Japan's Telecom "Big Bang"
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In mid-May, Kokusai Denshin Denwa Co., Ltd. (KDD), and Teleway Corp. announced a two-month postponement of their planned merger. Initially, these two firms -- Japan's leading international telephone company and one of the nation's three long-distance telephone firms -- had set October 1, 1998, as the date of their merger, but the May announcement set the date to December 1.
by Yaeko Mitsumori According to news reports, the companies were experiencing trouble agreeing on several of the merger conditions, including stock allotment. Both firms were adamant, however, that they were on track for a merger before the end of the year. According to Kan Higashi, president of Teleway, the prospective bride and groom felt it better to discuss and agree on all relevant issues before the marriage, rather than wait and risk separating soon after the honeymoon. Makio Inui, an analyst with Solomon Smith Barney who specializes in the telecommunications market, says that KDD and Teleway have no choice but to merge. "It is impossible for them to cancel their merger plan now. They have declared the plan in public, and have been gearing up their efforts [towards a merger] for the past six months."
A marriage of necessity As a special corporation under the KDD Law, KDD has until now been protected from a takeover. That law is scheduled to be abolished in July, however, as part of Japan's market liberalization efforts in line with the WTO's (World Trade Organization) Basic Telecommunications Agreement (BTA). Thereafter, it will be difficult for KDD to protect itself from a takeover. But the merger with Teleway, which has Toyota Motor Corp. as its major stockholder, will give the newly born firm a stable and powerful protector. A second reason is that neither firm seems likely to be able to go it alone in the increasingly competitive telecommunications market. KDD is expected to report a loss for the third straight year in fiscal 1998 (ending March 31, 1999) because of a significant reduction in international communications charges. Teleway, meanwhile, reported a concurrent loss in fiscal 1997 (which ended on March 31, 1998), even though Toyota increased its capital investment at the beginning of this year. Japan's other international and long-distance telephone companies have found tie-up partners or have already merged. Japan Telecom (JT), for example, virtually took over ITJ in October 1997, while NTT and IDC announced a tie-up plan in January 1998 and DDI and Teleglobe, the Canadian flag carrier, agreed to join forces in March. Thus, KDD and Teleway would seem to have no choice but to pick each other as prospective partners.
A market on the move The mobile market has also been affected by the Big Bang in Japan's telecommunications market. The first wave has reached the declining PHS (personal handyphone system) market; the number of PHS subscribers has been steadily decreasing since hitting a ceiling of 7 million last September. Last month, therefore, NTT and NTT DoCoMo announced that NTT Personal Communications Network Inc., the PHS companies owned by the NTT group, will be liquidated. NTT Personal reported \223 million in accumulated debt at the end of March 1998. NTT DoCoMo, which owns a 48% stake in NTT Personal, will take over the PHS business by year's end. NTT DoCoMo then plans to market a dual-function cellular/PHS terminal. DDI Pocket Telephone Inc., DDI's PHS company group, and Astel, another PHS company group owned by local electric firms, are also suffering from huge deficits. DDI Pocket reported a \144.5 billion loss and Astel lost \180 billion at the end of March 1998. These losses were attributed to heavy investments for constructing base stations and the large amount of incentives/kickbacks paid to retailers. Both firms are taking drastic, but very different, rescue measures to cope with the situation. Astel intends to slash operating costs, postpone hiring, and put off additional investment, while DDI Pocket will pursue an expansion management strategy. The cellular phone market, in contrast to PHS, continues to expand. But such rapid expansion has been led by the success of NTT DoCoMo, which enjoys the benefits of the NTT brand name and strong technological innovation capabilities. As part of their efforts to compete with NTT DoCoMo, DDI and IDO have decided to jointly launch cdmaOne service, employing technology developed by Qualcomm Inc. NTT DoCoMo, meanwhile, leads the W-CDMA development effort, which NTT is trying to make the international standard for the next-generation IMT-2000 cellular system. The Digital Phone Group and Digital Tuka Group are participating in the W-CDMA effort. DDI and IDO, however, are not joining the W-CDMA team, choosing instead to declare a joint venture and pursue the study of cdmaOne, a next-generation technology based on IS-95.
More competition, more cooperation But it is not only BT. All foreign carriers are reportedly seeking closer ties with Japanese carriers. Solomon's Inui declares that foreign carriers may take over some Japanese carriers in the near future. "When WorldCom and MCI merge, the new firm will have enough financial power to easily purchase KDD, for instance," he notes. Toyota seems poised to play a key role in the Japanese telecommunications market. As previously mentioned, Toyota is behind merger negotiations between KDD and Teleway. Japan's largest automobile firm controls three telecommunications companies (Teleway, IDO, and IDC) and is the sole player whose size rivals that of giant NTT. Total revenues of all the other Japanese telecommunications firms together, for example, is only about one-third of NTT's \6 trillion.Toyota, on the other hand, has annual revenues of about \8 trillion. At the negotiating table with KDD, Teleway reportedly was insisting on an allotment of two Teleway shares for each KDD share, in order to maintain the influence of Toyota in the new firm. KDD, however, was holding out for three Teleway shares per KDD share, in order to dilute Toyota's influence. The former arrangement would give Toyota a 12% stake in the new firm, while the latter would give it a 9% stake. KDD's largest shareholders at present are the Postal Ministry Coop. Association (10.9%), NTT (9.9%), Nippon Life Insurance (6.2%), and Dai-ichi Life Insurance (4.1%). Toyota's intention to wield influence over the new firm has clashed with KDD's pride, prolonging the negotiations. Teleway's Higashi declared that he was 99% certain that an agreement would be reached by the end of July. "We have almost reached consensus," he said, "but have failed to agree on only tiny issues." Considering recent rapid changes in the Japanese and world telecommunications markets, there is little time left for talk. In order to successfully complete the negotiations, Shingo Sakai, managing director of Toyota, was reportedly sent to Teleway as a chief negotiator with KDD.
Market factors Through two subsidiaries established last year -- NTT Worldwide Network Corp., a Type I carrier, and NTT Worldwide Telecommunications Corp., a Type II carrier -- NTT has already launched a variety of international services under the brand name of Arcstar. It is likely that when the international/long-distance firm is established next year, these two subsidiaries will be merged into the new firm. The government, for its part, is maintaining a neutral position regarding the restructuring of the market. As Shun Sakurai, director of the MPT's Telecommunications Policy Division, explains, the government should not stick its nose into the matter. Instead, each company should decide its position according to its policy. "Unless we find a sign that a certain M&A may hinder fair competition, we will let them go," Sakurai says. For both KDD and Teleway, the merger is only the first step in restructuring their business. Both firms have many issues to clear up. KDD has been suffering from a significant drop in international telephone call revenue, due in part to the increased use of substantially cheaper callback and Internet telephone services. Another big factor is gaiatsu (foreign pressure) from the US. KDD, plaintiff of a joint suit against the US government over the US Federal Communications Commission's benchmark order, at last decided to reduce its account charge to 15 cents, the level of the FCC's benchmark requirement. Teleway does not have a rosy future either. Higashi predicts the firm's revenue from long-distance telephone use will not expand this fiscal year because of a large decrease in communications charges is expected due to harsh competition. He expects, however, that revenue from network services, such as frame relay and Internet access, as well as "zero typed" services, will pick up.
Shifting paradigms The Japanese telecommunications industry is facing a new paradigm. To survive in the new world, carriers will have to develop new strategies and new management policies, and they may have to create new tie-ups or seek M&A partners. More and more tie-ups and M&As seem likely for the future.
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