Thursday, August 4, 2011

Hitachi, Mitsubishi edge towards groundbreaking merger

Hitachi Ltd and Mitsubishi Heavy Industries Ltd have begun talks to merge, three sources with knowledge of the matter told Reuters, a move that would bring much needed consolidation to corporate Japan.
Seen largely as a last resort of failing firms, Japanese companies until recently have largely eschewed 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 said.
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.
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 sprawling 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.
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 while Mitsubishi Heavy was valued at nearly $16 billion as of Wednesday's closing price. GE is worth $182 billion.
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.
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. The official, who declined to give his name, said his union couldn't comment until it had more information.More...

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