Echoes of history in battle over planned Idemitsu merger

Updated : 03.08.2016 / Category Economy


Hoshina Masayuki (1611-1673), founder of what later became the Aizu-Matsudaira clan, established 15 tenets for the Aizu domain, starting with correct moral values for regional samurai. Article 1 of the tenets can be translated as follows: "The Aizu domain must be absolutely loyal to the Tokugawa shogunate. If a lord attempts to usurp this ideal, vassals must admonish and stop the lord—even if he be a descendant of the founder—though it may spell death for such subordinates.

Such precepts, inducing feudal barons to exercise self-control and vassals to embrace self-sacrifice, eventually led to the domain's tragic defeat in the Battle of Aizu, which unfolded during the early part of the Meiji Restoration (1868). The spirits ingrained in the tenets, however, typify stoic samurai discipline, and even today, somewhat reflect Japanese philosophy regarding family, the state—and even modern corporate management.

In recent months, an intra-corporate feud redolent of the tense relationship between lord and vassals has erupted at Idemitsu Kosan Co. Ltd., Japan's second-largest oil wholesaler. It has been widely reported that the founding family, which holds 34 percent of the company's shares (with voting rights), oppose a managerial plan to merge Idemitsu with Showa Shell Sekiyu K.K., the nation's fifth-largest oil wholesaler.

Shosuke Idemitsu, honorary chairman and eldest son of founder Sazo Idemitsu, reportedly will not tolerate management moves that infringe upon the corporate tenets laid down by his father, which call for respect for human dignity, having a "large family" comprising executives and employees run the company, and safeguarding "purism" by not hiring external midcareer workers or executives. Idemitsu Chief Executive Officer Takashi Tsukioka is now reportedly trying to convince Shosuke of the need to realign the wholesale oil industry and reassure him that the proposed merger does not run counter to the firm's tenets.

On the surface, the situation is a clash over corporate precepts—similar to the tense relationship between lord and vassals—though a high-ranking official of the Ministry of Economy, Trade and Industry believes otherwise.

"There would be numerous problems if Idemitsu scrapped its plan to reorganize the wholesale industry, which is aimed at strengthening the oil industry," the official said. "Things get messy when a woman is involved."

It is believed that Shosuke's wife, Chieko, is at the heart of the feud. In a curious coincidence, Chieko, who turns 80 this year, hails from Aizu-Wakamatsu, Fukushima Prefecture, where the Aizu domain was located. If she were wrongly applying the Aizu clan tenets by regarding the management team as vassals who must obey their lord's instructions to the letter, then the dispute would not constitute a clash over corporate ideals, but rather, it would be a spat brought about the authoritarian demands of a woman. Initially, the oil industry was hoodwinked by the founding family.

"Threat from Aracom" used to criticize deal
During an Idemitsu shareholders meeting held at a Tokyo hotel on June 28, lawyer Takujiro Hamada, representing the founding family, voiced his clients' opposition to the merger plan and the casting of votes aimed at blocking reappointment of company board members. Members of the oil industry were unable to fathom the Idemitsu family's true motives, as Hamada cited not only differences in the corporate cultures of Idemitsu and Showa Shell as a reason for the resistance, but animosity between Saudi Arabia and Iran, too.

Saudi Aramco, a state-owned oil company in Saudi Arabia, is a major shareholder in Showa Shell with a stake of about 15 percent, while Idemitsu has reportedly been close to Iran since 1953, when the firm defied an effective British embargo on Iranian oil exports.

If Idemitsu and Showa Shell, which have similarly valued stock prices, decide to wed, Aramco's stake in the merged company would drop to around 6 percent—though the figure would depend on their stock-swap ratio—and the Idemitsu founding family would become top shareholder with a stake of around 20 percent. Speculation was rife that Aramco had been pressuring Idemitsu to increase the Saudi firm's stake in the merged company while also demanding that Idemitsu sever its ties with Iran. But a Showa Shell executive flatly denied the rumors, dismissing them as "unthinkable."

This is because Showa Shell is the biggest refiner of Iranian crude oil among its domestic rivals, even purchasing the energy resource through yen-denominated transactions when Iran was subject to U.S.-led economic sanctions. At one time, the company was selected from among Japanese oil wholesalers to negotiate oil prices with Iran, and has never experienced any form of pressure from Aramco. Idemitsu, on the other hand, buys only 1 percent of its oil from Iran, despite supposedly being pro-Iran.

Then who exactly is behind the corporate feud? There were widespread rumors of involvement by JX Nippon Oil & Energy (formerly the Nippon Oil Corporation). In addition to the Idemitsu-Showa Shell merger application, the Fair Trade Commission is currently screening another unification deal: JX Holdings, the nation's largest oil wholesaler, which has JX Nippon Oil & Energy under its arm, and TonenGeneral Sekiyu K.K. If these two merger plans are realized, JX-TonenGeneral would become Japan's largest oil wholesaler, with a 53 percent market share, while Idemitsu-Showa Shell would occupy 32 percent of the market. Combined, they would control 85 percent of the domestic market.

If the Idemitsu-Showa Shell coupling were to fall through, however, it would be easier for the FTC to approve the other merger. This would present a prime opportunity for JX to pull away Idemitsu, its long-time archrival. Rumors had it that JX had secretly suggested to the Idemitsu founding family that Idemitsu's merger plan was a bad move, though this was flatly denied by an Idemitsu executive.

"Our honorary chairman [Shosuke] was on bad terms with Mr. [former Nippon Oil President and kingpin Yasuoki] Takeuchi when he was Idemitsu president during the 1980s," the executive said. "He's been urging Idemitsu employees to catch and overtake Nippon Oil; there's no contact with JX."

Idemitsu and Showa Shell announced the planned merger in July 2015. Until last fall, Tsukioka was confident about realizing the corporate marriage, saying the founding family had given him a green light to make decisions on the deal.

Shosuke's about-face; Chieko's grudge
Indeed, Tsukioka had received approval from Shosuke to go ahead with the merger. But, if this is the case, what made Shosuke change his mind? And why on earth is Hamada acting as attorney for the founding family?

Hamada, a former Finance Ministry official who later became a lawmaker in both chambers of the Diet, is known as a tax expert. Around 1990, he often appeared on TV programs as a commentator with his businesswoman wife, Makiko. Hamada reportedly met Shosuke via Makiko.

Chieko and Makiko worked together as Japan Airlines cabin attendants over 50 years ago. The two maintained their friendship after Makiko quit her job after just one year. Makiko hosted gatherings of prominent women in the business and political worlds together with Shosuke and Chieko's eldest daughter, Sachiko, director at the Idemitsu Museum of Arts. This connection led to Hamada becoming the family's attorney.

"Mrs. Idemitsu probably complained about the Idemitsu management when she talked to the Hamadas," said an official of a long-standing Idemitsu agent. "She's got a deep-rooted grudge against the management."

The official explained how Shosuke met Chieko, whose Aizu-Wakamatsu-based family built up a fortune based on construction work. Shosuke reportedly fell in love with Chieko at first sight during a JAL flight. Following the marriage, Chieko's family set up a firm—now called Nissho Sangyo, which operates five gas stations in Fukushima Prefecture—and began selling oil products.

Relations between Idemitsu and Chieko's family were sound until Shosuke quit as the fifth Idemitsu president. But in the latter half of the 1990s, things turned sour. In the wake of a financial crisis, Idemitsu abolished the widespread business practice among oil wholesalers of retroactively discounting wholesale prices. Nissho Sangyo was among the Idemitsu agents that had to cough up large sums due to the end of the practice, reportedly paying somewhere between ¥300 million and ¥3 billion.

Chieko was furious over the offhand treatment of her family, directing her rage at the Idemitsu management team, which included Akihiko Tenbo, an executive director in charge of planning and accounting who was the forefront of reforms. However, it was the expansion policies undertaken by Shosuke when he was president that caused the crisis at Idemitsu. Since then, there has been friction between the founding family and the management side.

Idemitsu was headed by members of the Idemitsu family through to the seventh president, Akira Idemitsu. Shosuke served as president for 12 years from 1981, during which time he engineered the introduction of heavy oil cracking devices and ethylene production plants, while making proactive investments aimed at boosting sales. Thanks to his efforts, Idemitsu overtook Nippon Oil to become No. 1 in fuel oil sales in 1997—when Shosuke was chairman. Conversely, the company's outstanding interest-bearing debts swelled to ¥1.3 trillion.

Around that time, U.S. credit rating firm Moody's rated Idemitsu—with capital of only ¥1 billion—as B2 (speculative), triggering concerns about the firm's financial health. Alarmed by this, Tenbo conducted a string of reforms, including the nixing of the retroactive discounts.

Idemitsu went public in 2006 after a fierce battle between Shosuke and the management side led by Tenbo, who became the firm's eighth president prior to its listing, thus ending the founding family's rule.

Tenbo also explored the possibility of forging tie-ups with other companies. For example, Idemitsu merged its petrochemical operation with that of Mitsui Chemicals Inc. and integrated its liquefied petroleum gas business with that of Mitsubishi Corporation. These integrated companies have labor unions: In short, Idemitsu's tenets aimed at ensuring corporate purism and having a large family run the company have already changed in nature.

Thus, the founding family's reasons for objecting to the merger with Showa Shell—differences in corporate culture and claims about a threat from Aracom—seem to have been fabricated for Hamada to use when presenting the founding family's case. This likely demonstrates the level of the founding family's frustration with the Idemitsu management team since Tenbo appeared on the scene.

"The founding family is perhaps concerned about the two sons; particularly Mrs. Idemitsu," said the aforementioned Idemitsu agent official.

The eldest son, Masakazu, and the second son, Masamichi, each hold a 1.5 percent stake in Idemitsu; both entered the company upon graduating from Keio University. Although they have good reputations, neither seems to have inherited Sazo's shrewd business sense.

At one point, Masakazu, now 47, was transferred to become head of the Kobe branch—a move regarded as a stepping stone on the way to becoming a board member. But despite support from those around him, he failed to produce results in line with company expectations. Presently, Masakazu is a representative board member of Nissho Kosan, which manages the family's assets, while Masamichi, two years younger, has yet to hold a managerial position at Idemitsu. Both reportedly believe they should become CEO in light of their bloodline.

It is not difficult to imagine how Chieko feels about the situations of her sons. The ill will she feels toward Idemitsu management likely flared up again as the merger talks proceeded, which reportedly influenced Shosuke's decisions. Shosuke, who turned 89 on July 13, has poor hearing and is unable to speak smoothly.

Shosuke is a cultured figure; he is knowledgeable about objet d'art and curios, and is a skilled pottery maker. When he was president, he offered up visions for the company, though never conducted candid discussions with his subordinates. Consequently, he reportedly has only a few people in whom he can confide regarding various matters.

Acording to observers, the vacuum in the minds of the wealthy old couple has been filled by Hamada and his wife.

Tsukioka must stake everything to convince Shosuke
A dark cloud will remain over Idemitsu as long as Chieko, Makiko and Sachiko hover by Shosuke's side, proffering opinions. Article 4 of the 350-year-old Aizu domain tenets say: "No one shall listen to the words of women."

Unless the management team persuades the founding family to accept and approve the merger plan at an extraordinary shareholders meeting at the end of the year, Idemitsu will no longer be seen as a trustworthy company. Rather, it will likely be regarded as a somewhat bizarre business entity not worthy of partnership, due to its business decisions allegedly being influenced by women who are not part of the corporate board.

Indeed, there is growing skepticism in some Showa Shell quarters, with one source saying, "Idemitsu may well have been trying to acquire our company right from the outset."

Idemitsu plans to buy a 33 percent stake in Showa Shell, held by Royal Dutch Shell Plc, as early as September. If Idemitsu bows out from the deal citing opposition from the founding family, Showa Shell will fall under Idemitsu's arm. If the latter continues to buy Showa Shell shares and send its officials to the former's board, it will be able to demand that Showa Shell adopt Idemitsu's "Apollo" brand, and incorporate "Idemitsu" into its company name.

Skeptics, therefore, believe Idemitsu's true intention is to acquire Showa Shell, with the spat between the founding family and the management being no more than a ploy to realize the desired result. Idemitsu executives flatly reject such a scenario. But how does Shosuke feel about the fact that the feud has tarnished Idemitsu's reputation so much that even Showa Shell officials believe such a scenario?

"Shosuke didn't fire CEO Tsukioka at the shareholders meeting, even though he could have done," a securities industry source said. "This shows there's still room for reconciliation."

Tsukioka was reappointed with support from only 52 percent of the shareholders. Shosuke could have urged long-standing Idemitsu agents—who were allotted Idemitsu shares before the company was listed—to vote against Tsukioka's reappointments, as the agents are treated as "family" by Shosuke.

What options are open to Tsukioka now? He could try to persuade Shosuke to accept the merger deal by offering to quit his post and accept Masakazu and Masamitsu as outside directors. But the lord who allowed his vassals to "die" when trying to block a bad decision did not enjoy the same authority and respect as before. Shosuke may well end up—after much confusion—in a similar situation following the planned merger of Idemitsu and Showa Shell.


This is a translation of an article from the August 2016 issue of Sentaku. The original article can be found here.