For Sale: Japan Inc.

M&A activity in Japan appears to have picked up in recent months – some of the most notable transactions include a consortium buying Toshiba, KKR’s purchase of Calsonic, and Bain’s rumored winning bid for Takata, among many others. At first glance, this doesn’t appear to be out of the ordinary, as Japan is a large and developed economy where M&A activity ostensibly should be fairly commonplace. However, Japan has generally been known as being quite quiet for merger activity and is notoriously difficult for foreign companies to buy into, so why has there been a rash of purchases lately?

World Class Opportunity

Japan is the world’s third-largest economy by GDP, with a wealthy population, and thus presents a large opportunity for companies without a presence in the country. Furthermore, recognized as a developed economy, the rule of law in Japan is very well respected, providing security and confidence for businesses to invest in growth and capacity without fears of political interference. In addition, Japan’s Prime Minister Shinzo Abe was recently re-elected with a massive majority, giving him a strong mandate to fulfill his pledges to return the country to strong economic expansion. All of this adds up to a very favorable environment for business development and corporate growth in the country.

While very developed, however, the country’s history of protectionist policies and favored industries has caused some companies to grow large, but be run inefficiently. As time went on and the markets opened up in the late 20th century, the dominant positions enjoyed by these companies allowed them to survive until they either turned around their operations or ran into overwhelming difficulties. When the latter occurs, PE firms can move in and pick-up world-class assets very cheaply.

Keeping Things Nice and Easy…

Fueling foreign investment lately is the fact that the Bank of Japan has kept interest rates exceedingly low, while also continuing to inject considerable stimulus into the economy via its continued Quantitative Easing program; this is in contrast to other large developed economies, like the Eurozone and the US, where the monetary authorities are beginning to tighten their policies, meaning funding and financing are still cheap in Japan on both relative and absolute bases. Combined with the enormous amounts of dry powder private equity firms are sitting on, M&A activity was poised to explode.

Corporate Japan has also had its reputation take something of a hit in recent months, with scandals cropping up at large companies previously considered the paragons of their industries. Toshiba’s accounting scandal, Kobe’s doctoring of data, and Takata’s global airbag recall are just some examples of these titans’ fall from grace. Unfortunately, these scandals share the common thread of weak corporate governance causing leadership teams to attempt to cover up shortcomings. In turn, this sours investor sentiment towards not only the misbehaving companies, but also to many of those without any issues. With the economic environment making Japan ripe for the picking, large foreign firms with good reputations for solid corporate governance can gain large footholds in Japan at massive discounts. In addition to access to a market-leading position in a large, developed economy, many of these troubled Japanese businesses still own world-class assets, including valuable intellectual property, making them prime takeover targets.

The Japanese government, in a drive to make corporate Japan more accountable and repair their country’s image, seems to be less stringent about foreign firms snapping up domestic companies, meaning the tone from the top towards this activity is amicable, as well.

Consider Japan

As Japan wakes from its decades-long slumber of stagnation, with its economy logging several sequential quarters of growth, opportunities abound for M&A activity in the region. Expansionary fiscal and monetary policies, combined with a government more open to foreign ownership of domestic companies, and discounted prices due to scandals and bad behaviour mean that firms looking to expand in Japan, whether for the first time or to grow their footprints, are better poised to do so than at any other point in recent history, and those willing to take the plunge can make Japan Inc. a valuable addition to their global portfolios.


Kevan Hartford

Kevan Hartford is a Toronto-based finance professional working in asset management.