The Japanese government has asked Seoul-based private equity firm MBK Partners to cancel its planned acquisition of machine tool maker Makino Milling Machine, invoking a national security law for only the second time in history.
Makino’s machine tools are widely used in defense applications and the takeover could undermine national security, Finance Minister Satsuki Katayama said in parliament. Makino’s shares dropped as much as 10% on Thursday morning in Tokyo.
The move underscores Japan’s growing concerns over security as the U.S.’s commitment to defend its allies looks increasingly uncertain and tensions with neighboring China simmer. Earlier this week, the country removed restrictions on weapons exports for the first time since World War II.
“We understand this as a case-specific determination made by the Japanese government in light of the evolving characteristics and environment of Japan’s defense sector,” a spokesperson for MBK Partners said. “We are carefully reviewing the Japanese government’s recommendation,” they added.
MBK has until May 1 to respond to the government’s recommendation to abandon the deal, according to a statement by Makino. The government made the request on Wednesday.
Founded in 1937, Makino Milling supplies machine tools to aerospace, automotive, semiconductor and construction industries. Its customers include robot makers Daifuku and Fanuc, as well as Toyota Tsusho and Nikon. The company’s market value fell to ¥264 billion ($1.7 billion) with Thursday’s decline.
Japan’s machine tool industry is designated a core sector under the Foreign Exchange and Foreign Trade Act, which is designed in principle to protect the country from security risks, such as the outflow of military technology.
Prior to this incident, Japan had only ever rejected one deal under the FEFTA, when U.K.-based Children’s Investment Fund had applied for additional shares in power firm Electric Power Development in 2008.
If the Makino deal breaks down, it “will drastically cut future bids by foreign companies” for similar Japanese firms because government approval will look more risky, wrote Arun George, an analyst at Global Equity Research, in a report on Smartkarma.
The incident may also strain South Korea-Japan relations and could “slow South Korean investment in Japan,” George said.
South Korea’s Foreign Ministry did not immediately respond to a request seeking comment.
MBK, co-founded by Michael ByungJu Kim, one of Asia’s most prominent private equity tycoons, had agreed to buy Makino last year.
It’s rare for the government to recommend halting a deal under the FEFTA, said Yuki Kanemoto, a senior researcher at Daiwa Institute of Research. “The importance of national security has increased amid rising geopolitical tensions,” likely making government reviews of takeovers stricter, he said.
Japan’s government issued the request to MBK after considering the risk of a leak in technology or information linked…