The Journal The Authority on Global Business in Japan

Japan is in the midst of a merger and acquisition (M&A) boom, with cashed-up companies eager to seize growth opportunities overseas, while inbound deals have also picked up speed.

But with research showing more than half of all M&A transactions fail, domestic and foreign acquirers have been warned to avoid burning their cash in the race to acquire assets.

Although Chinese investments have hit the headlines, even a weak yen has failed to deter Japanese companies from racking up record overseas deals, outspending even their Asian rivals.



According to online M&A platform developer Equity X Inc., Japanese outbound M&A transactions hit a record high of nearly $69 billion in the first nine months of 2015, up more than 50 percent compared with the previous year.

A shrinking domestic market, an aging population, and the cheap cost of capital have sparked the flight overseas, which has already topped the 2012 record tally of ¥7.1 trillion.

In 2014, North America was the top target for outbound M&As, followed by Southeast Asia, western Europe, and northern Asia, with the financial, industrial, and technology sectors attracting the bulk of investments.

According to Dealogic, a New York-based financial software company, Japanese acquirers paid an almost 46 percent premium for their overseas acquisitions during the first quarter of 2015, well above the global average of 22 percent.

But with record corporate profits, an estimated $2 trillion of cash holdings, and a renewed focus on return on equity (ROE), firms have heeded Prime Minister Shinzo Abe’s call to add value for shareholders.

Kenneth Lebrun, chair of the Foreign Direct Investment (FDI) Committee of the American Chamber of Commerce in Japan (ACCJ), sees little sign of a slowdown in Japan, Inc.’s push to go global.

“It’s ultimately because of Japan’s demographics and the potential for economic growth here. The population is going to drop from 125 million to 100 million, and then to 90 million in between 30 and 40 years.

“That’s a daunting future for almost all Japanese companies, whether you’re selling beer, food, insurance or anything else. Companies have got to go outbound if they want to grow,” says Lebrun, a partner at law firm Shearman & Sterling’s Tokyo office.

Unlike the bubble era of the 1980s, when Japanese companies snapped up “trophy” US assets like Rockefeller Plaza and Pebble Beach, Lebrun says this time there is strategy to their approach.

“They are willing to pay for the assets they want. They have a longer-term view and a lower cost of capital than most US or European investors, along with a lower ROE, so the hurdle rate to make a successful acquisition is lower.

“From a Western perspective, it’s often argued that they’re overpaying . . . but the acquisitions over the past few years have been logical, strategic acquisitions.

“They’re buying sensible businesses to achieve their strategic objective of not being as dependent on the Japanese market,” Lebrun says.

In fiscal 2014, although overseas M&A deals by Japanese companies numbered a record high of 557, inbound transactions also grew for the third straight year to 1,558, the highest number since 2009.

Yet, despite the recent surge, Japan’s stock of FDI as a percentage of GDP stood at just 3.5 percent at the end of 2013, well below the Organisation for Economic Co-operation and Development (OECD) members’ average of 32 percent.

Keen to improve the ratio, the administration of Prime Minister Shinzo Abe has launched measures aimed at achieving ¥35 trillion worth of inward FDI by 2020. The steps taken include the setting up of an official FDI Promotion Council and the establishment of strategic special zones. The latter will offer incentives for foreign companies to establish businesses in designated areas.

The ACCJ has welcomed moves to lower the corporate tax rate and changes to corporate governance, including the creation of a stewardship code.

But, obstacles remain, such as a business culture resistant to M&As, a lack of independent directors, exclusive supplier networks, and restrictive labor practices.

Mai Suenaga, a lawyer at Clayton Utz, says that more effort is required to streamline the approvals process—to include the lodging of necessary documents in English rather than Japanese—although the economy remains the key consideration.

The ACCJ has pointed to M&A barriers, including anti-takeover defenses and the tax treatment of corporate reorganizations, arguing in a 2010 white paper that: “Japan is the developed nation that presently benefits the least, but has the most to gain, from increasing inflows of FDI.”

Nevertheless, the US State Department points to Japan’s continuing attractiveness as the world’s third-biggest economy. In addition, there are its intellectual property protections, as well as recent moves to cut capital gains, gift taxes, and the corporate tax rate.

Foreign takeovers of Japanese firms in Japan remain relatively rare, a factor attributed to differences in corporate culture and a perception that foreign acquisitions will lead to layoffs.

However, Ralf Bebenroth, professor at Kobe University’s Research Institute for Economics and Business Administration, says positive examples such as French automaker Renault’s 1999 takeover of Nissan Motor Co., Ltd have begun to change opinions.

“Employees in any firm, whether Japanese or otherwise, are generally against a takeover as there is normally some restructuring, and in Japan this opposition is even stronger due to the ‘insider’ culture. But when Renault took over Nissan, the Japanese started to understand that a strategic acquisition could be beneficial,” he says.


Bebenroth says the post-merger integration period is crucial, with foreign acquirers of Japanese companies needing to “take decisions instead of just being friendly to the Japanese employees” to realize synergies.

“You need to know what’s going on by installing your own executives, such as the CFO. I would also argue for employing local foreigners, and for Japanese who have lived abroad,” he says.

Bebenroth pointed to research showing that employees are more important than strategic and financial aspects in determining the success of an M&A.

“The key success factor is having the right strategy—just jumping in typically ends in failure, especially in Japan if you don’t have a relationship already.

“Employees are the key factor . . . for the target firm employees, procedural justice is most important so they know where they stand and what’s happening, while the bidder firm employees need good information,” he says.

Bebenroth suggests at least one out of 10 top managers be non-Japanese, to connect the affiliate to headquarters, using a 50:50 ratio of expatriates to locally hired foreigners. He also advises using a Western-style performance-based pay system, together with offering genuine career opportunities for staff.

Japanese employees can expect more M&A activity ahead, especially with the retirement of the baby-boomer generation. According to Bloomberg News, two-thirds of Japan’s small businesses have no successors, with 95 percent of companies still family run.

“An aging society with fewer children poses business succession problems for many business owners,” says Akio Kurata, CEO of Equity X.

“In this sense, foreign-based private equity firms in Japan can play the role of catalysts for leading inbound M&A transactions.”

The signing of the Trans-Pacific Partnership Agreement could also spark further M&A activity, such as in Japan’s agricultural and auto industries. In the meantime, though, it is full speed ahead for Japan’s offshore push, even as policymakers attempt to coax greater domestic investment.

“There’s an unbelievable amount of inefficiently used assets locked up in corporate Japan that should be transferred to companies that can use them more efficiently,” argues Shearman & Sterling’s Lebrun.

“Unless Japan allows in another million people a year, the only way to squeeze more growth is to become more productive and efficient, and that’s where M&A is critical.”




Anthony Fensom is an experienced business writer and communication consultant with more than a decade’s experience in the financial and media industries of Australia and Asia.