Question

Recent trends in globalization have forced businesses around the world to more keenly focus on profitability. This trend is also present in Japan, where historical links between banks and businesses have traditionally blurred the goals of firms. For example, the Japanese business engineering firm, Mitsui & Co. Ltd., recently launched “Challenge 21”. A plan directed at helping the company emerge as Japan’s leading business engineering group. According to a spokesperson for the company.” [ This plan permits us to] create new value and maximize profitability by taking steps such as renewing our management framework and prioritizing the allocation of our resources into strategic areas. We are committed to maximizing shareholder value through business conduct that balances the pursuit of earnings with socially responsible behavior.” Ultimately, the goal of any continuing company must be to maximize the value of the firm. This goal is often achieved by trying to hit intermediate targets, such as minimizing costs or increasing market share. If you as a manager- do not maximize your firm’s value over time, you will be in danger of either going out of business, being taken over by other owners (as in a leveraged buyout), or having stockholders elect to replace you and other managers. Source: “Mitsui & Co., Ltd. UK Regulatory Announcement: Final Results.” Business Wire, May 13, 2004.

Questions

1. What is (Challenge 21 ) plan of Mitsui & Co., Ltd.

2. What were the objectives of the management of Mitsui & Co., Ltd

. 3. What are the threats of not maximizing a firm’s value.

Answer 1

1.

In "Challenge 21," we have set the forceful quantitative focuses of overall gain YEN130 billion and a ROE of 12%, as we set about developing as Japan's most grounded. Far reaching Business Engineering gathering. Sadly, our net gain for the year of YEN68.4 billion implies that we missed the mark regarding these quantitative targets, fundamentally because of the huge costs coming about because of the rebuilding of auxiliaries and related organizations just as the expansion in annuity costs. The more slow recuperation of the Japanese economy and moderate development of the IT business likewise kept down our presentation. By and by, this is a record high of overall gain and our total assets and procuring premise have been consistently becoming through the previous three-year time of "Challenge 21". Simultaneously, we gained critical ground in arriving at subjective targets, for example, organizing the designation of corporate assets into vital zones, expanding the estimation of our backups and related organizations and executing business process re-designing as referenced previously.

2.

Mitsui & Co., Ltd, (hereinafter referred to as “the Company” or “Mitsui”) has over the course of its long history and tradition nurtured such values and ideals as “challenge and opportunity,” “freedom and open mindedness,” and “Mitsui is people.” Each and every company officer and employee shares the “Mitsui management principles” that were established in line with the teachings and thoughts of those who pioneered the way for us. By combining all of those individual capabilities under the umbrella of global business activities, we aim to create new value through highly transparent, fair working practices and contribute to society on a global basis. 2. The “Mitsui management principles” are “Mission,” “Vision,” and “Values,” which we define in the following manner: ■Mission: We will strive to contribute to the creation of a future where the aspirations of the people can be fulfilled. ■Vision: We aim to become a global business enabler that can meet the needs of our customers throughout the world. ■Values: We will • Build trust with fairness and humility. • Aspire to set high standards and to contribute to society. • Embrace the challenge of continuous innovation. • Foster a culture of open-mindedness. • Strive to develop others and oneself to achieve full potential. 3. The Mitsui management objectives are defined as Mitsui company officers and employees, while working under the “Mitsui management principles,” fulfilling the expectations and trust placed in us by our stakeholders, including shareholders, clients, employees as well as consumers and regional communities; proactively pursuing Corporate Social Responsibility (CSR) oriented management; and, as a result, 3/33 increasing corporate value from both the quantitative and qualitative aspects in a sustainable manner. 4. In order to attain our management objectives based on the “Mitsui management principles,” we aim to optimize business oversight and auditing systems. We provide for the guidelines for such as “Corporate governance principles” in Chapter 1. Also, in order to attain our management objectives, we have established the corporate internal control mechanism conducted under the systems provided for in the corporate governance principles. We provide for this as “Internal control principles” in Chapter 2. We present both these principles together as an overall image of Mitsui corporate governance. In Chapter 3, furthermore, in relation to overall Mitsui corporate governance, we state the “Necessary systems to ensure appropriate operations,” as provided for in the Companies Act of Japan.

3.

If firms lose sight of shareholder value maximisation, they make themselves vulnerable to takeover.

Finance professors tell students that they should maximise shareholder value. Note that this is not the same as maximising profits, a short-term, accounting-driven performance measure. Shareholder value is the present value of expected cash flows from now until infinity, clearly not a short-term concept. In an efficient market, the market value of equity should be equal to shareholder value. If managers believe it’s not, in particular if market values are below shareholder value, managers should buy back stock.

One of the reasons we argue that MBAs should focus on shareholder value maximisation is that failure to do so will create an arbitrage opportunity. A bidder can pay a premium for the shares, switch to value maximisation and make a profit in the process. This is a key motivation in the bid for Unilever by Kraft Heinz.
As target shareholders typically ask for a premium of 30 percent, this “takeover threat” only becomes real if the value destruction is at least equal to 30 percent of the market value of the target firm. In other words, if a company trades today at US$100 million, in order to justify a takeover premium of 30 percent, the company has to be worth at least US$130 million after the takeover bid. The fact that Kraft Heinz only offered an 18 percent premium for Unilever explains the failure of their bid. Also on the day of the announcement, Kraft Heinz’s stock price increased by 7 percent suggesting that the conglomerate could potentially pay more. So resisting the bid was entirely reasonable.

A shareholder-friendly response

What is surprising is the speedy response of the Unilever board: Immediately after the failed bid, they promised to revamp Unilever to boost profits. As a result, Unilever stock price rose to the level of the Kraft Heinz bid price. It shows the most shareholder-friendly way to respond to an unsolicited bid: Increase shareholder value to become a less attractive takeover target. Although we don’t know what the board has in mind, Unilever is a conglomerate of unrelated businesses (food and personal care) that potentially could increase shareholder value by divesting or spinning off part of the company, perhaps the food business, and focus on the personal care business.

Perhaps the restructuring will also result in the removal of CEO Paul Polman, one of the most vocal critics of shareholder value maximisation. In an interview with Forbes in 2015, Polman stated that “he was not working for shareholders…slavery was abolished a long time ago.” He seemed to be more interested in saving the planet by lowering the company’s environmental footprint than in pursuing shareholder-friendly activities such as share buybacks which he dismissed as financial engineering. This is somewhat surprising as he frequently blamed financial markets to be focused on short-term profits, not on long-term value. If this was the case, he should have bought back undervalued stock to benefit long-term shareholder value. So, depending on the outcome, the Kraft Heinz/Unilever confrontation may well become a classic business school corporate governance case study in what happens when firms don’t maximise shareholder value.