World Economy

Japan Inc shopping spree just beginning: Goldman

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Sitting on record cash piles and profits, Japanese companies are shopping for acquisitions and deal values could eventually double, says Goldman Sachs.

"Japanese M&A activity has recently begun accelerating, and we believe this could mark the beginning of a sustainable trend," said Goldman Sachs in a note published on Monday. "At 1.8 percent, Japan's ratio of M&A to gross domestic product remains one of the lowest in the developed world, but if [the ratio] rises to Germany's 4 percent, Japan's M&A market could more than double to ¥21 trillion ($174 billion) from ¥9 trillion in 2014."

In the first quarter of this year, Japanese companies splurged ¥3.9 trillion ($32.5 billion) on overseas acquisitions, a 76 percent on-year increase to the highest level in nine years, Goldman said, citing independent M&A advisory firm Recof's data. The biggest deal was Japan Post's $5.1 billion acquisition of Australia's Toll Holdings in February.

During the same period, the global volume of M&A deals rose 28 percent on-year to $606.8 billion, according to Dealogic data.

The trend for Japanese companies to seek outbound M&A as a source of growth will continue and the number of such M&A is expected to rise in 2015 and 2016," said Accenture Strategy managing director Takashi Yokotaki, who leads the Japan M&A practice, by email.

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"Japanese companies have been refraining from investments and saving cash...and we believe that this abundant cash is a major factor in accelerating outward M&A", he added.

ROE all the way

Recent reforms to corporate governance rules are putting Japanese corporations under pressure to boost return on equity (ROE) and spend their cash holdings, which stood at a record 87 trillion yen in fiscal 2014, Goldman said.

Another ROE-related catalyst may also spell the end of one of the most traditional of Japanese business practices: cross shareholdings to cement commercial relationships.

"Crossholdings are a likely cause of lower capital efficiency, and our assessment of ROE levels ranked by crossholding ratios shows that ROEs tend to be inversely correlated with the level of crossholdings," Goldman said.

And that in turn could free up more cash for M&A, Goldman said, citing the precedent of Germany: "as witnessed in the case of Germany during the late 1990s, unwinding of crossholdings could lead to greater M&A activity".

Bursting out

Still, the principal driver behind the push is to buy something that doesn't exist back home: growth potential.

Japan's economy is forecast to grow by 0.8 percent in 2015 and by one percent in 2016, well below the average forecast growth rate of 2.3 percent in 2015 and 2.6 percent in 2016 for the 23 member countries of the Organization of Economic Corporation and Development.

"Given stagnant or shrinking domestic markets, Japanese firms are likely to seek M&A opportunities in order to drive growth and longer-term synergies," Goldman said in the note.