Hitachi, Mitsubishi edge towards groundbreaking merger
Hitachi Ltd and Mitsubishi Heavy Industries Ltd have begun talks on what would be Japan's biggest domestic merger, three sources said, heralding a long awaited shake-up of the nation's industrial behemoths.
Traditionally seen as a last resort of failing firms, Japanese companies until recently have largely avoided strategic mergers. A combination of two of Japan's oldest, most established conglomerates would mark a deeper embrace of mergers as a tool for corporations to squeeze costs, combat a surging yen and gain competitive scale.
If the merger is confirmed it'd be very positive news for Japanese industry, because Tokyo companies wouldn't compete against each other when bidding for overseas infrastructure projects, thus increasing their chances and through this helping the country's economy, said Kiyoshi Noda, chief fund manager at MU Investments.
Although still on, discussions teetered close to collapse on Thursday after a leak to local media startled executives at the industrial giants, two of the sources with knowledge of the matter told Reuters.
Executives from Hitachi and Mitsubishi Heavy have met to discuss merging in areas such as next-generation power operations and smart grids, the sources said.
But after media reported the news and Hitachi's President Hiroaki Nakanishi said an announcement would come later on Thursday, both Hitachi and Mitsubishi Heavy officials denied the talks, adding no announcement was now planned.
The Nikkei newspaper, which broke the story, said the firms planned to set up a merger preparation committee.
PIPE DREAM
Both companies have been weighed down for years by high cost structures.
Hitachi, Japan's biggest industrial electronics firm, turned its first net profit in five years in the year ended in March and is still trying to reduce the size of its empire of 900 group firms. It has lost $14.3 billion in the last 10 years, compared with rival General Electric, which generated net profit of $160 billion in the same period.
Mitsubishi Heavy, the nation's leading heavy machinery maker, remains saddled by losses on its jet and shipbuilding operations. Operating profit in the three months to June 30 dipped 1 percent from a year earlier to 38.7 billion yen the company said on Thursday, with its aerospace unit posting a 2.9 billion yen loss.
A merger would create a $150 billion revenue infrastructure firm second only to GE, and could provide impetus for cost cuts essential if the two companies are to thrive in an environment with the yen trading at around 77-79 yen to the dollar.
The merged entity would still be small in terms of market value relative to other global industrial groups, such as GE, Siemens and ABB.
Hitachi has a market value of $27 billion, making it the likely dominant partner in any tie-up. Mitsubishi Heavy was valued at nearly $16 billion as of Wednesday's closing price.
Sources said nothing had been decided, from a merger ratio and even which would be the surviving entity.
Many of the key questions remain unaddressed. Who will take leadership in what? What will happen to overlapping businesses? What happens to each company's alliances? There is still some confusion internally, said one executive with direct knowledge of the talks.
While the scope and structure of any deal is uncertain, a full takeover of Mitsubishi Heavy, including its debt, could cost Hitachi around $28 billion, according to Thomson Reuters data. That would top Softbank's $17.5 billion purchase of Vodafone Group's Japan unit in 2004 as the country's biggest local deal.
Such a deal would mark a significant shift in a business landscape dominated by large, sprawling conglomerates with close ties to peers across a range of different industries.
It's going to be a history-changing event if true, said Fujio Ando, senior managing director at Chibagin Asset Management. It would really be praiseworthy if they can really move this forward because the merger means they will be creating a new company with companies from different ex-zaibatsu or business groups. This used to be seen as extremely difficult.
Hitachi rose as much as 3.8 percent before closing up 1.7 percent as concerns the talks had broken down weighed, while Mitsubishi Heavy rose 3.4 percent, after jumping 5.4 percent in earlier trading.
A merger between the two industrial groups has not yet been discussed with workers, a union official said.
We have not heard about the merger. It was a big surprise to find out about the talks in the paper, said an official at Hitachi Workers Union, which represents around 30,000 workers at Hitachi.
In sign of the resistance a merger would encounter, worker representatives at Mitsubishi Heavy were adamant there would be no marriage.
Our company has never decided on merging with Hitachi, nor do we plan on doing so, said general secretary of the Mitsubishi Heavy Industries Workers Union, Muramoto Takashi.
I don't see what Mitsubishi has to gain from this, said Takashi, who represent 35,000 employees.
YEN STRENGTH
A gain in the yen to record levels and a weak global economic outlook may make executives think again as the double punch prompts more Japanese companies to mull mergers with rivals, in a bid to lower costs and stay competitive.
Japan intervened in currency markets on Thursday in an effort to stem the rise of the yen, which is threatening to derail the economy's recovery from the March earthquake.
In May, Nippon Steel Corp and Sumitomo Metal Industries submitted plans to merge in a $10 billion deal to create the world's second-largest steelmaker to battle competition from Asian rivals and shrinking demand from domestic automakers.
Hitachi makes products ranging from rice cookers, televisions to excavators, lawn mowers and computer chips and projects annual sales this business year of 9.5 trillion yen. The company, which employs 360,000 people, said on Wednesday it would halt production of television panels.
Mitsubishi Heavy is Japan's leading aircraft builder, defense contractor, a major shipbuilder and the lead system integrator for Japan's space program. A major partner of Boeing Co, it racks up annual sales of about 3 trillion yen with 69,000 workers worldwide.
By combining their reactor businesses, Hitachi, which makes boiling-water reactors, would have access to Mitsubishi Heavy's pressurized-water reactor technology, which has become the technology of choice by countries around the world.
But for Mitsubishi Heavy, the advantage would be solely in the scale afforded by the merger, which could help it better weather an industry downturn as nations around the world demand more stringent safety requirements in the wake of the Fukushima nuclear power plant crisis. ($1 = 76.890 Japanese Yen)
(Additional reporting by Jochelle Mendonca and Megha Mandavia in Bangalore and Tokyo Company News Team; Editing by Lincoln Feast and Dean Yates)
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