April 2016 Issue
2015 was a remarkable year for global mergers and acquisitions (M&A), with record valuations driving M&A activity forward. A slew of transactions later in the year saw 2015 go down as the biggest ever year for M&A activity. Volume reached $4.304 trillion, according to figures released by data provider Dealogic, surpassing 2007’s previous record of $4.296 trillion. There were many reasons for last year’s M&A explosion, including cheap debt, increasing boardroom confidence and competition from consolidating rivals.
Chinese and US companies were particularly active. Yet 2015 also saw a number of Japanese organisations in an acquiring mood, with outbound dealmaking exceeding $82bn for the first time ever. The low cost of borrowing, an ageing population and growing competition from companies at home are factors leading businesses in Japan to execute cross-border deals to boost profitability.
Companies across the spectrum were active in the market, though naturally mid-market and larger deals caught the eye. In July Nikkei, Japan's largest media company, announced it was buying the FT Group from Pearson for £844m, as part of its strategy to increase its international presence. The FT deal was one of the largest momentum building deals from 2015, which has seen activity spill over in the first quarter of 2016. Early 2016 has seen around $5bn worth of deals announced at the time of writing. Deals such as Asahi’s offer for three Anheuser-Busch InBev beer brands – Peroni, Grolsch and UK craft brewer Meantime – as well as Mitsubishi’s acquisition of a 25 percent stake in South Staffordshire Group from private equity giant KKR, have kept the ball rolling. Mid-sized firms were also active. Printer manufacturer Brother Industries acquired Britain’s Domino Printing for $1.6bn.
“Outbound M&A by Japanese corporations remains relatively robust despite the recent market uncertainty,” says Kenneth Lebrun, a partner at Shearman & Sterling. “The primary driver of this is the strategic imperative to grow outside of the shrinking Japanese market. Japan’s population is expected to fall from 127 million to 92 million over the next 40 years – this has life-or-death implications for almost every industry in Japan, from consumer products to financial services. A secondary driver of outbound M&A is that Japanese companies have record amounts of cash on their balance sheets and access to relatively cheap debt.”
“The shrinking domestic market means companies will have to cast their net further.”
Given the state of the global economy, and the countless opportunities available, 2015’s impressive dealmaking record may continue in 2016 and beyond. However, Japanese firms have been known to overpay for target companies, resulting in some degree of distress down the line. Cultural differences have also been a barrier which Japanese organisations must overcome when pursuing a deal overseas. For these reasons, Japanese firms should pursue a more holistic approach to their acquisitions, to avoid attracting the ire of the markets, according to Mr Lebrun. “We have seen the market punish the stock price of certain Japanese companies upon the announcement of acquisitions with overly rich pricing or unclear synergies. This is leading many Japanese companies to a more strategic, thoughtful acquisition strategy. The ongoing global consolidation of a wide range of industries including pharma, semiconductors, beer and insurance, will continue to pressure Japanese companies without the scale to effectively compete,” he says.
The quest for overseas acquisitions will see Japanese firms battling companies from other subdued economies over the course of 2016. Though they are believed to have amassed around $3 trillion in cash, Japanese companies will be contending for assets with aggressively acquiring Chinese firms. Chinese businesses are increasingly transitioning into non-traditional spaces, including advanced technology, and are looking to import established Western brands into their domestic market. The Chinese government is in the midst of redrawing the national economy, and as China moves away from low-end manufacturing toward newer, higher value industries, Chinese and Japanese organisations will find themselves in more direct competition for assets.
One fillip for Japanese businesses will be the edge they enjoy in the US market when it comes to assets in the telecoms, defence and energy industries. Chinese firms are partly restricted from entering these sectors, and security concerns over links between Chinese companies and the state do not apply to Japanese firms, who can therefore be more active in the world’s biggest economy.
Yet the appetite for outbound acquisitions could easily diminish this year. “We may see a temporary pause or slowdown in outbound acquisitions as a result of the recently announced negative interest rates and currency and stock market volatility, as market participants acclimatise to the new conditions,” says Mr Lebrun. “In this uncertain and volatile market environment, I would also expect that the focus of deal activity for Japanese companies will continue to shift from the BRICs and other developing economies to the US and Europe.”
Thanks to weaker domestic demand and slowed investment in housing, the Japanese economy is in a state of contraction. But efforts are underway to try to turn the tide. The Bank of Japan’s decision to introduce negative interest rates, for example, was a radical step which could help to revitalise the flagging national economy. Given the state of things at home it can be little wonder that Japanese firms are looking overseas for investment opportunities. The shrinking domestic market means companies will have to cast their net further.
© Financier Worldwide
BY
Richard Summerfield