Japan Leads the Way in M&A Activity Amidst Global Downturn in Deals

05 Oct, 2023

Japan Leads the Way in M&A Activity Amidst Global Downturn in Deals

Japan's M&A market is defying the global decline trend this year, buoyed by a surge in domestic deals. Rising costs, stricter governance rules, and shareholder pressure are compelling companies to explore strategic options. Data from LSEG reveals that the total value of M&A transactions involving Japanese companies increased by 14 percent year-on-year to reach $111 billion in the first nine months of 2023, making Japan the only major market worldwide to experience growth.

This momentum is expected to persist in the near term, as the prospect of more corporate restructuring, carve-outs, and management buyouts makes Japan an attractive hunting ground for global private equity firms. Bain Capital Asia Managing Partner David Gross-Loh noted, "The Japanese stock market is performing quite well, and this type of favorable environment encourages founders and those with concentrated ownership to consider selling." He added that there are several billion dollars' worth of deal opportunities in their pipeline for the next 6-12 months, including billion-dollar-plus take-private situations.

Domestic deals, such as the private equity buyouts of Toshiba and JSR totaling over $20 billion, witnessed a remarkable 67 percent surge, reversing the traditional outbound acquisition model for growth, according to LSEG data. Pressure on listed firms has intensified, with the Tokyo Stock Exchange advocating better capital efficiency, effectively endorsing activist shareholders seeking changes.

The two largest deals this year, Toshiba Corp and JSR Corp, both had activists involved. Jim Verbeeten, a partner at consulting firm Bain & Company in Tokyo, emphasized, "If your stock is underperforming relative to your book value, you are more likely to start thinking proactively about what to do before an activist shows up."

Shinsuke Tsunoda, senior managing director and veteran M&A banker at Nomura Securities, pointed out that the challenging business environment, marked by rising inflation and pressure on profit margins, is making companies more open to drastic actions, including mergers with rivals. He stated, "Faced with higher wages and rising materials and energy costs, companies are more serious about restructuring their lackluster domestic businesses, a step long overdue."

A weak yen, combined with low-interest rates in Japan, is also a significant driver of M&A activity. Terms for loans from Japanese banks have tightened somewhat since the Marelli Holdings case, where an auto parts supplier was bought by KKR in a leveraged deal and requested a massive debt waiver. However, these terms remain attractive compared to other markets.

The robust M&A market in Japan coincides with a shift in long-standing obstacles to dealmaking. The Japanese government released new M&A guidelines in August aimed at encouraging corporate takeovers by cracking down on excessive defense tactics and removing the stigma around unsolicited bids. This shift has already led to notable cases, such as Nidec Corp's unsolicited tender offer for Takisawa Machine Tool, which was accepted by the Takisawa board.

According to insights from CLSA Japan strategist Nicholas Smith, Japan's shrinking demographics are creating favorable conditions for increased merger and acquisition (M&A) activities. The tightening labor markets are making corporate restructuring and cost-saving measures more attainable. Smith elaborated on this by saying, "In the past, concerns related to excess employment hindered M&A deals because reducing redundant workforce was the primary method for cutting costs and boosting returns. With the labor shortage becoming more pronounced, we should anticipate a surge in M&A activities, as companies are increasingly viewed as potential sources of skilled labor."