The confrontation between sportswear maker Descente Ltd. and general trading company Itochu Corp. has deepened, with the manufacturer refusing a demand from its largest shareholder to reinforce their relationship. Itochu has acquired additional shares in Descente and requested a renewal of the manufacturer's management. Against this move, Descente entered into a partnership with Wacoal Holdings Corp., aiming to reduce its dependency on Itochu. As a result, the once close relationship between the two Japanese companies has disappeared, and instead, an emotional feud has developed.
Open criticism
"We're not satisfied with the current management [of Descente]. There are problems, including that of communication," Tsuyoshi Hachimura, senior managing executive officer of Itochu, said at a press conference for his company's account settlement on Friday.
Although Itochu is the largest shareholder of Descente, it is rare for a company listed on the First Section of the Tokyo Stock Exchange to openly criticize other listed companies.
Itochu is proud of the fact that it has managed to save Descente from financial crisis multiple times -- when Descente suffered a huge deficit in 1984 due to excessive inventories, Itochu supported it by purchasing shares and dispatching executives to Descente. When a Descente licensing agreement expired with Adidas AG, which had been the biggest earning source for Descente, in 1998, Itochu supported the company.
That changed in 2013 after a president, who had come from Itochu, was replaced by Masatoshi Ishimoto, a member of the founding family of Descente. Ishimoto strongly sought for the company to be run on its own and gradually watered down the relationship with Itochu, with this act lying behind the current confrontation.
A direct trigger of the confrontation was a face-to-face talk by the two company heads in Tokyo in late June this year. According to sources, during the meeting, Masahiro Okafuji, chairman and chief executive officer of Itochu, said to Ishimoto that Itochu was willing to strengthen its involvement in the management of Descente. It is said that he also called for a shakeup of the company's management.
Behind Okafuji's hardline stance is his dissatisfaction with Descente's overseas strategy. Descente's business performance has been strong, with sales hitting a record high of 141.1 billion yen (1.25 billion dollars) in the business year ending March 2018. However, the company depends mostly on business in South Korea for its profits. Itochu has been calling for the expansion of its business into other markets -- including China -- that are expected to grow, but Descente has been slow to respond. During the meeting, Okafuji requested Ishimoto review his strategy, but Ishimoto did not appear willing to do so, according to sources.
Itochu became more frustrated in the wake of the meeting, and it has gradually increased its shareholding in Descente through purchases in the market and other means. Its shareholding percentage increased from about 25 percent to 29.84 percent in October. If the figure exceeds 33.4 percent, Itochu will be able to veto important issues related to the management of Descente, such as capital increases, which will place major pressure on the sportswear company.
When a company increases its stake in another company, the former often informs the latter so that it doesn't strain their relationship. However, as Descente was not informed of the purchase from Itochu, Ishimoto said, "Honestly speaking, we're baffled."
Through a tie-up in August with Wacoal, Descente is attempting to fend off pressure from Itochu. Ishimoto showed a cautious stance on the expansion of cooperation offered from Itochu at a press conference on Oct. 30, which was held regarding his company's account settlement.
"General trading companies are unique to Japan, so they will not be used in overseas business operations," Ishimoto said.
The confrontation is highly likely to remain at a deadlock in the future.
Itochu has another option to make Descente a subsidiary through a hostile takeover bid. However, this is risky.
The strategies of general trading firms, including Itochu, involve strengthening business ties by investing in many companies. If Itochu goes ahead with a hostile takeover bid, it could have a negative impact on the relationship of trust with partner companies that it has built up.
On the other hand, Descente has no choice but to wait for its largest shareholder Itochu to react. Wacoal is cautious about concluding a capital tie-up with Descente, and is unlikely to act as a backer in the fight against Itochu.
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