The mantra on the lips of many Japanese chief executives these days is “overseas expansion”. With a shrinking domestic market due to a rapidly deteriorating demographic profile, they are keen to find new opportunities abroad.
Noriyuki Inoue, chief executive of Daikin, voiced the increasingly common view last month when he told reporters that the air conditioner manufacturer wanted to make foreign “tie-ups, joint ventures and acquisitions an everyday practice”.
Japanese companies should be well placed. Their improved spending power due to recovering profits after the financial crisis has been boosted by the strong yen , which is hovering close to a 15-year high. Meanwhile, many overseas companies that have not recovered from the crisis are still considered to be cheap.
While the volume of outbound mergers and acquisition activity rose by a quarter last year, however, the total of $34.4 billion was way below the $74.2 billion record set in 2008, according to data from Dealogic. Why has there not been more activity? “Japanese outbound deals are just not there in the numbers you’d expect,” said Edward Cole, a lawyer at Freshfields Bruckhaus Deringer in Tokyo.
“There’s a lot of interest for the limited number of opportunities out there. Some companies lack recent M&A experience and thus tread too carefully ... and miss out on deals.”
In fact, Japan has historically punched below its weight in cross-border M&A. Last year, it accounted for just 3.4 percent of deals. Its biggest share, in 2008, was only 6.6 percent. In the 1980s, Japanese companies, buoyed by a booming domestic economy, snatched up assets around the world, generating fodder for countless books on how Japan would take over the world.
But three decades later, the impetus for overseas purchases is the opposite due to a weak domestic economy. And the targets are no longer marquee buildings in Manhattan, but companies that can help compensate for a shrinking market back home.
Analysts say one reason Japanese companies have not done more M&A is that they face growing competition for a smaller number of targets. Their competition spans from private equity firms which have recovered from the financial crisis to cash-rich foreign companies, including an increasing number from China.
“Last year, the completion rate on deals that were being worked on was ... disappointing,” said Steven Thomas, managing director of M&A at UBS in Tokyo.
Mr Thomas added that since the financial crisis there had been a lag translating overseas ambitions into deals, but that there has been a recent increase in activity. At the end of December, for example, Dai-ichi Life Insurance announced a plan to take over Tower Australia Group in a $1.2 billion deal.
Other big deals completed last year included Shiseido’s $1.7 billion acquisition of Bare Escentuals of the U.S.. Also, NTT Group purchased Dimension Data of South Africa for $3.2 billion, while Kirin acquired Singapore’s Fraser and Neave, the beverage company, for $1 billion.
While there have been some large deals, however, the vast majority have been relatively small. According to data from Dealogic, the top 10 deals in 2010 accounted for more than half the total in value, with the remaining $16.4 billion in transactions split between 474 mergers and acquisitions.
Kenji Fujita, head of M&A at Mitsubishi UFJ Morgan Stanley, says another problem for Japanese companies wanting to make overseas acquisitions is their size. He says Japan has too many companies in many sectors, which means that each one is unable to maintain a large enough market share, and thus profitability at home, to make the bold overseas acquisitions they need.
Indeed, telecoms and healthcare companies — two of the most profitable domestic industries, according to Macquarie – have been more likely to do overseas deals than companies in the more crowded information technology and industrial companies.
Additional reporting by Jonathan Soble in Tokyo