Asia’s Biggest Dealmaking Force Right Now Isn't China
(Bloomberg) — Japanese firms outspent Chinese rivals for the second year in a row to be the biggest dealmaking force in Asia in 2019, aided by favorable financing and reduced competition in the face of U.S.-China tensions.
Over $200 billion of domestic and foreign deals shook up Japan’s business landscape last year, and the buying is set to continue into 2020 as a dwindling population spurs greater outbound buying. A corporate governance overhaul is also forcing companies to rethink long-held beliefs around M&A.
Here are five key drivers of Japanese dealmaking to watch for in 2020:
As the domestic market shrinks, the biggest recent driver of Japanese dealmaking has been the need to boost foreign exposure. Overseas deals made up almost $112 billion out of a total of over $200 billion in purchases by Japanese firms last year, according to data compiled by Bloomberg.
Insurance, healthcare, technology and consumer sectors are expected to be active areas for overseas buying in 2020, industry watchers say, while the U.S. will continue to be the biggest geographic target. The reduced competition for U.S. assets from Chinese companies also boosts Japan’s chances.
“If you’re trying to increase the percentage of overseas sales for your company, you can’t buy small,” said Ken LeBrun, a partner at Davis Polk Wardwell in Tokyo. “You need to buy large companies, and there are more large companies for sale in the U.S. than anywhere else.”
Hostile takeovers among Japanese firms were considered almost taboo for years, but a flurry of bids in 2019 suggested a long-predicted wave of consolidation could finally have arrived.
It began in January, when Itochu Corp. launched a bid to buy a controlling stake in sportswear maker Descente Ltd. The bid, the first domestic hostile takeover effort in almost a decade, was successful, and Itochu wasted little time in dumping Descente’s management.
A tug-of-war over little-known hotel operator Unizo Holdings Co. broke out in July, triggered by travel agency HIS Co.’s attempt to take control. Unizo’s search for a white knight brought unexpected global interest from the likes of Softbank-backed Fortress Investment Group and Blackstone Group Inc., and most recently led to a proposed management buyout backed by Lone Star Group.
Most recently, Hoya Corp. made a stunning unsolicited offer to buy NuFlare Technology Inc., seeking to outbid an earlier proposal by Toshiba Corp. to take control of its listed affiliate. The trend is likely to continue into 2020, says Yoshihiko Yano, head of Japan M&A at Goldman Sachs Group Inc., as corporate leaders become more willing to ruffle feathers to chase the assets they want for growth.
There’s investor appetite for private-equity funded Japan deals and corporate carve-outs and some buyout firms like Apollo Global Management Inc. are boosting local hiring. Koichiro Doi, the head of Japan M&A at JPMorgan Chase & Co., said he’s seen an increase in inquiries from private equity firms actively looking for opportunities in Japan.
Behind this lies a changing mindset around selling to private equity: it’s now viewed as a viable option for corporates looking to divest, and for smaller family-owned businesses without succession plans, said Jeff Acton, a managing director at BDA Partners in Tokyo.
Large deals involving private equity funds in recent years have helped usher in that new mindset, like Bain Capital’s $18 billion buyout of Toshiba’s memory chip business in 2018 and KKR & Co.’s $4.3 billion purchase of an auto-parts supplier from Nissan Motor Co. in 2016.
KKR said last year that the island nation is its “highest priority” after the U.S. and it’s said to be raising money for a new $12.5 billion fund focused on Asia. All big funds are looking to allocate more to Japan, said BDA’s Acton. “It’s been a very hot market in terms of fund-raising.”
Investing and corporate governance overhauls pushed by Prime Minister Shinzo Abe have forced Japanese companies to finally take notice of their shareholders — and empowered investors to speak up more.
Shareholders made proposals at the annual general meetings of a record 54 companies in June 2019, an increase of 35% compared to 2018, according to IR Japan Holdings Ltd. data. The shareholder pressure on companies to boost profitability and capital efficiency will likely push them to dispose of non-core holdings and seek out acquisitions that complement their main businesses, bankers say.
Last year, vocal shareholders had varying degrees of success. Marathon Asset Management protested the surprise ousting of the chief executive of toilet-maker Lixil Group Corp. and ultimately helped re-instate him. But American activist investor Dan Loeb was rebuffed in his attempt to shake things up at Sony Corp. last summer, when the company snubbed his proposal to sell off its semiconductor and financial services operations.
Parent and child
The complicated structure of many Japanese conglomerates has long baffled foreign investors, with publicly traded parent companies and their networks of listed units — so-called parent-child listings — coming in for particular criticism. But driven by corporate governance changes that have boosted outside voices on boards, as well as a forthcoming overhaul of the Tokyo Stock Exchange, many are starting to rein in or divest their listed units.
In 2019, Honda Motor Co. and Hitachi Ltd. agreed to merge four car parts businesses into one conglomerate supplier, while Mitsubishi Chemical Holdings Corp. offered $4.5 billion to buy out the rest of drugmaker Mitsubishi Tanabe Pharma Corp. Hitachi and Toshiba also took steps to consolidate or divest multiple listed units under their control.
Tokyo investors are now speculating that Sony, Fujitsu Ltd. and NEC Corp. will be next to tidy up their listed portfolios in 2020.
Contact editor Yang Ge (email@example.com)
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