, however, maintained its autonomy throughout the war. After the end of the war in 1945, the American-led occupation authority broke up the old powerful zaibatsu cliques based on the belief that such powerful industrial conglomerates facilitated the armament of the military regime. Hence in 1948, the old Dai-Ichi Bank was spun off from Teikoku Bank.

Starting in the 1960s, Japan began to transform itself into an export-led economy, which took off in the 1970s as the country became a powerhouse in the manufacturing of textiles, electronics, machinery and automobiles. Both Nippon Kangyo and Dai-Ichi rode this wave of great economic expansion, and in the process became closely associated with a group of emerging industrials including Shiseido (cosmetics), Nippon Express (logistics), Seibu (department store), Hitachi (electronics), Kawasaki (heavy industries) and C. Itoh & Co. (import & export, raw materials, manufacturing and investment conglomerate).

As these businesses grew to become some of the world’s largest in their respective industries, the demand for larger corporate loans also increased, which called for larger banks with a stronger capital base. In 1969, a proposal to combine the Mitsubishi Bank and Dai-Ichi Bank was put forward, but the shareholders of Dai-Ichi balked at the idea, fearing that the much larger Mitsubishi Bank (as part of the historic zaibatsu Mitsubishi conglomerate) would simply take Dai-Ichi’s capital, then discriminate against Dai-Ichi’s clients, some of which were rising competitors to the Mitsubishi group companies.

Soon after walking away from Mitsubishi Bank, Dai-Ichi Bank agreed to merge with Nippon Kangyo Bank in 1970, adopting a new name Dai-Ichi Kangyo Bank. It immediately became one of Japan’s largest banks. The new bank now had 300 branches across the country, with a strong market share particularly in Tokyo and Osaka. However, in the Japanese corporate culture, maximizing efficiency and profits is often not the primary goal, instead, corporate cronyism that aims to maintain harmony amongst long-standing clients takes precedence over ensuring a reasonable return on investment. When Nippon Kangyo and Dai-Ichi were combined, integrating the two management teams and client lists proved challenging, as officials from both banks wanted to continue favouring their old clients over “the other side’s” clients. The in-fighting took years to smooth out.

In due course though, Dai-Ichi Kangyo Bank expanded rapidly, benefiting from Japan’s soaring exports in the 1970s and 1980s. Internationally, the bank launched the Dai-Ichi Kangyo Trust Co. in the U.S. to engage in the investment banking business, something that deposit banks were forbidden to do domestically under Japanese banking regulations.

Meanwhile, the U.S. government adopted a long-running low-dollar policy in the 1980s, which pushed up the value of the Japanese yen, just as Japan was amassing huge trading surpluses from its export machine. Awash with excess capital and a strong currency, Japan's banks made easy credit to their clients, leading to a period of extreme domestic real estate and stock price inflation. The ever rising prices led to more complacent lending by the banks, creating a vicious speculative cycle, which eventually pushed prices to unsustainable levels. Corporate Japan also made a number of high-profile overseas "trophy" purchases in the late 1980s, including New York City's Rockefeller Center and Columbia Pictures. The "speculation party" ended abruptly in the early 1990s, when Japan finally raised interest rates to cool the speculation.

The asset price collapse hit Japan's economy and banks extremely hard and total loan losses across all banks are said to have amounted to USD $500-billion.

Fuji Bank

Fuji Bank can trace its history to Zenjiro Yasuda, a young entrepreneur who in 1866 launched a business dealing with silver, gold and copper. As a supporter of the Meiji Restoration movement, he was rewarded when the Tokugawa Shogunate government was overthrown in 1868 as one of the fiscal agents for the Ministry of Justice. Mr. Yasuda also participated in the creation of the Third National Bank in 1876. In 1880, Mr. Yasuda launched Yasuda Bank and Yasuda Mutual Life Insurance Co. Then in 1893, Zenjiro Yasuda acquired the ailing Tokyo Fire Insurance and transformed it into the Yasuda Fire & Marine Insurance Co. eventually.

In 1923, the area surrounding Tokyo, known as Kanto, suffered a devastating earthquake that killed as many as 140,000 people. In addition to the loss of countless lives, the destruction of the capital region wiped out the properties and livelihood of those who survived. The resulting economic recession led to many bank failures, but Yasuda Bank was able to take over and integrate many of the weaker competitors into its own fold during the 1920s.

As mentioned earlier, the 1930s saw the rapid rise of Japan’s militarism and agenda to dominate the Far East. Throughout the 1930s into 1945, Yasuda Bank helped fund Japan’s military spending and invasion of China (1937) and attack on Pearl Harbor (1941). Following World War II, the American-led Supreme Commander for the Allied Powers broke up the Yasuda financial group (like it did to other powerful Japanese businesses and banks). In 1948, Yasuda Bank was reformed into the new Fuji Bank.

Laws restricting how corporate Japan could conduct business were relaxed in 1952, and several former Yasuda companies reverted to their pre-war names. Though Fuji Bank decided to keep its new name, it restored cross-shareholdings with Yasuda Mutual Life and Yasuda Fire & Marine Insurance.

During the 1960s and 1970s, Fuji Bank built up a list of corporate clients that were amongst the most famous and powerful names. To better serve its clients’ foreign operations, Fuji opened offices in Australia, Switzerland, Hong Kong and Singapore in the early 1970s. As Japan’s banking regulations forbade city banks such as Fuji from engaging in the investment banking business within Japan, Fuji Bank established a number of securities brokerages in the United States in the 1970s. The OPEC oil crisis in 1973 initially shook Japan’s economy, as the country relied 100% on foreign oil. However, Japan’s auto makers benefited greatly from the skyrocketing global demand for fuel-efficient cars.

Continuing its overseas expansion, Fuji in 1983 spent USD $425-million to buy the commercial lending division of Walter E. Heller International Corp., quickly gaining a significant loan portfolio.

In 1988, Fuji acquired a 24.9% stake in Kleinwort Benson Government Securities, a Chicago-based dealer of U.S. treasuries for USD $14.5-million. At the time that was the maximum stake allowed for a foreign entity of a U.S. government securities dealer. However, just one year later, the law was changed to permit Fuji to fully acquire the remaining 75.1% of Kleinwort Benson Government Securities, which it promptly did for USD $44-million.

Industrial Bank of Japan (IBJ)

The Industrial Bank of Japan was created in 1902 by the Japanese government to promote the country’s industries. Just less than a decade earlier, Japan had surprised the world by defeating China, historically the dominant power in the Far East, during the Sino-Japanese War. Encouraged by this victory, Japan was even more determined to develop its manufacturing and heavy industries to catch up with the European and American powers.

Following another victory against Russia in the Russo-Japanese War (1904 to 1905), Japan ramped up its development of steel mills, shipyards and chemicals plants during the 1920s and 1930s. When the government policy turned increasingly imperialistic, corporate Japan received funding from the IBJ and benefited from the sharply increased military spending. During World War II, IBJ’s responsibility expanded to occupied territories throughout Asia to finance industrial and mining activities that supported Japan’s war machine.

After World War II ended in 1945, IBJ retreated to Japan and joined the post-war rebuilding effort. In 1950, under the direction of the occupying Allied Powers, IBJ was removed from government control and sold to private investors. Despite this, IBJ continued to play its role as the middleman between the government and Japan’s highly cronyism-influenced private sector.

As a major long-term credit lender, IBJ held tremendous power through its massive shareholdings and debenture holdings in many Japanese corporations. However, even though IBJ grew rapidly along with Japan’s export-oriented economy during the 1980s, it lacked a domestic branch network to enter the personal banking market. Instead, the bank sought further growth outside of Japan, establishing subsidiaries in Britain, Switzerland and the United States to provide institutional investor and investment banking services.

As mentioned earlier, Japan’s real estate market spiralled into a speculative bubble towards the late 1980s as the red-hot economy fed into ever rising domestic asset (stock and real estate) prices. Competing banks trying to gain market share loosened up loan approval conditions as land prices kept rising, giving lenders and borrowers alike the false sense that real estate was a sure bet.

Needless to say, the bubble subsequently burst in 1990 and the massive loan losses and asset price depreciation pummelled Japan into decades of economic stagnation and dis-inflation or even deflation.

After closing at an all-time high of 38,915 points on 1989-12-29, the Nikkei 225 stock benchmark fell by 63% by 1995 (indeed at one point in 2008, the index was down 82% from its 1989 all-time high). Due to Japan’s weak and ambiguous accounting rules, banks were allowed to cover up their loan losses by either extending non-performing loans, or by keeping the value of their repossessed (i.e. foreclosed) properties at the pre-crash levels. It was estimated that Japan’s banks lost some USD $500-billion from the collapse. Their failure to face up and address the depleted capital only clouded the true severity of the banking crisis and prolonged the uncertainty. Even with a reported USD $400-billion bailout from the government, Japan’s banking sector remained wounded and unable to heal. One may argue that Japan has never recovered from this credit crisis after the bubble burst in 1990 even as this article was written in 2013.

Recent transaction(s):
  • In 1999, three of the recession-ravaged banks: Dai-Ichi Kangyo Bank, Industrial Bank of Japan and Fuji Bank agreed to merge to form the present-day Mizuho Financial. Like other Japanese megabank mergers in the late 1990s, the value of the Fuji-Dai-Ichi Kangyo combination was not clearly-defined. While later reports placed the value at USD $40.1-billion, the figure appeared improbably high for two ailing banks.
  • In 2002, the merger was formally completed and under the parent company Mizuho Holdings were Mizuho Bank (retail banking) and Mizuho Corporate Bank (for enterprise banking).
  • In 2005, Mizuho Holdings was renamed Mizuho Financial Group.
  • In September 2011, Mizuho took a 15% stake in the Joint Stock Commercial Bank for Foreign Trade, also known as Vietcombank, for USD $567-million (JPY 43.5-billion).  Vietcombank had a network of 377 branches at the time.  Mizuho would become the Vietnamese bank's second largest shareholder after the Vietnam government.

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