SpirE-Journal 2018 Q4

Japan’s appetite for mergers and acquisitions abroad

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Japan’s appetite for mergers and acquisitions abroad

The overall Mergers & Acquisitions (M&A) activity of Japanese firms continues to grow and overseas M&A deals are in the spotlight. In 2016, Japan’s outbound M&A activity exceeded USD100 billion, the second highest historic level and a 15% increase over 2015. Will Japan continue to tap into international markets in search of growth and sustainability?

Growing M&A activity
A low economic growth rate and a shrinking population shocked Japan’s business leaders into changing their outlook, prioritizing growth through overseas market development. And M&A was seen as the fastest way to achieve that.

Significant cross-border M&A activity is a relatively recent phenomenon in Japan. Japanese M&A volume was robust in 2016, amounting to USD198 billion in total transaction value. Cross-border M&A did well, accounting for 57 per cent of total M&A deals in 2016, up from 45 per cent in 2011.

Beginning in 2006, Japan’s cross-border M&A volume increased in size and overall share. From a low point of 12 per cent in 2005, it increased to 29 per cent in 2006 eventually climbing to 63 per cent in the first quarter of 2017.

These significant changes were due to macroeconomic conditions in Japan. In 2009, China’s economy overtook Japan’s in size. A low economic growth rate and a shrinking population shocked Japan’s business leaders into changing their outlook, prioritizing growth through overseas market development. And M&A was seen as the fastest way to achieve that.

Drivers of outbound M&A

Japan continued its strong outbound M&A performance in 2017. It accounted for USD14.7 billion in total overseas M&A deals in the first quarter of 2017, in the form of 63 deals.

Some factors responsible for increased outbound M&A activity from Japan include:

Shrinking domestic population and slowing economy

In 2008, Japan’s population was at its peak – just over 128 million. It continues to decline and will drop an additional 16 per cent to 108 million by 2040.

China took on the mantle of the world’s second-largest economy in 2009. This created urgency among Japanese corporations to explore outbound acquisitions to enter new markets and obtain new capabilities as well as products.

Change in mind set toward outbound M&A

Historically, Japanese corporations did not embrace M&A as part of their strategy as it was deemed culturally challenging, given the perceived loss of face involved when selling a business.

However, this mind-set has changed. Acquiring international business is now seen as necessary to enhance growth and competitiveness.

Conducive financing environment
In the 1980s, it was said that Japan always exported its way out of an economic downturn. Nowadays, foreign direct investment and (increasingly) M&A are seen as part of that exporting magic bullet.

The Bank of Japan implemented a number of monetary easing policies to lower borrowing costs for Japanese corporations, to encourage the expansion of their investments.

For example, it pushed interest rates below zero in January 2016. The current rates are slightly above zero. In the 1980s, it was said that Japan always exported its way out of an economic downturn. Nowadays, foreign direct investment and (increasingly) M&A are seen as part of that exporting magic bullet.

Supportive political environment

Over a span of ten years, the Japanese government introduced a number of initiatives and policies to support domestic and overseas strategic investments were introduced.

The Japan Bank for International Cooperation (JBIC), Innovation Network Corporation of Japan (INCJ) and the Development Bank of Japan (DBJ) are financial institutions owned by the government, with a mandate to support Japanese corporations in cross-border investments. They provide expertise before and after acquisitions as well as financing options.

For instance, DBJ and LIXIL – a Japanese building material manufacturer – acquired 87.5 per cent equity interest in GROHE group, a German sanitary fittings manufacturer, in September 2013 . This strategic joint venture increased LIXIL’s footprint in Europe and aided its expansion in China.

Regions with robust growth

Despite the current global slowdown in M&A transactions, Japan continues to acquire overseas assets aggressively. Total M&A transactions reached USD198 billion in 2016 with foreign M&A accounting for over 50 per cent.

A few emerging economies which Japanese companies are eying as sites for overseas M&A are:


2016 was a record breaking year for the Chinese M&A industry, with 554 deals worth USD240.3 billion. As the scale of Chinese outbound merger and acquisition activity declined in 2017 due to a shift from manufacturing towards domestic consumption, Japanese companies may pick up their activity level, hoping to gain better access to the vast China consumer goods market.

As a result of increased regulatory scrutiny of overseas deals and significant forex transactions, Chinese outbound investment may grow more modestly in 2018.


During the second half of 2017, Singapore’s inbound M&A rose 214 per cent to USD14 billion for the third quarter. Inbound M&A activity reached USD63 billion since January 2017, up 32 per cent from 2016. Singapore is still ahead in terms in value and deal count in Southeast Asia with Indonesia coming in second with four deals valued at USD1.5 billion.

One of the largest contributors to M&A deal values was real estate, a top contributor since 2016, at a 23.6 per cent contribution in deal volume and 29 per cent to deal value.


2016 saw Thailand emerge as a dominant player in the Southeast Asia region. M&A deals surged to reach USD10.1 billion – three times of what was achieved in 2015.

Between Q1-Q3 2016, Thailand surpassed Singapore with the most inter-regional deals in Southeast Asia, worth USD9.9 billion.


Vietnam’s outbound M&A deals continued its upward trend with 341 deals in 2015 at a value of USD5.20 billion. M&A activities are expected to reach a deal value of USD20 billion in 2015-2018.

2015 marked Vietnam’s further integration into the global market with many new Foreign Trade Agreement (FTAs) signed, including those with South Korea and the European Union. FTAs are likely to boost capital flows, both in terms of investment and trading, including M&A activities.

Growth sectors to watch out for

Asia is an increasingly attractive destination for global M&A deals.

What are the key sectors of interest for Japanese contemplating M&A deals in Asia?

Consumer and retail

The consumer and retail M&A market will continue to prosper across geographies, reflecting fresh investor and consumer confidence in 2018. The year 2016 was a busy one for M&A activity in Asian consumer and retail – deal value surged 40 percent, reaching nearly USD100 billion.

For instance, consumer goods leader Hindustan Unilever Ltd (HUL) acquired Indulekha and Vayodha hair brands from Kerala-based Moson Group for USD49.8 million in December 2015. This was the first inorganic expansion deal for HUL.

Energy and power

M&A deals in energy continued to show promise in 2017, with total deal value amounting to USD11.5 billion for a total of 10 deals. Divestment is expected to continue in this space.

Royal Dutch Shell sold several of its gas and oil assets in Thailand to Kuwait Foreign Petroleum Exploration Company in January 2017.

Investments are also turning green. For example, the Indian government set clean energy targets such as 175 Gigawatt (GW) of renewable energy by 2022, of which solar energy will account for 100 GW.

Financial services

Asian M&A activity in the financial services sector in 2016 was valued at USD44 billion in total transactions with 174 deals. Although M&A deals involving financial companies dropped by 10 per cent amid global uncertainty, South Korea and China have still posted growth.

For instance, Tokyo Marine Holdings acquired U.S.-based HCC Insurance Holdings Inc. in June 2015, with the deal valued at USD7.5 billion.


Technology will continue to drive M&A deals in years to come, especially in Asia. Among M&A deals announced in 2016, 15 per cent of the acquisitions involved technology companies, valued at approximately USD125 billion as of June 2017.

In February 2017, Finquest – a Singapore-based platform that accelerates cross-border direct investments as well as M&A in Asia – acquired Detecq, a platform that matches technology companies with investors.


The momentum for telecom M&A activity continues, with investors showing enthusiasm for entering new geographies and growth segments. 2016 saw the second biggest Japanese outbound M&A deal, when internet and telecommunications conglomerate SoftBank Group acquired UK chipmaker ARM Holdings for USD30.2 billion.

Challenges ahead

Japan ranks 11th globally in terms of outbound deals as of March 2017. Overseas M&A is now a buzzword in Tokyo and other major Japanese cities, with companies attending seminars on the theme and many executives sharing their experiences. Corporate Japan realizes that it has to navigate a learning curve for overseas M&A and do it fast.

Some challenges that hinder outbound M&A transactions include:

Cultural differences

Language and cultural differences remain and have proven difficult to overcome. Japanese acquirers tend to seek to retain the employees and management team of target companies. Hence, effective integration and communication strategies are crucial.

Internal approvals

Ad hoc board meetings are uncommon in Japan. Many Japanese companies have rigidly formal internal approval processes and spend time exchanging ideas with their board members and educating them on the potential target during the due diligence process. This often causes irritation on the side of the seller and can lead to M&A opportunities lost to speedier acquirers from countries like China and the USA.

Due diligence process

As with all M&A deals, it is crucial to perform valuation and due diligence to ensure the right price is being paid for an acquisition. Most Japanese acquirers tend to over-rely on public information, which is not always the best way to assess the target company and identify less obvious problems, particularly in emerging markets.

Goodwill impairment under IFRS

For acquirers, inaccurate goodwill accounting may lead to serious consequences such as incorrect financial reporting, falling share prices and possibly exposure to legal or regulatory risk.

Japanese corporations traditionally apply Japanese Generally Accepted Accounting Principles (J-GAAP) accounting methods. However, many companies are shifting to the adoption of International Financial Reporting Standards (IFRS) which is more conducive to M&A. This helps improve the pro forma earnings.

The road ahead for Japan’s outbound M&A

A bigger issue is that Japanese firms have shown themselves to be cautious about acquiring companies in emerging economies, preferring instead to do M&A deals in developed regions like Europe, Australia and North America.

Japanese companies are now embracing foreign deals for growth, so as to hedge against a stagnant economy and an aging population. The rise in M&A activity is due to the inability to generate growth domestically.

Cross-border acquisitions will help Japanese companies to enter new markets, obtain new capabilities and access innovation to drive market share and enhance global competitiveness.

Outbound acquisitions accounted for most of the value of M&A activity in Japan in 2016. Japan closed nearly three times more outbound deals in 2016 – worth about USD100 billion – than it did during the whole of the 1980’s. However, Japan’s deal count for outbound M&A activity in the first half of 2017 was only a few deals short of the record set in 2015.

A bigger issue is that Japanese firms have shown themselves to be cautious about acquiring companies in emerging economies, preferring instead to do M&A deals in developed regions like Europe, Australia and North America. However emerging markets are growing faster than developed ones. Emerging economies also typically have fewer viable M&A targets which means that speed is of the essence.

Going forward, Japanese companies will need to develop fresh strategies to ensure that they close good deals and successfully execute post-merger integration, if they are not to lose out to competing acquirers from other countries. Cultural understanding, communication skills, excessive risk aversion and speed of decision-making are some of the areas which Japan will need to address before it can become a global M&A superpower.

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