The opportunity for Japan in M&A

By Gideon Franklin

Published Monday 01 February 2016

2015 was a record year for Mergers and Acquisitions, with Japan proving no exception. Total M&A involving Japanese companies was ¥16tr ($130bn), with the outbound component smashing previous records at ¥11tr ($93bn). The ratio of cross–border transactions was the highest ever at 78%. This may appear counterintuitive, as Abenomics has been promoting a weaker yen, which makes buying companies outside Japan more expensive. What I think has happened, however, is that the weaker yen has provided exporters with strong cashflow, which has in turn whetted their appetite for spending on acquisitions. Corporate management is under pressure from shareholders to put its cash to work in such a low interest rate environment.

Looking more closely into the data for Japanese M&A it turns out that the UK was the second most popular destination after the USA measured both by value ($12.9bn) and by number of deals (35). In the last 20 years there have been 437 acquisitions by Japanese companies in the UK with a combined value of ¥13.5tr ($112bn). The UK does enjoy the natural advantages of the English language and some of the world’s finest golf courses, which have always attracted the Japanese. More to the point perhaps is that it is perceived as a relatively easy place to do business from a cultural and regulatory point of view – we do not have the same system of work councils as some European countries and the government does not meddle too much with companies’ affairs.

Recent high profile acquisitions in the UK by Japanese companies include Mitsui Sumitomo Insurance buying the listed Lloyd’s insurance company Amlin ($5.3bn), Nikkei buying the Financial Times ($1.2bn) and Brother acquiring the listed company Domino Printing ($1.5bn). The spread of industries in which Japan is interested is getting ever more diverse, including in recent years manufacturing, media, energy, property, financials, pharmaceutical and consumer sectors. In one of the largest deals in the advertising sector, Dentsu acquired Aegis Group ($4.9bn) in 2012.

The banking crisis has thrown up opportunities, with Mizuho in 2015 acquiring the RBS US loan portfolio for $2.9bn, while Nomura had boosted its international investment banking presence through the purchase of the Lehman Brothers European and Asian operations. Clearly if Japanese industry is going cross-border, the advisors need their own international capacity to support this trend. Traditionally the Japanese trading houses have been at the forefront as partners in Japan’s globalization, but while industry is going it alone more the trading houses are not standing still – the largest Japanese deal globally last year was the $10bn acquisition by Itochu of a stake in the Chinese financial conglomerate CITIC.

So what is fuelling all this activity and is it a good thing?  It comes against the background of a declining population and a disappointing domestic economy. Unless companies in Japan do something they will shrink and no longer be able to offer the lifetime employment which is a core tenet of the system. The food and drinks industry is a classic example. Suntory has been on a global buying spree – Orangina in France, Lucozade and Ribena in the UK, Beam in the USA and Frucor in New Zealand.  To help finance this the company did an IPO of its soft drinks business three years ago. The 210 year old private company Mizkan has acquired Branston Pickle and Sarson’s vinegar from Premier Foods in the UK, and the pasta sauce company Bertolli from Unilever in a $2.2bn transaction in the USA.

I remember when I was a student at Cambridge University reading Japanese I entered an essay contest entitled “The image of the Japanese in the UK media”. In the 1980s there was a debate about whether the advent of the Japanese should be welcomed or not – people protested against plans for Nissan to build a car factory in the UK and scenes were broadcast of US senators breaking Toshiba electronics equipment in protest against Japanese imports. There were fears about the impact of the Japanese on the UK domestic car industry or the US electronics market. Today Nissan is the largest UK car producer. And it fascinates me that the largest US manufacturer Apple does not make anything in America, relying on sourcing in Asia, with the hottest of its components made in Japan – notably  by Toshiba.

I do expect this M&A trend of Japan to continue, but it is not without challenges. The Japanese were not amused by some of the fanfare surrounding the visit to the UK last year of the Chinese president Xi Jinping including initiatives to welcome competitors into markets where Japanese companies felt they had special treatment, such as nuclear power generation and trains. Japan is slow to embrace international accounting standards (IFRS), which means that amortization of goodwill is often a barrier to acquisitions, as companies are reluctant to see the short-term strain on profit. This can lead sometimes to partnership arrangements instead of outright purchases. Also, there remains a lack of international management experience, so acquisitions are often limited to companies which are not perceived to need restructuring and can be left alone.

A feature of 2015, however, has been a broadening of the M&A reach. Italy, for example, saw 13 Japanese M&A deals. The largest ever by a Japanese company was the acquisition by the UK based Hitachi Rail Europe of AnsaldoBreda (rolling stock) and a stake in Ansaldo STS (signaling equipment and turnkey projects) from the state controlled company Finmeccanica. Mitsubishi Electric acquired DeLClima, an air conditioning company, from De’Longhi, providing it with technology in chillers and a footprint for distribution of its own branded products in Europe. There have been significant acquisitions in Sweden, Holland and Turkey. With all its woes, Europe is seen as a good hunting ground, bordered by emerging markets and with companies which have a history of being international. Indeed the biggest ever acquisition in the UK by a Japanese company was a decade ago when Japan Tobacco acquired Gallaher, providing it a big footprint in Russia. This was followed up in 2015 with the $5.0bn acquisition of the international rights to National American Spirit from Reynolds America. Meanwhile another state controlled company, Japan Post, acquired the Australian logistics company Toll in a $5.1bn deal ahead of its privatization.

The image of Japan has changed significantly in recent years. Nothing has done more to help this than the country’s food. New Japanese restaurants are springing up in the UK all the time, from fashionable sushi bars to simple noodle shops. The weak yen makes Japan a cheaper travel destination and a big attraction is often the gastronomy. The slogan “Cool Japan” has been adopted, redolent of “Cool Britannia”, coined to promote the UK in the Blair era. Corporate Japan is now a part of the landscape in the UK. Yokohama Rubber is the Chelsea shirt sponsor. Moreover, Leicester City tops the Premier League as I write, aided by goals from their Japanese player Shinji Okazaki. When a bank is handling the sale of a company they will think early on whether there might be an Asian buyer universe and Japan will no longer be ignored on the basis that it is an unknown quantity or that decision making is too slow.

Notwithstanding all of these changes the level of Japanese activity in M&A could be much, much higher. For every completed deal there are lots where Japan has been second or not got past the starting line. Japan has a huge amount to offer the rest of the world with its special products and technologies. Japanese companies are welcomed now also because they are seen to take the long term view. Contrast the growth of Nissan in the UK with the recently announced cuts by Tata Steel of India (which acquired British Steel) at Port Talbot in Wales. If low cost countries invest in the UK it should be no surprise where they are likely to place their priorities when economies need to be made. For European companies Japan can offer a great partner for expansion into Asia and yes, that includes China, which remains a close trading partner despite political tensions.

Graph showing 20 year history of Japan M&A (Source: Recaf, Gideon Franklin Limited)
(Source: Recaf, Gideon Franklin Limited)
 Pie Chart showing Japan M&A Global Breakdown (Source: Recaf, Gideon Franklin Limited)
(Source: Recaf, Gideon Franklin Limited)
Pie Chart showing Japan M&A European Breakdown
(Source: Recaf, Gideon Franklin Limited)