Will Resona spark a buyout spree?

FALLOUT FROM THE [yen] 2 trillion bailout of Resona in late May produced many days of turmoil on Tokyo markets as investors ran scared of a financial meltdown.

Bank stocks across the board suffered one of their worst one-day falls in nearly four years, and the troubled banking sector led the Nikkei 225 index down below the 8,000 point mark and into the realms of a 20-year low.

Even before the opening bell rang, fears of a crash in public confidence and a run on the cash machines prompted the Bank of Japan to flood the money market with an extra [yen] 1 trillion. Governor Toshihiko Fukui last took that action exactly two months earlier on the day the US launched its assault on Iraq.

Despite its de facto nationalization of Resona, the Japanese government was determined to allow shares in the battered financial group to continue trading. Sell-orders were piled high as the market opened, and Resona shares quickly took a near 15 percent dive.

But investors have since turned their attention to the significant question of what will happen next, and there are several important clues. They all point, say the analysts, to the prospect of a buyout spree. Japanese banks may have some serious problems, but there are still some extremely profitable operations lurking in the mire. Resona's weak results came in spite of hidden business strengths dotted about the group.

Japan's wider economic problems have already exposed a number of areas where Western buyout groups--such as Ripplewood--are eagerly sifting through the deadwood in search of gems. Investment houses like Goldman Sachs have found prime opportunities in golf courses; others have gone for parts of big retail empires or entertainment conglomerates.

The Japan buyout game may be in its early stages, but if the foreign--or even adventurous domestic--firms descended on the Japanese banks, the whole process could be vastly accelerated. There are also hints that the more visionary elements of the Koizumi administration would be all too happy to let that scenario play itself out.

And all the banks could be buyout targets. After the so-called "Resona Shock," government ministries and financial regulators dripped information about Resona's future into the market. Traders, meanwhile, decided not to risk giving the other big banks the benefit of the doubt. "Look at the economy, look at deflation, look at the bankruptcies," said one SocGen broker. "Resona is not facing these problems alone."

Despite repeated assurances from the Koizumi administration that the financial group's appeal for capital had not triggered a crisis, many took it as a clear sign of worse troubles to come. Others, however, applauded the nationalization as a bold piece of reformist action on the part of the government.

"This is a tacit admission by the govertwnent that the financial system is on the verge of crisis," said Lehman Brothers economist Paul Sheard. "We have long argued that the Financial Crisis Response framework could be used to preempt rather than just react to a crisis."

Mizuho and UFJ, which, like Resona, are the result of recent defensive mergers, are the houses that most believe are in the firing line. Those fears were partially confirmed when Mizuho finally turned in results for fiscal 2002 and hit the market with the biggest loss in Japanese corporate history.

Plenty of experts are now reaching the conclusion that the ultimate solution to the problems of Japan's banks may lie in outside forces: buyout firms coming in, forcing the necessary restructuring and turning a profit. As JP Morgan banks analyst Seiji Otsuka explained: "The Resona group's crisis has steadily worsened, coming as it does right in the midst of a financial system crisis, and indicates that the major banks are having difficulties improving their financial situation on their own."

As investors have quickly realized, ff the same accounting rigor is applied to Resona's rivals and companies in other sectors, they too might fall below the capital adequacy line and into prime buyout territory. The deadwood is plain to see. The question is: Who is bold enough to swoop down and seek out the prizes?