European financial crisis opens door to investment from cash-rich Japanese suitors

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Financial turmoil in Europe could benefit Japanese companies’ effort to internationalise, industry sources said.

Speaking on 1 November at a mergermarket roundtable entitled “A Resilient Japan – Outbound M&A”, the speakers, who were drawn from banks, law firms, corporates and accountancy groups, said Japanese companies were keener than ever to expand outside of their domestic sphere and would find European companies particularly attractive. Deals were being driven by an increase in the number of European disposals because of the ongoing financial crisis, but also by the ease and certainty with which due diligence can be carried out on European players, they said.

According to Kazuhiro Fukushima, partner at Deloitte Tohmatsu FAS, Japanese companies had been interested in outbound deals even ahead of the earthquakes in March 2011. Since then, he said, this trend has accelerated and companies are focused on using outbound M&A to build on their strengths.

Kenji Fujita, managing director, Mitsubishi UFJ Morgan Stanley Securities, said Europe’s financial crisis in conjunction with abundant cash held by Japanese firms has boosted M&A interest in Europe. He said ongoing capital markets turmoil meant European companies were often faced with significant financing constraints, and they therefore welcomed investment from Japan.

Recent deals bore witness to this wider trend, including acquisitions by Takeda, Toshiba, and Nisshinbo, he said, adding that European companies’ strong sales and distribution channels beyond Europe to the Middle East, Africa and Latin America also made them attractive to Japanese buyers.

Meanwhile, said Fujita, there has been an increase in the number of “Fund-to-Japan” deals whereby private equity companies sell assets to top-tier Japanese players as part of their exit activity. He noted Takeda’s May 2011 acquisition of Nycomed and Toshiba’s acquisition of Landis+Gyr in the same month as notable examples of this. “Private equity funds are rushing to exit from their portfolio companies which they acquired before the financial crisis,” he said. “In contrast, domestic consolidation is not actively happening in Japan yet.”

“Fund-to-Japan” deals in 2011 include Itochu’s acquisition of UK tire retailer Kwik Fit Group in March, Asahi Group Holdings’ acquisition of New Zealand’s Flavoured Beverages Group Holdings in August and Nisshinbo’s acquisition of Germany’s TMD Friction Holdings in September. According to mergermarket data, four out of the 10 largest outbound acquisitions by Japanese companies from January 2011 to October 2011, were of private equity portfolio companies.

Nobuo Nakata, partner at law firm Allen & Overy, said Japanese companies are increasingly interested in deals in Asia, South America, and other emerging countries but that compliance could be an issue in some of these regions.

Nonetheless, firms could mitigate acquisition risk by targeting, for example, Asian companies that have been owned and controlled by Western companies for a long time or Asian portfolio companies owned by Western investment funds. He said this approach makes sense because Western companies require international levels of compliance, although one drawback could be higher acquisition prices.

According to Haruyasu Asakura, chief operating officer at Innovation Network Corporation of Japan, another way to mitigate transaction risk is for buyers to focus on post-merger-integration (PMI). In particular, communication is an important factor, he said, and board members on both sides of a deal should make a strong effort to understand each other’s corporate culture from the early stages of due diligence.

Also speaking at the roundtable was Yasuhiro Fukuyama, executive general manager at Suntory. He pointed out that well-established sales platforms and strong brands are among the key factors bidders should look for in targets.

The speakers’ comments about an increase in outbound Japan deals are mirrored by mergermarket data. According to a survey carried out in June, 2011, 55% of executive and fund manager respondents expected that outbound deals by Japanese companies would increase significantly in the next two years. More than 30% of respondents predicted that Europe will be the main region where Japanese companies will conduct acquisitions.

In the same survey, 95% of respondents said that increasing market share is the main goal of outbound deals, while more than 10% of respondents said the acquisition of strong brands was seen as the goal of such deals.

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