Corporate Japan, with the active support of the government, is undertaking an increasingly aggressive restructuring at home and the biggest wave of In-Out M&A ever. In many cases this is transformational for the companies involved.
Corporate Japan Constrained By Deflation
Companies have had to do it on their own for the last 15 years. Corporate Japan has been constrained by deflation, biting demographics and policy passivity. This has encouraged consolidation at home, such as the 2011 steel industry announcement, and the need to look overseas for growth. M&A has been a key driver of the internationalization of Japanese companies. The excitement around the new LDP government revolves around the chance for change. In particular, the government is targeting the elimination of entrenched deflationary expectations, and we are hopeful that reform will arrive with Japan’s entry into the TPP program. The Trans-Pacific Strategic Economic Partnership (TPP) plays an important role in the growth strategy of the Abe government and is a core element in the restoration of the competitiveness of the Japanese economy.
Corporate Japan M&A activity (¥bn)*
Total In-In In-Out Out-In
2007 12,437 6,599 2,819 3,019
2008 12,517 4,622 7,426 469
2009 7,913 4,341 2,890 682
2010 6,655 2,461 3,760 434
2011 10,703 3,432 6,272 1,000
2012 10,719 2,946 7,340 433
2013 YTD 2,435 1,077 1,272 86
*Note: In-In means M&A between Japanese companies. In-Out denotes M&A by Japanese companies with foreign companies. Out-In represents M&A by foreign companies with Corporate Japan. Source: RECOF, Macquarie Research, June 2013
Corporate Japan: M&A Routes to Build Profitability
Japanese companies appear to be employing two broad M&A routes to build profitability over the next two to five years and neither offers instant gratification to external shareholders.
1) Corporate Japan: The In-In route – ‘domestic champions’
Consolidate domestically by absorbing a submerging competitor. A sizable premium is often necessary to encourage career management to relinquish control.
An example is the acquisition of Sanyo Electric by ULVAC, Inc. (TYO:6728).
Sanyo was the largest battery cell maker in the world. We believe that Panasonic was also attracted to the solar industry because of the growing demand profile and to Sanyo because it has high-efficiency solar cells and plans to expand into thin film.
Japan’s electric appliances sector still consists of at least nine leading players, resulting in intense competition. Much more In-In deal activity is needed. Players include both specialist home appliance companies and comprehensive electronic manufacturers and information equipment firms. M&A activity has occurred in the sector before but the In-In deals – before the Sanyo Electric transaction – had been small in transaction value.
2) Corporate Japan: The In-Out route – ‘seeking global scale’
Acquire a successful overseas company at a premium valuation and retain proven management to minimize operational execution risks.
Landmark transactions include the Japan Tobacco purchase of RJ Reynolds International in 1999. Left in place in Geneva, the original management delivered consistent growth, enabling Japan Tobacco Inc (TYO:2914) to undertake the even-larger purchase of Gallaher, announced in 2006.
Japan Tobacco’s main brands now include Winston, Camel, Salem and Mild Seven. In addition, the company owns the Benson & Hedges and Silk Cut brands in the U.K. and has three leading brands in Russia—L.D, Sobranie and Glamour.
An even more aggressive example was the acquisition by Nippon Sheet Glass of U.K.-based Pilkington in 2006, after which not only was the Pilkington management left in place but Nippon Sheet Glass also moved to an integrated global management organization led by Pilkington executives. In this case, the combined entity has struggled so far.
So, is Japanese M&A generally good for shareholders, or not?
The results for Corporate Japan are mixed. The combination of substantial premiums and a lack of any immediate post-merger or acquisition cost reductions often leads to an initial decline in the share price of the acquirer. The acquisitions are perceived as strategic, with value expected to emerge over the medium term in the form of higher sales and profit growth. It is perhaps easy to be skeptical on this point and it is best to judge deals on a case-by-case basis.