Nintendo has also attested a major sale of shares worth 1.9 billion dollars when various long time institutional investors such as large Japanese banks decide to unwind their strategic stakes in the game giant Nintendo. The announcement is a significant one not only to Nintendo but also to the changing corporate governance situation in Japan. Although the company is still financially stable and culturally dominant, the move is part of larger structural developments that determine the way Japanese corporations deal with cross-shareholdings and investor relations.
The main figure of the development is the Kyoto-based Nintendo Co., Ltd. which is the company of the globally known franchises including Super Mario. Nintendo has been having strategic relationships with financial institutions and business partners in terms of cross shareholdings which is a common practice in Japan where the companies own shares in each other to strengthen long term relation. Now that model is slowly being torn down.
The sum of shares being sold is about 290 billion yen or about 1.9 billion dollars, at the current closing price, without any other overallotment options. MUFG Bank and Bank of Kyoto are also some of the most important sellers, as well as financial and corporate stakeholders. The decision comes after increased regulatory and market pressure that has urged Japanese-based companies to wind up cross-shareholding in favor of more open capital structures.
Nintendo reacted to the sale by declaring up to 100 billion yen to a share buyback program, in which it has the right to repurchase a total of 14 million shares. Share buybacks have frequently been taken as an indicator of corporate confidence, indicating that the management thinks the stock is underpriced, or that they can give back extra cash to the shareholders productively. Strategically, the buyback also contributes to the stabilization of the market effect of massive institutional divestments.
The response in the market was favourable but good. Following the sale news, Nintendo shares cut previous profits but ended almost 3 per cent. higher. In the meantime, stocks of Kyoto Financial Group, a local bank that took part in the deal, flew nearly 10 percent. The explosive increase in the stock of the lender is a good example on how the financial institutions can take advantage of the capital that is locked up in the long term equity holdings.
Other financial institutions involved in the sale are the Resona Bank which belongs to Resona Holdings and the DeNA Co., Ltd.. MUFG Bank, a bank that is a part of Mitsubishi UFJ Financial group will also sell Nintendo shares that are already managed by MUFG in a trust bank model. All these transactions reflect a synchronized change and not an individual change of portfolio.
The Japanese corporate culture has been engrained with cross-shareholding. The practice became conspicuous in the post war economic boom where firms were interested in being stable and defended against each other by hostile takeovers. Using their interests in each other, corporations formed thick webs of mutually supporting interests. Critics, however, especially international investors and experts on governance have argued that these arrangements may protect the management against accountability to the shareholders, and may decrease the efficiency of the markets.
Japanese regulated bodies and Tokyo Stock Exchange have raised the alarm in the recent years. Codes of corporate governance that have been implemented in the last ten years, have encouraged businesses to provide the economic rationale of the cross-shareholding or dispose them gradually. Regular inspection of banks especially has been increased on the basis of capital adequacy and concentration of risk. Consequently, most financial institutions have made publicly stated policies to diminish equity holdings that are not directly related to the core lending relationships.
This shareholder structure transformation of Nintendo is not the first. In 2019, Japan banks sold a total of 71 billion yen worth of Nintendo shares to a group. It is a much bigger transaction, compared to the case before, indicating a more decisive move towards the direction of governance reforms.
The timing is notable. The gaming industry worldwide is rapidly developing, its cost of development is increasing, and the mobile and cloud-based platforms are becoming more threatening competitors. However, Nintendo is in a comparatively good position, as it has strong intellectual property portfolio and is well-known to have a history of hardware innovation. Although the management of the company has long been conservative regarding long-term creative freedom as opposed to the active use of financial engineering, the share buyback suggests that the management is now ready to operate in capital markets more actively.
On a bigger level, the trend is not only limited to Nintendo. Japanese conglomerates in all industries are reevaluating the cross-shareholding models. More so, the Toyota Motor Corporation is rumored to be planning the massive liquidation of strategic stakes that might possibly entail banks and insurers being divested of billions of dollars of stock. The synchronized changes indicate that the Japanese corporate ecosystem is not adjusting individually, but it is structurally modernizing.
As a would-be investor, this has many sides to it. Less cross-shareholdings can lead to more liquidity as well as shareholder power. Business firms might be put under more pressure to enhance the profitability of their equity and capital efficiency. Simultaneously, the traditional business ties constructed on the basis of mutual equity interests can turn into the more traditional commercial alliances.
In the case of Nintendo itself, the sale is not found to manifest itself in operational weakness. Rather, it is in line with the systemic governance reforms and the priority of capital management on the part of financial institutions. The buy back policy of the firm could serve to reassure the investors that the management team still works on the balance between strategic flexibility and shareholder value.
Another aspect to note is the cultural aspect. The stability of the Japanese corporations was praised during decades due to its continuity and the long-term orientation. However in an ever increasingly globalized market that is becoming more and more transpirous and activism driven by investors, insulation can be construed as stagnation. Through this process of unwinding, Nintendo ends up being involved in a larger process that is redefining the Japanese companies in the world stage.
