Japan Says Report That It Recommended MBK Halt Makino Acquisition Is True, Citing National Security Concerns

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[The Financial News, Tokyo = Seo Hye-jin] The Japanese government said on the 23rd that reports were true that it had recommended South Korean private equity firm MBK Partners halt its acquisition of Japanese machine tool maker Makino Milling Machine Co., Ltd. (Makino).
Chief Cabinet Secretary Minoru Kihara, the Japanese government’s top spokesman, said at a press conference that day, "We recommended that MBK Partners halt the acquisition as of the 22nd." He added that the measure was taken after deliberation by a review panel, based on the judgment that it could undermine national security.
The machine tool industry includes dual-use technologies that can be adapted for military purposes, and is classified as a "core industry" under Japan’s Foreign Exchange and Foreign Trade Act. As a result, foreign investors must undergo a government review in advance before acquiring stakes in related companies.
MBK Partners must decide within 10 days whether to accept the government’s recommendation to halt the deal. If it rejects the recommendation, the Japanese government can issue a stop order under the law.
Earlier, Makino faced a hostile M&A attempt by Japanese electronics parts maker Nidec Corporation in April last year. MBK Partners then stepped in as a white knight and announced in June that it would make Makino a wholly owned subsidiary through a tender offer, or TOB.
MBK Partners had originally planned to launch the TOB in early December last year, but the schedule was repeatedly delayed. It had secured major overseas approvals, including antitrust clearances in the United States and China, as well as investment screening approvals in the United States, Germany, France and Italy. However, delays in Japan’s foreign exchange review pushed the timetable back. The launch was delayed again on the 10th of this month, and a late-June start had been expected. In the end, the Japanese government’s intervention has made the deal increasingly unlikely.
Meanwhile, Kihara said in relation to the Foreign Exchange Transactions Act amendment bill now before the National Diet of Japan that "we will explain the purpose of the revision sufficiently and work to secure its prompt passage."
The bill’s key feature is the creation of a "Japan Committee on Foreign Investment." The new body would bring together officials from the Ministry of Finance (Japan), METI, the National Security Secretariat and other relevant ministries to conduct integrated reviews of individual investment cases, in a structure similar to CFIUS in the United States.
Under the current system, each ministry conducts its own review, and the role of intelligence agencies is not clearly defined. Critics have said this leaves security risks insufficiently checked.
So far, there has been only one case in which a recommendation or order to halt an investment was issued. Before the Foreign Exchange Transactions Act was revised, the Japanese government ordered a British investment fund to stop its plan to buy additional shares in J-POWER in 2008. As a case in which a recommendation or order to halt was issued through prior screening under the Foreign Exchange Transactions Act, this Makino acquisition is the first.
The Sanae Takaichi Cabinet is moving to tighten screening of foreign investment, viewing the possible leakage of military-related technology to China and Russia as a major security risk.
The amendment also includes a provision requiring relevant agencies to be consulted when the Ministry of Finance (Japan) and others determine that a foreign investment raises security concerns. In addition, it would make prior notification the rule when a foreign company acquires another foreign company that holds shares in a Japanese company tied to national security, while strengthening monitoring functions.
\r\nEven domestic investors would be subject to prior screening if they are under the control or influence of a foreign government.
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sjmary@fnnews.com Seo Hye-jin Reporter