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When Toshiba said it would pay $5.4bn for US nuclear group Westinghouse in 2006, many M&A bankers winced. The Tokyo-based group said it was counting on the market for atomic energy expanding by half by the end of the next decade — hence the commitment to pay sky-high multiples of 2.8 times annual sales and 174 times pre-tax profits for a business that had changed hands for $1.1bn just seven years earlier.
The scepticism proved justified. Since the deal, Toshiba has taken a litany of writedowns on the acquisition and in November owned up to a cumulative operating loss of $290m from the Westinghouse unit since it took control.
Some advisers confide that they see the deal as an example of a phenomenon peculiar to Japan. From Mitsubishi’s top-of-the-cycle purchase of Rockefeller Group in 1989 to Daiichi Sankyo’s acquisition of Ranbaxy in 2008, Japanese companies have earned a reputation as indiscriminate buyers, more interested in deal completion than price.
Japanese acquirers are often compelled to do deals outside Japan, bankers note, because their home market is shrinking. A falling population — 268,000 more deaths than births last year — increases the appeal of foreign targets and the multiples paid for them.
Among a recent flurry of deals in the insurance sector, in June Tokio Marine paid $7.5bn for US-based HCC Insurance. Nippon Life, the assurer, then spent $1.7bn in October on the life business of National Australia Bank.
Many companies have enough cash to fund deals directly, allowing them to bypass the scrutiny of banks or capital markets. Boards of directors tend to be dominated by insiders, meaning acquisition projects backed by senior executives may not face much challenge.
Bankers with mandates to sell businesses routinely begin their rounds in Tokyo. “You never know how long Japanese [companies] will take to make up their minds but all our bankers are there, all the time,” says one M&A banker based in New York.
The data suggest Japanese acquirers go in high and stay there. According to Dealogic analysis of global M&A since 2000, outbound bidders from Japan have offered an average 27 per cent premium on the previous day’s close — five percentage points higher than the global average.
Over that period, just 1.1 per cent of bids by Japanese companies have been withdrawn, rejected or allowed to expire. The global failure rate is more than twice as high, at 2.5 per cent.
Bankers willing to speak on the record point to mitigating circumstances for the high prices. Gary Parr, a vice-chairman at Lazard, emphasises that he does not like to generalise but, after more than 30 years of advising Japanese financial services companies, notes that they enter negotiations with conviction — hence rich offers and fewer dropouts.
“[Acquirers] are very disciplined in studying their potential targets and the markets in which they operate, then once they have set their eyes on a target they spend a lot of time building consensus . . . to make sure everyone is on board,” he says. “Once they’ve reached the end of this process, price is less important to them, as they’re buying an asset for the long-term. Their focus is on getting the right fit. That takes time.”
Another factor pushing up prices, say bankers, is that bidders from Japan tend not to relish the tension and drama of auctions and are often prepared to pay a premium to avoid them.
Competitive processes, which are common in the US, tend to “pressure the buyer to enter into a binding agreement after limited due diligence access”, says James Del Favero, head of cross-border M&A at Goldman Sachs in New York, who has more than 20 years’ experience of dealing with Japanese acquirers.
“I do think that some buyers pay to be exclusive, even today,” he says. “Call it indifference to the additional premium to close a deal, call it reluctance to commit without having seen everything.”
Toshiba’s Westinghouse experience set an example, in that respect. The high price came after a four-way contest with Toshiba emerging as “a clear winner”, according to Mike Parker, chief executive of the seller, British Nuclear Fuels.
“If you use short-term numerical metrics, it might seem like they are overpaying for assets, but if you adopt a long-term strategic analysis they are actually buying at pretty good values,” says Anu Aiyengar, head of North American M&A at JPMorgan Chase in New York.