In the first place, the structure makes it almost practically impossible to break the discipline of M&A in itself, and the “discipline of M&A,” which has been the most important aspect of our company since we went public, will not change.

The two reasons are as follows.

①The Company is not in a position to freely use surplus funds at its own discretion and is forced to be examined to get finance for each M&A, making it virtually impossible to force through undisciplined M&A.

② Theoretically, M&A through stock issuance in disregard of stock price is a possibility. However, since the incentive in this case is not cash but a stock acquisition right and the mechanism is such that no benefits accrue without an increase in the stock price, an increase in the stock price itself is a clear incentive.

Let us explain each of them.

①The Company is not in a position to freely use surplus funds at its own discretion and is forced to be examined to get finance for each M&A, making it virtually impossible to force through undisciplined M&A.

If we had ample equity capital and cash on hand, we might be at risk of executing an unreasonable M&A based solely on our own judgment. However, the reality is different.

We are a developing company which is in the eighth year since its establishment and has only accumulated seven fiscal years of financial results. Therefore, each time we execute an M&A, we need to raise funds from creditors and investors and undergo their review.

In particular, in M&A through borrowing, which we mainly carry out, financial institutions as creditors have a strict view of “downside risk.” We go through a process in which detailed M&A information (which is not disclosed to equity investors) is shared with creditors before they make a decision on financing.

Thus, even if we were to ignore our discipline and pursue reckless M&A, it would not be feasible because we would not be able to obtain financing.

→ As a result, our structure has always allowed us to execute only “disciplined M&A.”

We add a supplementary point regarding equity financing just to make sure. Although such a situation is not possible in practice, it is not absolutely impossible for a listed company to raise funds by forcibly issuing new shares in disregard of equity value.

However, the reason why such a situation cannot happen in reality is not simply a matter of ethics or the rule of faith, but because the stock acquisition right incentive we have designed is a mechanism that discourages such behavior from the standpoint of economic rationality. We will explain this in ②.

②Theoretically, M&A through stock issuance in disregard of the stock price is a possibility, but since the incentive in this case is not cash but a stock acquisition right and the mechanism is such that no benefits accrue without an increase in the stock price, an increase in the stock price itself is a clear incentive.

We will explain that the design of the stock options (stock acquisition rights) we are introducing does not in itself have any incentive to break the discipline of M&A.

First of all, if the incentive were to be “a ‘cash’ bonus for achieving EBITDA of 75.0 billion yen,” there could be an incentive to pursue EBITDA alone, even at the expense of the stock price.

However, since these are stock acquisition rights, they can only be exercised if “the stock price at the time of issuance is at or above the stock price at the time of issuance.” We assume the issuance within this fiscal year and the stock price at the time of issuance will be determined at that moment (However, since they can be exercised only when both the performance-related and tenure-related conditions are fulfilled, dilution will not occur until the financial results for the fiscal year ending on January 31, 2030 are finalized.).

Only the amount in excess of the stock price at the time of its issuance will be the incentive. To give a simple example, for example, let me see a case of an officer or employee who was allocated 1,000 shares at a share price of 1,000 yen. If the person remains with the company until the end of January 2029 and an EBITDA of 75.0 billion yen is achieved in the fiscal year ending on January 31, 2030.

If the stock price remains at 1,000 yen, 1,000,000 yen worth of stock acquisition rights become exercisable. However, the incentive is zero because 1,000,000 yen must be paid upon exercise. Similarly, if the stock price were 5,000 yen, the incentive would be 4,000,000 yen because it would be worth 5,000,000 yen and 1,000,000 yen would be paid upon exercise.

In other words, this incentive is designed to be “beneficial only when the stock price rises.”

In addition, especially, our officers and employees, who are in almost constant contact with M&A information, have significant restrictions on selling their shares, unlike our outside shareholders. We will be able to exercise our GENDA shares for the first time approximately five years from now, and will also have to pay the exercise price first upon exercise.

Therefore, we hope that you will understand that even a slight increase in the stock price is not enough.

As described above, the design is to maximize shareholder value along with earnings growth, or more precisely, to maximize “equity value per share,” which is also in the interest of the officers and employees themselves.

As described above, we have a structure that makes it structurally difficult to deviate from discipline in M&A, based on the dual safeguards of rigorous funding screening for each M&A project due to financial constraints and sound incentive design in stock options.

Even if these mechanisms did not exist, we would continue to consistently orient and accelerate our “growth through disciplined M&A.” We will continue to earnestly serve our shareholders and all other stakeholders and work to steadily and sustainably enhance our enterprise value. We would sincerely appreciate your continued support.