At the height of the 1980s Japanese economic bubble, Akio Morita, co-founder of Sony, which had just paid $3.4 billion for Columbia Pictures, set an already anxious corporate America on edge.
“If you don’t want Japan to buy it,” Morita said, “don’t sell it.”
More than 25 years on that infamous line has crept back into Japanese boardrooms in 2015, girding sentiment as outbound deal-making surpasses Y10 trillion ($82 billion) for the first time. The buying is being led by a new generation of chief executives — leaders who appear driven more by necessity than narcissism this time around.
They have seen the demographic charts that promise long-term decline at home and are now scrutinised by shareholders no longer tolerant of trophy purchases.
The overseas acquisition boom predates the 2013 arrival of Abenomics but has swollen under its influence. Prime Minister Shinzo Abe’s new corporate governance code means companies are under intense pressure to raise their return on equity and justify their vast stockpiles of cash.
Some have bought back shares, others have raised dividends, many have opted to do acquisitions. The result has been a collective lunge by Japan Inc. for businesses ranging from banks and niche cigarette brands to logistics companies and the ‘Financial Times’. In the insurance sector alone, Japanese companies struck $25 billion of deals during 2015.
The overseas spending is strongly tipped to continue even as Japan battles a spendthrift reputation that has led some critics to quip that if it paid Y10 trillion for its various prizes, it probably overpaid by Y5 trillion. The criticism dates back to whimsical acquisitions in the 1980s.
But if Japan Inc. has overpaid in the past 12 months the motivation for doing so seems clear: business survival. More than a quarter of Japan’s population is aged over 65 and its birth rate is among the lowest in the OECD.
The insurance business has been one of the first to feel the full impact of this demographic shift, hence its position as the most active buyer overseas this year.
Large-scale immigration has been all but ruled out, leaving companies in the banking, retail and consumer products sectors facing a declining domestic market and economic growth in long-term jeopardy. Amid such stark projections the premium paid for overseas assets, say deal advisers, is seen as the going rate to stay in business.
“It’s a nightmare for CEOs when top-line growth is declining,” says Yoshihiko Yano, head of M&A at Goldman Sachs in Tokyo. “Everybody wants to do an overseas acquisition. Even a company with just a $1 billion market capitalisation may want to acquire another firm that is larger than itself.”
Behind the dealmakers, quite apart from the ultra-low interest rate environment, is a banking sector desperate for long-term lending opportunities. The Japanese deals come on the back of a bumper year for mergers and acquisitions worldwide, totalling $4.9 trillion. The pivotal question in Tokyo however is whether this resurrected Japanese dealmaker is any good at making deals.
The instinct, admit M&A bankers, is to look at takeovers that went horribly wrong, such as Kirin’s 2011 purchase of Brazil’s Schincariol and Lixil’s 2015 debacle buying a fraudulent Chinese asset, and assume not.
The Morita comment was a cruel high water mark. In the years that followed, Japan’s bubble burst, the risk appetite retreated and the country’s reputation as a trophy-hunting swashbuckler shrivelled. Now, a quarter of a century later, a rather different Japan — its coffers recharged by cost-cutting and the weak yen and its motives transformed by the rise of China and its own demographics — has returned as a voracious buyer beyond its borders.
A growing number of companies have in-house M&A departments. Wary of the ever more competitive international environment for landing quality assets, its companies have also learnt to be more nimble. “The big trend over the past few years is that Japanese businesses are not letting perfect be the enemy of good,” says Ed Cole, managing partner at law firm Freshfields Bruckhaus Deringer.
Bankers and lawyers argue that Japan has not overpaid unreasonably for its targets between 2012 and 2015, and that its deal-making should not be judged in the same way as outbound acquisitions by US or European players.
“[Japanese companies] want good quality assets and they want to keep the existing management team in place,” says Peter Eadon-Clarke, chief Japan strategist at Macquarie. “What you are seeing is Japanese companies paying a full price to achieve that.”
Figures by Dealogic, the data provider, show that the median premium [based on a pre-deal target share price] paid by Japanese companies for overseas deals exceeded 35 per cent this year, twice the figure paid by US buyers. However, when judged by enterprise value to earnings before interest, tax, depreciation and amortisation Japanese and US buyers paid almost the same to secure their targets.
Japanese companies, says Matthias Horbach, an M&A lawyer at Skadden, Arps, Slate, Meagher and Flom, have a very long investment term and can pay higher prices than companies from other countries or private equity funds that expect to achieve their returns a lot faster. Equally, say others, Japanese deals are not always driven by cost but more often by revenue and products.
“Japanese M&A is still not driven by the idea of increasing shareholder value,” says Shinsuke Tsunoda, the global head of M&A at Nomura. “They think more in terms of whether the deal is good for the companies and its employees in the longer term.”
The lack of strong domestic growth — the economy expanded at an annualised rate of 1 per cent in the third quarter — is just one of many long-term threats that have driven Japanese companies abroad. The recently agreed Trans-Pacific Partnership deal, a multilateral free-trade agreement that will remove some of the protections Japanese companies have enjoyed, is another catalyst.
But for corporate Japan the threat from a rising China is the more daunting prospect. For more than a decade it has been clear that China’s domestic market is large enough to propel the country’s companies to the top three global players in every sector from steel to banking.
The burst of outbound M&A has, in large part, been a response to that: to secure Japan’s place at the top table before the ambition becomes impossible. Its companies, says Tsunoda, want to use overseas M&A to secure their positions so that they do not become targets themselves. “To expand their businesses and profits, relying on Japan is not sensible,” he says.
Driven by lower interest rates and a need to diversify from a shrinking domestic market, the insurance industry has accounted for nearly 30 per cent of the value of outbound deals by Japanese companies this year, according to Dealogic. The spending represents a synchronised response to an approaching crisis.
A deal was announced each month between June and September by the sector’s biggest players: the largest was the $7.5 billion acquisition of HCC by Tokio Marine. But the $5 billion takeover of StanCorp Financial Group by Meiji Yasuda Life Insurance, and the $3.8 billion purchase of Symetra Financial by Sumitomo Life Insurance were not far behind.
All of these deals gave the Japanese companies greater access to the US, the world’s largest life insurance market. The flurry of activity closed with a $5.3 billion bid for UK-listed insurer Amlin by Mitsui Sumitomo, a subsidiary of MS & AD.
Some insurers are also cementing their positions at home before venturing abroad with Nippon Life spending $2.3 billion to buy smaller rival Mitsui Life. Domestic consolidation has been a constant theme this year with rivals in oil, regional banking and consumer electronics also merging.
Bankers are counting on more activity in the insurance market, but also in other sectors facing the same long-term dilemma. Nomura, the country’s largest brokerage, has agreed to pay $1 billion for a 40 per cent stake in US American Century Investments.
“For insurance companies, the government itself is pushing them to purchase overseas assets. Otherwise, policyholders in Japan may not be protected over the next 50 years,” says one M&A banker at a US brokerage.
Some advisers warn that the Japanese rush to follow peers with headline-grabbing deals could result in sloppy due diligence. “I have my doubts as to whether some of these deals will work,” says an M&A lawyer at a US-based firm, highlighting the difficulty in assessing the quality of some of the assets bought.
Investors balked when Japan Tobacco paid $5 billion for the non-US business of the Natural American Spirit brand. Shares in the Japanese company slipped 9 per cent in the three days after the deal was announced in September.
The response seemed justified. The company had not fully explained its rationale for the money paid to Reynolds American while Credit Suisse quickly estimated the buying price at 65 times the brand’s earnings before interest, tax, depreciation and amortisation.
Investors asked if the Japanese had overpaid again. M&A advisers say that Japanese companies operate on different financial metrics and investment timescales that can often explain chunky premiums. When executives talk about synergy, for example, the Japanese aim to expand market share and product profile, while US companies focus on squeezing costs.
Some Japanese buyers such as Bridgestone, which bought US tyremaker Firestone in 1988, are willing to wait a decade to recover acquisition costs, a time-horizon not given to companies elsewhere facing shareholder pressure.
JT executives say they expect to recover the $5 billion investment over five years, helped by a 22 per cent saving from tax efficiency related to goodwill accounting. The deal also offered JT a rare opportunity to buy a premium brand that is growing fast in its own home market. Anticipated sales in Japan alone, executives say, are enough to justify the high price.
“This is a deal that will clearly enhance JT’s growth potential,” argues Naohiro Minami, its chief financial officer. Following the initial sell-off, its shares recovered and are now 13 per cent higher than when the deal was struck.
JT’s 7.5 billion pound acquisition of UK-based Gallaher in 2007 and its 1999 purchase of the non-US tobacco business of RJR Nabisco were also criticised, but the deals are now seen as textbook examples of how a Japanese company can grow into an international force.
Hideo Takasaki, the chief executive of Nitto Denko, the world’s biggest maker of optical films used on Apple’s iPhone screens, is looking hard at a list of overseas targets brought to him by both bankers and his employees.
“The price of M&A deals keep rising,” Takasaki complains. “It’s becoming like a bubble.”
Nitto Denko, like many Japanese parts suppliers needs new applications and markets from cars to health care to reduce its reliance on smartphone sales. The company has a budget of Y150 billion ($1.2bn) for M&A and other investments to be completed by the 2017-18 financial year. “We want to buy speed so we are willing to pay a premium,” Takasaki says.
He is not alone. Panasonic agreed to acquire US refrigerated display case maker Hussmann for $1.5 billion as part of the $8.2 billion it has set aside for purchases between now and 2019.
Advisers say sectors such as beverages and pharmaceuticals, which were aggressive in the last acquisition boom in about 2010, could return to the M&A scene in 2016, spurred by consolidation in global markets. Japanese drinks group Asahi appears interested in assets that Anheuser-Busch InBev will spin off to allay regulatory concerns over its proposed 71 billion pound acquisition of SABMiller, say bankers.
“There is substantial global consolidation in a number of key industries of Japanese interest,” says Kenneth Siegel, managing partner at law firm Morrison & Foerster. “It is hard for many Japanese companies to keep pace. They face the danger of becoming an isolated archipelago.”
Japanese buyers are increasingly targeting companies in developed markets where prices tend to be lower and where assets are considered better quality, says Shinsuke Tsunoda, the global head of M&A at Nomura. According to Dealogic, the US was the most popular destination for Japanese buyers last year, accounting for 39 per cent of outbound deals, while the UK made up 11 per cent.
— Financial Times
