Prospective buyers will be allowed to offer shares instead of cash in their acquisition bids.

Saddled with stubbornly depressed share prices and a pending change in corporate law that eases restrictions on foreign firms, Japanese companies are peering over the battlements for an expected onslaught of takeover attempts, sources say.

The Legislative Council of the Justice Ministry is preparing bills slated to take effect as early as 2006 that will dramatically change the rules for incorporation.

Procedures for corporate mergers will be simplified and hurdles for establishing a joint-stock company, such as the minimum initial capital requirement, will be removed.

As a result, it will be possible to set up a company with as little as 1 yen in capital.

Most worrying to Japanese corporate executives, however, is the provision for allowing foreign firms to offer shares instead of cash in their acquisition bid-a great boon to those bent on M&A.

Fear of hostile takeovers by foreign firms has driven some major Japanese companies to tie up with domestic rivals to beef up capitalization.

One example is drugmaker Yamanouchi Pharmaceutical Co., which in February announced a plan to merge with Fujisawa Pharmaceutical Co.

At the time, Yamanouchi, which trades on the Tokyo Stock Exchange, was capitalized at about 1.2 trillion yen, making it an attractive target for Western titans such as Pfizer Inc. of the United States, which is worth over 20 trillion yen.

``If a foreign firm like that comes to buy us, we will have no protection and can easily be swallowed up by them,'' said Yamanouchi President Toichi Takenaka.

The greater the disparity in net worth between firms, the easier it is to accomplish a takeover.

For example, if a company worth 2 trillion yen seeks to take over a firm capitalized at 200 billion yen, the acquisition is relatively difficult.

The firm attempting the takeover would need to issue 200 billion yen worth of additional shares, thus increasing the number of its shares by 10 percent, thereby diluting its outstanding shares substantially.

On the other hand, a firm capitalized at 20 trillion yen would only need to increase its capitalization by 1 percent.

In the past, Japanese firms have fended off takeover attempts by collaborating with partners and crossholding shares.

However, the introduction of mark-to-market accounting, which forces firms to appraise their assets at current market value, has changed the business landscape. As stocks plunged during the economic downturn, the crossholding arrangement broke down.

It isn't only company executives who fear a surge of hostile takeovers. Bureaucrats and securities traders are anticipating an upsurge as well, according to sources.

Executives at banking giant Mitsubishi Tokyo Financial Group, which plans to merge with the UFJ Group next October, said the megamerger was in part prompted by worries of foreign takeover attempts.

With the exception of bona fide business titans like Toyota Motor Corp., one of the world's largest automakers, many corporations look ripe for the picking.

Particularly jittery are firms in sectors that have large-capital rivals in the United States, such as retail, pharmaceuticals and financial firms.

Even Nippon Keidanren (Japan Business Federation), normally a champion of deregulation, issued a statement in November calling for protective measures against foreign takeover attempts.

Analysts point out that Japanese firms are particularly vulnerable to takeover attempts because their share prices are relatively low compared to U.S. rivals.(IHT/Asahi: December 10,2004)