Koito Case

Koito-Pickens-Toyota Case top dog 1 The Nipp acese corporate g everywherenance system differs vastly from the US system. Discuss corporate governance issues that whitethorn a travel down the stairs the Japanese keiretsu. The corporate governance system in Japan is widely polar from the US one hitherto as it mostly involves a laughable business model called Keiretsu. A Keiretsu is a form of corporate grammatical construction that groups a preparedness of companies with interlocking senesce of music directors and common business bets. Thus, turn up-of-pocket to its particular structure, some governance problem may arise under this Japanese Keiretsu ) Issues from the perspectives of financiers Because the business is considered almost like an extended family, the financing may give out political and the Japanese Keiretsu will almost al rooms go away choose to members of their Keiretsu. This could tug the financiers, for instance, to finance a company member of their Kei ratsu they wouldnt have finance otherwise. As utmost as the potential financiers be concerned, the main issue is the difficulty to accede and invest in the Keiretsu. set downting financial information about the Keiretsu firms could be complicated insofar as the financial and accounting statements ar non disclosed.Thus, such discretion could mavin to an ambiguity or a miss of understanding from an right(prenominal) perspective. Actually, the keiretsu ar just trying to protect themselves from what they fear the most that is to say the yakuza and the greenmailing. b) Issues from the perspectives owners As mentioned above, the keiretsu atomic number 18 suspicious towards the outside and this behavior may prove distant owners face some difficulties. Because the keiretsu system is much more in favor of inside stockholders than the outside ones, the former may find some difficulties to make the most of their shareholder rights.And this can maybe explain why the outside share holders are often a minority in comparison with the shareholders of the keiretsu. Moreover, hitherto if one of the outside owners becomes the biggest one, as T. Boone Pickens did, he may non be able to use his rights as he hoped. c) Issues from the perspectives suppliers cardinal of the main issues for foreign suppliers is to the relationship mingled with OEMs and suppliers that often leads to dumping on the prices and enables the outside supplier to compete with such cheap prices.As far as the integrated suppliers are concerned, the exclusive partnership with the keiretsu they belong enables them to do business with another track firm and to gain market shares. d) Issues from the perspectives employees On the one baseball mitt and in case of horizontal integ symmetryn, the genuinely structure of a Keiretsu can lead into a confusion in management. The management transfers are so back up that employees do not understand for which company they really work for is. One the o ther, the surd stability that comes out from this system could lead to a overleap of action and performance from employees. apparent movement 2What were T. Boone Pickens motives when he bought the share? In the look of numerous, Mr. Pickens was only acting as a front man for Mr. Watanabe, a well-known green mailer in order to pave a way to gain power and control over the corporation. Mr. Pickens denies all these accusations of greenmailing by cl preying that he bought the share to carry out a test case in order to evaluate the ragibility of the market. In others words, his initiative has the only aim of checking whether the United States could make, in the future, profitable investment fundss in Japan depending of the degree of welcome of the market.Moreover, it is not implausible to think that one motive of T. Boone Pickens was the quest of profit. It should be borne in mind T. Boone Pickens targeted Koito as an undervalued investment opportunity in so far as he anticipated a Koito stock rise due to the tight link between Toyota and Koito. The good performances of Koito stock combine with the rise of the net income and gross sales reinforce this idea due to the circumstance that the shareholders average annual return has impressively step-upd. So the pursuit of rise of the dividends could have motivated him to buy the share.As the strikingst shareholder of Koito Manufacturing, is he entitled to representation on the board, does Japanese law allow for that? If not what in the law could he use to get an equivalent direct? With 26. 4% of stock, T. Boone Pickens should have been entitled to representation on the board of Koito insofar as the Japanese law gives him rights due to the fact that he owns more than 10% of stock. But not so in the Japanese Keiretsu foreland of view. He was overwhelmingly denied board access in a 1989 annual meeting. It is not a custom in Japan just to say, Ive become a major shareholder so I should become director. , said Takao Matsuura, president Koito Manufacturing Ltd. There are reasons to wager that his seat on the board was compromised by the fact that the company considers him as a greenmailer. subtle that T. Boone Pickens was planning to increase his stake to 30%, he could obtain board representation by acquiring 4% more than what he expected. In fact, the Japanese law states that those with at least(prenominal) 34% self-command could evoke special shareholder resolutions.An alternative would be to establish a rising relationship between Mr. Pickens and all the members of the keiretsu based on faithfulness and transparency. They would not suspect him of greenmail anymore. We can suppose that T. Boone Pickens has chosen this way insofar as he supported the adoption of a proposal prohibiting Koito from paying greenmail. Question 3 Besides board representation, T. Boone Pickens demanded higher dividend payouts. Were his demands justified? Provide denary evidence to back your answer. Besid es board representation, T.Boone Pickens asked for higher dividend payout saying that Boone Cos philosophy was to put stockholder interests first (page 7) and in this very case, his demand for a higher dividend can be justified. Indeed, when we look at the dividend payout ratio for the period 1982 1985 (Table 1), it decreases meanwhile the well-kept kale was increasing (Table 2). Moreover, at the same period, the proportion of cash was also increasing. In others words, the contain earnings were not invested enough and stay as cash.Then in 1986, we noticed that the payout ratio increased up to 39% and at the same time the retained earnings and the cash goes strongly down. Finally, almost the same phenomenon is observed between 1988 and 1990. In other words, the payout ratio is not positively cor associate to the retained earnings which are not invested and stay as cash. Table 1 Table 2 Is on that point anything in the Japanese commercial figure that would allow Pickens to try t o get more dividends? If yes, why doesnt he use this? If not, based on your experience as an international investment banker, what pitchs would you recommend him to cast?In order to increase dividends, T. Boone Pickens had several solutions. Indeed, many researches on the conflicts of interest between majority and minority shareholders show that dividendpayoutis negatively related to ownership concentration and support the assumption that large shareholders do not appear to use dividend policy to remove excesscash. In other words,firms with concentrated ownership are less likely to increase dividends when profitability increases and more likely to omit dividends when investment opportunities improve. So, T. Boone Pickens could decrease the ownership concentration of Koito.There are also some more aggressive solutions to get more dividends. T. Boone Pickens could increase his shares ownership in order to increase his conclusion power in the General Assembly insofar as a owner of 3 4% or more of the outstanding stock could propose special shareholder resolutions. Question 4 Pickens accused Toyota of limiting pay earned by Koito Manufacturing. Explain how the mechanism works? This mechanism is related to the very structure of keiretsu insofar as Toyota, like most Japanese OEM, owns equity positions in its suppliers.In 1986 almost half of Koitos output was bought by Toyota and at the same time, Toyota has built a dominant position over Koito by having a 19%-part of Koitos ownership. Therefore, Toyota was not just one of Koitos customers but also one of its owners. Through its powerful warp and thanks to the close and informal relationship between Toyota and its suppliers, the car shaper had been able to negotiate supply contracts, lower prices and then limited cabbage earned by Koito. Is this a self-dealing dealing? According to Steven L.Emanuel (Corporations, 2009), a self-dealing transaction occurs when tierce following conditions are met (1) A key play er (officer, director or controlling shareholder) and the corporation are on opposite sides of a transaction, (2) The key player has helped influence the corporations decision to enter the transaction (3) The key players personal financial interests are at least potentially in conflict with the financial interests of the corporation. In the case of Koito, 3 members out of 23 are Toyotas executives.Even if these 3 members are no longer Toyotas executives, the Japanese notion of loyalty and the business relations between Toyota and Koito (Toyota buy 48% of Koitos output) could think that these three chairmen could act in favor of Toyota or at least try to satisfy the two companies. And in this way, the supplier was treated below the belt and conflicts of interests might have occurred. If Pickens gets access to financial information, how can he set out to prove his accusations? If you were an investment banker, what accounts or data would you tell him to scrutinize.If Pickens gets ac cess to financial information, he could canvas the Income Statement and compare the evolution of the result of sales and the growth of gross profit over these past geezerhood. Generally, sales and gross profit evolve in the same direction unless there is a below cost-selling. However, here we noticed for example that in 1986, as sales had large(p) by almost 10,2%, gross profit had grown by 7% and that in 1990, when the sales had grown by 10. 85%, gross profit had only grown up by 2. 8%. Such comparisons could be setting off alarm bells and could point out the fact that Toyota is limiting profits earned by Koito Manufacturing.On the other hand and if he can, he could also compare directly the price of goods sell to Toyota with the price of the same goods sold to minor customers such as Hino Motors. A high difference between the two prices combined with the fact that three directors of Koito are retired Toyota executives, would prove these self dealing transactions. Would you sugg est to change the charter of the organization of Koito? As investment banker, I would suggest him to analyze thoroughly the income statements and the supply contracts between Toyota and Koito in details to reinforce his accusations.As far as the charter of the organization of Koito is concerned, I would suggest to add a clause which enables a person somehow related to a strong customer or a strong supplier to be ordained as director to Koitos board of directors. Question 5 Toyota has imperil to cut all ties with Koito Manufacturing if Pickens take over the company. How would this affect Pickens investments? If you were a minority shareholder in Koito Manufacturing, whose side would you take? Calculate the value of your shares with or without Toyota.Because Toyota is the second largest shareholder in Koito and is its principal customer, representing 48% of the total sales (Exhibit 2), we may think that cutting ties with Koito Manufacturing will lead to huge losses, at least in the first year. Lets then calculate the value of a share with and without Toyota. In order to use the Discounted cash Flow methodology, here are the assumptions we made * The value of the firm is adjoin to the value of the discounted cash flows for the next four years plus its terminal value. The same growth is expected for the coming four years (this growth was calculated as the mean of the previous years growth) * Because the lack of information concerning the cost of equity we used today Koitos of import (1. 38), a risk free rate of 3% and a Rm of 10% (return on S&P) in order to calculate an approximative WACC. Our calculations put up us with a WACC of almost 8%. With Toyota Without Toyota If I were a minority shareholder I would probably take Pickens side because he puts shareholder interests first.However, I would be careful and make sure that making stockholders interest first instead of companys one will not damage the entitys wealth. Based on your assessment of the case, a re large shareholders an powerful solution to corporate gouvernance problem? Based on the analysis of this case, it appears that being a large shareholder is not necessarily an effective solution to the corporate governance problem. Indeed, even if T. Boone Pickens is the largest shareholder, he actually has no influence on management issues including those which concern the amount of dividends paid.