Japanese companies have been experiencing deflation, an aging population, and policy passivity as headwinds for growth. These dynamics have encouraged consolidation of companies domestically, as well as mergers with international competitors. Mergers and acquisitions (M&A) activity has driven international sales growth in Japan. The new LDP government wants to change entrenched deflationary expectations and Macquarie analysts hope that reform will materialize with Japan’s participation in the Trans-Pacific Strategic Economic Partnership (TPP) program.
Macquarie expects that increased competition will drive improved corporate behavior, which in turn will favor shareholders’ interests, capital efficiency, and return on equity. Mergers and acquisitions helps sustain earnings growth and return excess capacity to productive uses. Macquarie analysts think that momentum for earnings growth has slowed and do not see a return of earnings to the peaks of 2006-2008 until at least March of 2015.
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Mergers In Japan Categories
Japan’s mergers, according to Macquarie, seem to fall into two categories: In-In and In-Out. The In-In transaction involves a strong domestic firm absorbing a weak domestic competitor, and the acquirer pays a large premium to encourage management from the target to give up control. In turn, returns to shareholders on the transaction decline. For example, ULVAC, Inc. (TYO:6728) acquired Sanyo Electric. The latter was the largest battery cell maker in the world and had high efficiency solar cells. Panasonic was attracted to these Sanyo characteristics. Also, the electric sector remains highly competitive and Macquarie analysts expect more In-In consolidation to occur with larger transaction sizes.
The In-Out transaction involves a Japanese company acquiring a successful overseas target at a premium retaining local management to take advantage of their market expertise. For example, Nippon Sheet Glass Company, Limited (TYO:5202) acquired UK-based Pilkington Deutschland AG (FRA:FDD) (ETR:FDD) in 2006. Pilkington executives were retained and they lead a more global strategy for the company. However, the merged entity has struggled thus far.
Unfortunately, Mergers and acquisitions transactions by Japanese companies do not provide immediate rewards for shareholders, as targets are purchased at large premiums and cost reductions are not realized shortly after the transactions. In turn, the share price of the acquirer declines initially. Japanese executives claim that the transactions will build value over the long term by improving sales and profits. Macquarie analysts believe that investors should analyze each merger on a case by case basis to see if it represents improved value.
There are Mergers and acquisitions transactions that aim to put excess cash in balance sheets to use. Return potential for these transactions may be better relative to deals financed with acquirer company equity as long as the target is acquired at a reasonable price. The table below shows cash-rich companies ranked by ratio of net cash to total assets. Note that 14 of these companies have foreign owners, with an average foreign shareholding ratio of 41.8 percent.