Japanese cross-border M&A
February 2015 | TALKINGPOINT | MERGERS & ACQUISITIONS
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FW speaks with Shigeki Tatsuno and Akitaka Anzai, partners at Anderson Mori & Tomotsune, about Japanese cross-border M&A.
FW: In your opinion, what factors have driven an increase in cross-border M&A activity involving Japanese companies?
Tatsuno: The Japanese market is shrinking due to Japan’s declining population. This is encouraging Japanese companies to consider entering overseas markets. In addition, as the cost of labour in Japan is comparatively high, Japanese industries are looking for ways to reduce costs and increase their goods’ price competitiveness. Due to these factors, we are seeing an increasing number of Japanese companies expanding their businesses abroad, not only in South East Asia, areas which are both geographically near to Japan and have growing domestic markets, but also in other emerging market economies. On the other hand, for overseas companies, the current weakness of the Japanese yen makes Japanese companies good acquisition targets. Fortunately for acquisitive overseas companies, such targets are readily available due to the recent trend of Japanese corporate reorganisations in which non-core or unprofitable businesses are sold off. In addition, in every market sector, many major Japanese companies are seeking to adapt so that they are competitive in the global marketplace. For this reason, we are seeing a number of large Japanese corporates seeking large M&A deals with major European and American companies, to increase their worldwide market share.
FW: Which sectors and regions seem to be particularly attractive to both Japanese outbound acquirers and foreign inbound acquirers?
Anzai: The emerging market economies are particularly attractive to Japanese outbound acquirers at the moment, not only in the manufacturing sector, but also the non-manufacturing sector. The emerging markets have rapidly growing populations and therefore large markets, which are being targeted by Japanese companies through strategic M&A transactions in those overseas countries. With respect to the manufacturing sector, some of Japan’s biggest companies are car manufacturers which have embraced overseas expansion so that they now have a presence in many overseas markets. Accordingly, it is natural for Japanese car parts manufacturers to expand their businesses in the countries in which their principal clients, car manufacturers, have a presence. Furthermore, although primary industry continues to relocate to lower-cost emerging markets, the Japanese tertiary sector, or non-manufacturing sector, is expanding. According to all publicly available statistics, we have seen a notable amount of outbound M&A activity from Japanese companies in the finance, IT, real estate and entertainment sectors. Unprofitable or non-core businesses of struggling Japanese companies are good targets for foreign inbound acquirers. Foreign acquisition is particularly strong in the electronic goods manufacturing and semi-conductor manufacturing industries.
“We are seeing a number of large Japanese corporates seeking large M&A deals with major European and American companies, to increase their worldwide market share.”
FW: Could you outline some of the common issues that may arise when Japanese dealmakers are negotiating and closing cross-border mergers and acquisitions, such as the general expectations and preconceptions of the process on both sides of the deal?
Tatsuno: One key difference is the speed of decision making. Japanese companies are generally slower at making decisions because they tend to have complex internal approval processes, and decisions have to be discussed and approved by many different layers of management, known as ringi in Japanese. Japanese deal teams also tend to have less authority to negotiate issues or conclude documentation than their foreign counterparts, and will have to seek internal approval in a wider range of circumstances. In particular, members of the Japanese deal team will be required to present material issues to senior management for review and approval. Due to the need to obtain internal approvals, a Japanese deal team is likely also to be more willing to spend time documenting and analysing all potential issues with a deal, including those that are unlikely to occur in practice. This is due to the more risk-averse business culture prevalent in Japan and a thorough consideration of all of the risks inherent in any decision may be a prerequisite for obtaining internal approval. Japanese listed companies tend to be particularly risk-averse. Of course, English is not the native language of Japanese people, and the quality of English is very variable. Accordingly, where negotiations or documents are in English, the Japanese counterparty will require more support from their lawyers or may need to wait for translations of key documents or information, which further lengthens the negotiation process.
FW: To what extent do cultural and regulatory differences play a part when a Japanese company pursues an overseas target?
Anzai: When negotiating and drafting required documents and agreements in transactions where a Japanese company acquires an overseas company, Japanese companies may sometimes hesitate in presenting their requirements to counterparties due to their lack of facility in English and the Japanese cultural concern that making strong demands may undermine the transaction or their relationship with the counterparty. Therefore, we sometimes see transactions proceeding in favour of non-Japanese counterparties. To prevent this from occurring Japanese law firms familiar with Japanese business culture, can support such Japanese companies and negotiate their requests with foreign counterparties and counsel. A major hurdle for Japanese companies seeking to expand in emerging markets is the foreign ownership restriction that features in many of those jurisdictions. In some jurisdictions, if a Japanese company wishes to own or incorporate an overseas company it cannot own 100 percent of the shares and must partner with a local entity. Furthermore, there may be additional restrictions on foreign possession of necessary licences or ownership of land.
“Japanese business culture is often very different to that in other areas of the world and therefore careful thinking is sometimes needed to integrate firms which come from very different cultural backgrounds.”
FW: What advice would you give to Japanese acquirers in terms of making their due diligence and risk management processes as effective as possible?
Tatsuno: Japanese companies are often faced with a large number of foreign language documents to review in the due diligence process. Therefore, Japanese acquirers will need to appoint and rely upon local professionals to conduct due diligence (DD) and review the risk management process. The scope of DD in foreign countries generally is not notably different from DD undertaken in purely Japanese domestic matters. However, Japanese companies will need to rely upon their local advisers to instruct them as to the key issues arising in the DD process. Japanese acquirers should discuss the scope of DD with local advisers in advance and seek to understand the issues that are important in the jurisdiction of interest. For example, government filings and regulatory requirements are usually very jurisdiction-dependent and Japanese companies will need particular support in analysing such documents.
FW: What are the main challenges faced on both the buy and sell-side when undertaking post-deal integration? How should Japanese outbound acquirers, as well as foreign inbound acquirers, address these problems?
Anzai: Japanese business culture is often very different to that in other areas of the world and therefore careful thinking is sometimes needed to integrate firms which come from very different cultural backgrounds. In this regard, labour issues are typically a major challenge. Japanese companies are usually concerned about whether there are sufficient local employees in the overseas company in order to manage and operate the new acquisition. As always, the language barrier means that Japanese companies must typically rely on their local employees in overseas markets. For Japanese sellers, those Japanese employees who will be transferred to a foreign entity are typically very concerned, as they suspect that they may be laid off. This could cause low workforce morale and a drop in company loyalty. In either case, a strong degree of understanding of local culture and good clear channels of communication can assist in resolving such integration issues.
“‘Abenomics’ has provided a boost to Japanese companies in recent years, by making more cash available to companies for growth and investment.”
FW: In recent months, Japanese companies have been shedding underperforming businesses to become much more efficient. In your opinion, how might this trend shape the M&A market?
Tatsuno: Due to the weakness of the Japanese yen, this is a good opportunity for non-Japanese corporations and non-Japanese funds to acquire Japanese companies, and we are seeing increased activity in this area. Participation of non-Japanese corporations or funds in Japanese businesses may also change the business culture inside those businesses, increasing efficiency and profitability. Ten or more years ago, Japanese companies were generally not friendly to foreign investors, however this attitude has changed and the facts show that a number of Japanese companies now welcome foreign investment.
FW: In what ways might the revision of the Companies Act, expected to take effect in mid-2015, impact the appetite for dealmaking among Japanese companies and foreign acquirers?
Anzai: The revision of the Companies Act will take effect from 1 May 2015 and will contain several matters relevant to M&A transactions. One helpful addition will be a new squeeze-out mechanism applying to minority shareholders holding less than 10 percent of the total voting rights. The new provision would allow the major shareholder to buy out such minority shareholders using cash, whereas the previous mechanism required an issuance of shares. This is a welcome amendment as the current squeeze-out mechanism requires passage of a shareholders’ special resolution of the target company, followed by issuance and allotment of shares to those shareholders. Other amendments to the Companies Act increase the depth and scope of disclosures required in M&A transactions.
“We expect continuing weakness in the Japanese yen and therefore a continued trend of foreign acquisitions of Japanese companies.”
FW: What impact might the recent economic retraction in Japan have on M&A going forward? What are your thoughts on the prime minister’s ‘Abenomics’ plan to revive the economy?
Tatsuno: ‘Abenomics’ has provided a boost to Japanese companies in recent years, by making more cash available to companies for growth and investment. Abenomics is currently considered a success, most notably because share prices have generally risen since Prime Minister Abe took office and the Japanese yen exchange rate is favourable for exporters. Furthermore, Abenomics is now here to stay, given his recent resounding victory in the national elections. However, unrelated to Abenomics, Japanese companies have shown an increased willingness to separate and dispose of non-core or unprofitable businesses of late, which has helped their profitability. Japanese companies which have recovered profitability have also been more aggressive in expanding their core business, both domestically and overseas, through M&A activity.
FW: Looking ahead, what are your expectations for cross-border M&A activity involving Japanese entities as we head into 2015? What are the key issues and developments to look out for?
Anzai: We expect continuing weakness in the Japanese yen and therefore a continued trend of foreign acquisitions of Japanese companies. In addition, due to a shrinking domestic market and the continual pressure to reduce costs, Japanese companies have no option but to expand into overseas markets, and we therefore expect more M&A activity from Japanese companies overseas in 2015. The main issue for Japanese companies investing overseas is the political and economic stability of the target market. For foreign companies, the key issue will be whether growth in their own domestic markets is sufficient to fund acquisitions in Japan.
Shigeki Tatsuno is a partner at Anderson Mori & Tomotsune and specialises in mergers and acquisitions, joint ventures and cross-border investments. Mr Tatsuno has extensive experience in advising venture companies and advising on private equity funds. He also provides advice to foreign and domestic clients on intellectual property issues/transactions and general corporate matters. He can be contacted on +81 3 6888 1124 or by email: shigeki.tatsuno@amt-law.com.
Akitaka Anzai is a partner of Anderson Mori & Tomotsune working primarily in the field of Japan-Southeast Asia related matters, such M&A, establishment of joint venture companies, labour issues or disputes in Southeast Asia countries including Malaysia and Thailand, and working on capital market transactions, such as the issuance of equity or debt by domestic and foreign companies, and Islamic finance. He can be contacted on +81 3 6888 5820 or by email: akitaka.anzai@amt-law.com.
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