12/87 PRIVATIZATION: NTT AND JAPAN AIRLINES NIPPON TELEGRAPH & TELEPHONE

One 53 year old housewife living in Tokyo came to pay it all in cash (the 2.55 million yen for purchasing an NTT share on the day of the second public offering of the government's shares). With an ear to ear grin she said "Since the Ministry of Finance is behind this, I am not worried that the price will fall below the present offering price." The closing price of NTT shares on December 28 was 2.16 million yen. Our smiling lady had already lost 390,000 yen per share including brokerage commissions and trading taxes, that reaches about 20% of her initial investment. While no one would claim that all housewives are stock market experts, one Fuji Bank executive did note that since the ministry still plans to sell more of its holdings of NTT shares over the next couple of years, any losses incurred now will surely hurt future sales.

The stock price of NTT shares was already in marked decline even prior to the October 20, 1987 market panic, and nothing except the ministry's powerful intervention had sold its shares, And after the government had sold its shares the stock price continued its decline, assuredly leaving bitter taste in the mouths of the many small investors the ministry had deliberately cultivated for purchasing the shares. Indeed many analysts blamed the general downtrend of the overall market on the NTT share sale as the sale absorbed 5 trillion yen.

In early November, 1987 the Japanese government sold 1.95 million of the shares it held by Nippon Telegraph & Telephone at 2.55 million yen each. This was at a 3.5% discount from the market price prior to the sale. The sale is expected to provide the government with 4.97 trillion yen, from which 60 billion yen will be deducted for fees to 250 Japanese and 35 foreign securities firms for their assistance in selling the issue. The Ministry of Finance reportedly pressured the major Japanese securities firms to orchestrate the market so that it could receive a good price on its sale. Prior to the sale, short-selling of the NTT shares was reportedly discouraged. Indeed, Japanese life insurance firms and trust banks complained that they had started receiving requests from the Ministry of Finance not to sell their holdings of NTT from several days prior to the sale of the shares. The securities companies as well stopped making sales for their own accounts and banned any recommendations for sales of NTT shares. In the actual sale, 314,000 shares were placed on a preferential basis in the hands of friendly shareholders, mostly institutional investors, such as Nippon Life Insurance, and Dai-Ichi Kangyo Bank and Fuji Bank bought 9000 shares each while the Industrial bank of Japan bought 12,000 shares. Insurance companies bought a total of 98,000 shares on this basis, the trust banks 81,000 shares and the local and mutual banks 16,000 shares. The price per share for this preferential selection was 2,700,000 yen per share.

JAPAN AIR LINES SHARES LISTING

The Ministry of Finance was not able to work any of its magic when it sold its remaining shareholdings in Japan Air Lines from December 15, 1987. On that date the government sold 48,099,600 shares or 34.5% of JAL's outstanding shares. Although the company's shares had reached a peak of 20,100 yen on October 15, 1987 and the ministry by late November, 1987 expected to be able to sell the shares at about 17,000 per share, only two weeks later they had to settle for 13,414 yen. At 17,000 yen the ministry had hoped to obtain about 800 billion yen. But pity the poor investor. By the end of December, 1987 prices had fallen as low as 12,300 yen.

UNDERWRITING

Although securities firms reportedly received 60 billion yen for their efforts in the sale of the shares of NTT, it could, in the long term, prove to be an expensive exercise. The Ministry of Finance won a total victory over the securities companies in the sale. The securities companies have long maintained a cartel-like agreement insisting on at least 3.5% of any issue. Yet the ministry was able to get the securities firms to accept 1.49% for the sale of the shares of NTT. The ministry claimed that this was a special case, but the securities firms were concerned that private sector firms may start demanding similar treatment. Indeed, treasurers of major firms such as Hitachi noted that would start seeking discounts from the next time they issue shares. Many remember that when the Ministry of Finance obtained a cut in the commissions for the securities houses in a long term bond issue in April 1986, it also brought down commissions for local government bonds, guaranteed bonds and Samurai bonds. The underwriting group for the sale of the government's remaining holdings of the shares of Japan Air Lines was made up 32 securities firms, including 8 foreign securities houses. This was the first time for foreign securities firms to be given senior positions in the sale of government shares, foreigners are permitted to own up to one-third of the shares of JAL. Thus foreign securities firms were put in charge of the sale of 5.3% of the total sale of shares. The breakdown of the shares of JAL for sale by securities firms was as follows:

Percent of total

Nomura ---16

Daiwa ---14

Nikko ---13

Yamaichi ---13

Nippon Kangyo Kakumaru ---4

New Japan ---4

Sanyo ---3

Wako ---3

Kokusai ---2

Yamatane ---2

Cosmos ---2

Okasan ---2

Dai-ichi ---1

Tokyo ---1

Toyo ---0.8

Universal ---0.8

Marusan ---0.8

Taiheiyo ---0.8

Maruman ---0.5

National ---0.5

Merrill Lynch ---0.5

Morgan Stanley ---0.5

Goldman Sachs ---0.5

Salomon Brothers ---0.5

First Boston ---0.5

S.G. Warburg ---0.5

Kleinwort Benson ---0.5

Jardine Flemming ---0.5

Meiko ---0.3

Towa ---0.3

SOURCE: NIKKEI FINANCIAL DAILY 112187, p.1

THE JAPAN LAWLETTER, December, 1987. By Roderick Seeman