August 5, 2011 5:42 pm

Proposed Hitachi and MHI link under threat

A potentially historic tie-up between Hitachi and Mitsubishi Heavy Industries (MHI), two of Japan’s biggest and oldest industrial groups, may be unravelling before it began after negotiations exposed conflicting visions of a deal.

MHI is resisting pressure from Hitachi to commit to a full merger, according to people familiar with the situation, preferring a narrower agreement focused on infrastructure businesses such as nuclear power and railroads.

Both companies are struggling to stay competitive with global engineering rivals such as General Electric and Siemens, a task that has been made more difficult by the relentless rise in the yen’s exchange rate. The nuclear meltdowns in Fukushima have meanwhile hurt prospects for growth in nuclear power equipment, a business in which the two groups have invested heavily.

Whatever the potential advantages of a tie-up, MHI is understood to be wary of being dominated by the larger Hitachi, whose market value of roughly Y2,100bn is more than one and a half times that of MHI.

“One problem with a deal is the extent to which MHI would appear as the junior partner,” said Pelham Smithers of Pelham Smithers Associates.

News of the companies’ plans emerged on Thursday when Japan’s Nikkei business daily revealed the talks and said a formal agreement was imminent. It characterised the goal of the negotiations as a merger, albeit one that would begin with infrastructure businesses and move only gradually to a broader integration.

Prospects for a deal moved closer when Hiroaki Nakanishi, Hitachi’s president, confirmed the report and said an announcement was planned for Thursday afternoon. Shares in both companies rose as investors considered the implications of what would be Japan’s largest industrial merger, with the potential to reshape sectors from energy to railways to shipbuilding.

MHI later responded to Thursday’s newspaper report and Mr Nakanishi’s statement by saying it had “no plans to merge”.

However, informal talks were likely to continue, people who have been briefed on the situation said, but the scope and timing of any eventual agreement is unclear. Concluding a deal will be harder during the companies’ summer shutdowns, which Hitachi takes next week and MHI the week after.

For Hitachi, the task of negotiating with MHI is made more complicated by the latter’s membership in the broader Mitsubishi group of companies, which includes Mitsubishi Motors, Mitsubishi Electric and the Mitsubishi Corporation trading house. Although the companies are formally separate, their bosses meet regularly, expect to be consulted on major decisions and are known to be highly protective of the 140-year-old Mitsubishi brand.

Thursday’s disclosure of the talks occurred before other Mitsubishi group members could be properly consulted, the Yomiuri newspaper reported, prompting objections from some executives that may have contributed to the failure to reach a deal.

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