Japan’s cash-rich companies are coming (again)

Mergers and acquisitions

The Japanese are coming (again)

Oct 2nd 2008 | TOKYO
From The Economist print edition

Japan’s cash-rich companies are buying up foreign firms

THE credit crunch has reduced merger and acquisition (M&A) activity around the world. Banks have tightened their purse-strings and the cheap credit that financed deals during the private-equity boom has dried up. This year the value of deals has fallen by 15% in America and 30% in Europe. But there is a bright spot amid the gloom: Japanese companies are on a spending spree, capitalising on the distress to buy firms abroad. The number of foreign deals involving Japanese firms has increased only slightly compared with last year, but the value of transactions has more than doubled, reaching ¥6 trillion (around $57 billion) so far this year, and on track to exceed 2006’s record.

This wave of deals follows two previous forays overseas. In the late 1980s Japanese firms raced after foreign real estate, and in the late 1990s they piled into technology companies (see chart). Both binges ended badly, as companies sold their stakes at a loss and bolted for home. But things could be different this time. Instead of trophy assets such as Rockefeller Center or Pebble Beach golf course, the targets are companies that fit strategically with their acquirers, providing new technology or access to new markets.

Japanese firms can afford to be so acquisitive because, unlike companies elsewhere, they are flush with cash. Thanks to conservative managers and years of record profits, Japanese public companies are sitting on cash reserves of more than ¥60 trillion, estimates Nikkei, a financial-news company. At home, companies face a slowing economy, a cultural aversion to takeovers and an ageing and declining population. “They are pampered in cash. But they can’t invest in Japan—so they go abroad,” explains Shoichi Niwa of Recof Data, an M&A advisory firm.

Moreover, there are fewer rival buyers because of the difficulty of raising capital just now. Where Japanese companies lost out in bidding wars over potential acquisitions in the past, today they are winning, explains Robert Davis, the head of M&A in Europe for Nomura, a Japanese financial-services firm.

In addition, the share prices of many companies have tumbled in the financial crisis, making acquisitions more attractive, and the yen has strengthened relative to the dollar and euro, making Japanese cash go further. But the most important factor driving the deals is that after years of talking about the need to expand overseas—to achieve global scale and compete more effectively with Western firms and emerging giants from elsewhere—Japanese firms have realised that today’s misery provides the ideal opportunity.

Accordingly, most of the deals are strategic. For example, Takeda Pharmaceutical paid $8.8 billion for America’s Millennium Pharmaceuticals to get hold of its cancer drugs. Daiichi Sankyo paid $4 billion for Ranbaxy, an Indian maker of generic drugs with strong sales in emerging markets. TDK, an electronics firm, is spending ¥200 billion on Epcos, a German firm, to fill holes in its product line. Tokio Marine, an insurer, is paying ¥500 billion for Philadelphia Consolidated, to gain access to the American market. Even so, some deals are opportunistic: in September Mitsubishi UFJ Financial Group, a Japanese bank, paid $9 billion for a 21% stake in Morgan Stanley, a struggling American bank. And Nomura paid a pittance for the European, Asian and Middle Eastern operations of Lehman Brothers after it went bust.

Unlike in previous overseas acquisition sprees, the Japanese are regarded as good owners by foreign companies, says David Marra of the Boston Consulting Group in Tokyo. This is because they tend to be long-term investors (unlike private-equity firms) and have a good record of operating abroad (unlike investors from China or the Gulf—the only other people with money these days). They do everything they can to retain existing managers, notes Steven Thomas, head of M&A at UBS in Tokyo.

The deals are likely to continue, though there is no particular rush, since the credit markets seem unlikely to rebound in the near future. But before Japanese bosses celebrate, they may want to consider that this golden opportunity is hardly the result of business perspicuity. Japanese companies had such a surfeit of unused capital because of poor corporate governance and fiscal management. Luck has provided them with the chance to go global. But they will need wisdom and skill to manage what they buy.