05 June, 2011

Japan Bank Mergers & Acquisitions (Sumitomo Mitsui Financial Group)

Photo: A Sumitomo Mitsui Bank branch in Kamakura.
Photo credit: tomochu. Here is a link to her photostream:

Sumitomo Mitsui Financial Group, Inc.

Sumitomo Mitsui Banking Corp. was created in 2001 when Sakura Bank and Sumitomo Bank merged. Sakura Bank itself was known as the Mitsui Taiyo Kobe Bank when formed by the 1990 combination of the Mitsui Bank and the Taiyo Kobe Bank.

The Mitsui Bank

Mitsui has been a powerful name in the Japanese business world for several centuries. In 1672, Mitsui Takatoshi took over a family business and opened a kimono shop in Edo (now Tokyo) in the following year. This kimono shop eventually developed into department store giant Mitsukoshi in the early 1900s, which following a merger with rival Isetan, still exists today as Isetan Mitsukoshi Holdings. Other businesses established by the extended family eventually evolved into the modern-day Mitsui keiretsu (the post-war Japanese conglomerates resulting from the re-grouping of the former zaibatsu).

In 1683, the Mitsui family launched a money exchange business that handled cash transfers between Osaka and Edo. This money exchange marked the House of Mitsui’s first involvement in finance. During the 18th and early 19th centuries, Mitsui became a powerhouse in the fabric trade, finance and mining.

In the 1860s, the House of Mitsui, long supporters of the Tokugawa shogunate, switched allegiance to the Meiji forces that culminated in the restoration of the emperor in 1868. The new regime widely opened up Japan’s ports to foreign trade and visitors for the first time since the 1630s. The Meiji government also promptly rewarded the House of Mitsui’s support with special privileges to manage its tax revenue. Some described the Mitsui finance house as practically the state treasury of the period.

In 1873, the House of Meiji and the House of Ono jointly founded the Dai-Ichi Kokuritsu Ginko (literally the First National Bank), whose responsibilities included issuing currency on behalf of the imperial treasury for the next 23 years. In 1876, the House of Mitsui established an international trading concern called Mitsui Bussan as well as a bank entirely of their own, the Mitsui Bank, to exclusively finance and manage payments for Mitsui Bussan.

Japan’s modernization policies led to a great rise in industrial output, trade volume and most importantly, the country’s rise as a major economic, political and military power in the Far East towards the end of the 19th century. Its rising military aggression towards its neighbours resulted in the Sino-Japanese War of 1894-95, the invasion of Manchuria in 1931, then a full invasion of China in 1937, which in 1941 became part of the larger World War II when Japan attacked Pearl Harbour in Hawaii. All these military conflicts involved heavily and benefited greatly Japan’s zaibatsu including Mitsui Bussan and the Mitsui Bank.

In 1943, amidst the war with the Allied forces, the Mitsui Bank merged with the Dai-Ichi Bank to become the Teikoku Bank. The Dai-Ichi Bank was reformed out of the original Dai-Ichi Kokuritsu Ginko in 1896, when the latter’s central bank status ended. Teikoku then took over Jugo Bank in 1944.

Following the devastating World War II, the General Headquarters (GHQ) of the Supreme Commander of the Allied Powers were determined to ensure the pre-war industrial- banking conglomerates be never powerful enough to support and finance a militarist regime again by enacting laws to break up the zaibatsu system. Powerful zaibatsu like Mitsubishi, Mitsui, Sumitomo and Yasuda were broken up into hundreds of smaller businesses and banned from dealing with their former associated companies. In 1948, the Dai-Ichi Bank was re-spun off from Teikoku Bank. Teikoku itself was banned from dealing with the former Mitsui group.

Japan’s economy expanded rapidly in the 1950s as the burgeoning export sector led to sustained employment growth and rising income. During the decade, Teikoku opened overseas offices in London, Mumbai (Bombay) and Bangkok. The bank also introduced an early form of computer system. Teikoku reverted to its old name of Mitsui Bank in 1954 when the anti-monopoly legislation was relaxed. Gradually, the former zaibatsu system re-formed to a more loosely-affiliated system known a keiretsu. In the early 1950s, the new Mitsui & Co. group of companies were re-established.

The 1960s saw a great increase in both deposits and loans in the Japanese banking system as the economy continued to boom. In 1968, Mitsui took over a Tokyo bank called Toto Bank.

The Taiyo Kobe Bank

The Taiyo Kobe Bank was created in 1973 by the merger of the Kobe Bank and the Taiyo Bank. Both banks were unrelated to the traditional pre-war zaibatsu banks such as Mitsubishi, Mitsui, Sumitomo and Yasuda.

The Kobe Bank was the older one of the two and was established in 1936 from the consolidation of seven regional banks in the Hyogo Prefecture, near the key cities of Kobe, Osaka and Kyoto. While many smaller banks were absorbed by the powerful zaibatsu banks during World War II, the Kobe Bank had maintained its independence and at the end of the war, added the trust business to its lines of products.

The Kobe Bank focused on serving small- and medium-sized businesses in the Kobe region that were too small to attract the big zaibatsu banks. Still, following its clients’ business, the bank first opened representative offices in London and New York in the late 1950s, then upgraded them into full branches by the early 1970s. In 1960, to comply with new banking legislation, the Kobe Bank sold its trust business to Toyo Trust & Banking.

The Taiyo Bank traces its history to the 1940 founding of the Dai Nihon Mujin out of four small mutual savings and loan companies in Tokyo. The small bank struggled through the difficult war years, and in 1948 dropped Dai from its name. Following banking legislation changes, Nihon Mujin was re-chartered in 1951 as a mutual bank under the name Nihon Sogo Bank (meaning Japan Mutual Bank). In 1968, Nihon Sogo demutualized itself and adopted the name Taiyo Bank.

However, despite all the transformations, the lack of economies of scale and nationwide operations made it difficult for the Kobe and the Taiyo to compete with their larger rivals. In 1973, the Kobe Bank and the Taiyo Bank combined to form the Taiyo Kobe Bank, becoming the largest of all city banks in Japan based on the number of branches.

Sumitomo Bank

Like the House of Mitsui, the Sumitomo conglomerate also traces its history to the 17th century. The family was then headed by a Kyoto book shopkeeper and herbal medicine man named Masatomo Sumitomo. Masatomo’s brother-in-law learnt and developed a new copper-smelting technology, which turned the family business into a leading copper refiner by the 1650s. Over the next three centuries, the House of Sumitomo expanded into the textile, sugar, chemicals and medicine business, and moved its base to from Kyoto to the Osaka region.

Following the Meiji Restoration in 1868 and the opening of Japan’s borders to foreign trade and merchants, the country rapidly adopted new technologies from the West. As a historic base metals refiner and trader, the Sumitomo group further expanded into the machinery, electric cable and coal industries, becoming one of Japan’s most powerful zaibatsu. In 1895, the conglomerate established a private bank named Sumitomo Bank. The bank was re-organized into a limited-liability company and floated publicly in 1912.

In 1945, Sumitomo Bank took over Hannan Bank and Ikeda Jitsugyo Bank. After World War II, Sumitomo, which like other zaibatsu had greatly profited from supplying Japan’s weapon sectors, was broken up into hundreds of smaller companies forbidden to use its former name or trade with the former group members. Furthermore, in 1948, Sumitomo Bank was forced to rename itself the Osaka Bank as it broke ties with the former Sumitomo group of companies.

Interestingly, by 1952, the anti-monopoly laws had already been relaxed that the Osaka Bank restored the name Sumitomo Bank. The bank then actively took up the responsibility of re-grouping the Sumitomo conglomerate. During the 1950s, the bank made a number of highly successful investments, including one in Matsushita Electric (maker of the National and Panasonic brands of electronics and appliances).

In 1965, Sumitomo merged with Kawachi Bank. Still lacking a meaningful presence in the Tokyo region, however, Sumitomo in 1986 acquired the Heiwa Sogo Bank, which operated about 100 branches around the Japanese capital city.

Like other Japanese banks, Sumitomo Bank benefited greatly from the soaring export-led economic growth in the 1970s and 1980s.  Meanwhile, the U.S. government started to adopt a long-running low-dollar policy, which pushed up the value of the Japanese yen, just as Japan was amassing huge trading surpluses. 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 are said to have amounted to USD $500-billion.

Recent transaction(s):
  • In 1990, the Mitsui Bank and the Taiyo Kobe Bank agreed to merge to become the Mitsui Taiyo Kobe Bank. The new bank leapfrogged to become the second largest bank in the country. In 1992, the Mitsui Taiyo Kobe renamed itself Sakura Bank.
  • Throughout the 1990s, the banking crisis and economic recession worsened significantly in Japan. Loan losses across the entire banking sector were estimated at USD $500-billion, and the Japanese government provided some USD $400-billion in state aid to prevent a complete collapse of the banking sector. Japan’s economy has experienced minimal real growth from 1990 to 2011, and the Nikkei 225 stock index by mid-2011 remained about 75% below its all-time high reached at the end of 1989.
  • In 1999, Sakura Bank agreed to combine with Sumitomo Bank. The actual combination did not complete until 2001. The name Sakura was dropped and the new bank restored part of Sakura's old name Mitsui, creating the current Sumitomo Mitsui Bank. Like many corporate mergers in Japan, the share exchange ratio was unclear and the value of the merger was not disclosed. Thomson Reuters and WSJ Research later valued the deal at USD $45.4-billion, which appeared unreasonably high for two very sick banks.
  • In 2004, Sumitomo Mitsui made a competing USD $29.0-billion offer for UFJ Holdings, which resulted from the three-way combination between Sanwa Bank, Tokai Bank and Toyo Trust in 2002. Eventually, however, UFJ Holdings favoured the merger proposal from Mitsubishi Tokyo Financial Group.
  • In 2008, Sumitomo Mitsui subscribed to GBP 500-million of new shares issued by Britain’s Barclays plc as part of Barclays' effort to raise fund to acquire Dutch banking giant ABN AMRO Holding. Barclays “luckily” lost ABN AMRO to a tri-bank consortium formed by the Royal Bank of Scotland Group (RBS), Fortis and Banco Santander. The consortium’s ill-timed purchase of the over-priced ABN AMRO led to the nationalization of both RBS and Fortis in 2009.
  • In 2009, Sumitomo Mitsui bought Japanese retail broker Nikko Cordial Securities Inc. and other assets from Citigroup for a total cash value of JPY 774.5-billion (USD $7.9-billion). The purchase also included the stock and bond underwriting units of Nikko Citigroup, and JPY 28.5-billion of Japanese-listed securities held by Citigroup.
  • In June 2010, Sumitomo Mitsui bought a 4.5% stake in India’s No. 4 bank by market capitalization, Kotak Mahindra Bank, for INR 13.66-billion (USD $296-million).
  • In January 2012, Sumitomo Mitsui Financial and trading conglomerate Sumitomo Corp. jointly acquired airliner-leasing firm RBS Aviation Capital from the Royal Bank of Scotland for USD $7.3-billion. Sumitomo Mitsui Financial would take 70% of the Dublin-based business and Sumitomo Corp. would take the rest. RBS Aviation Capital owned, managed or had orders for 329 commercial jet airliners.
  • Between May 2013 and March 2014, Sumitomo Mitsui acquired a 40% stake in Indonesia's PT Bank Tabungan Pensiunan Nasional for USD $1.5-billion.  The Indonesian bank had over 1,200 branches and points of sales across the country.
  • In March 2015, Sumitomo Mitsui subscribed to HKD $6.6-billion (USD $849-million, JPY 105-billion) worth of new Bank of East Asia shares.  Following the investment, Sumitomo Mitsui's stake in the Hong Kong bank rose to 17.5% from 9.7%.

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