Late last month,
Japan Tobacco announced that it was buying its
British rival, Gallaher Group Plc, for about US$15
billion. This is big news for two reasons: the
proposed deal is the largest-ever foreign
acquisition undertaken by a Japanese company, and
it marks a new assertiveness by a part of the
international business community that has long
been in retreat, Japanese corporations.
While considerable attention has been
given to the flood of merger-and-acquisition
(M&A) money going into Japan over the
past
several years, it appears that Japanese companies
are now equally set on buying foreign companies.
Combined with a banking system flush with money
and low international interest rates, the renewed
health of corporate balance sheets has reopened
the door for Japanese companies to the global
M&A game.
According to Dealogic,
Japanese companies announced 162 acquisitions of
non-Japanese entities worth a total of $20.8
billion between January and mid-August 2006. That
is more than the $15.9 billion worth of overseas
acquisitions announced in 2005 and five times
2003's total. Going international makes
considerable sense, but as always it carries
risks.
The last time Japanese companies
ventured off their islands was during the "bubble
economy" of the 1980s. At that time, the yen was
strong and Japanese companies appeared ready to
take over the global economy. This was, after all,
the time that Harvard University Professor Ezra
Vogel wrote Japan as Number One, depicting
the eclipse of Pax Americana and the rise of Pax
Nipponica. It was also a period when Sony Corp
bought Columbia Pictures (which has been a drag on
its balance sheets for years) and Mitsubishi
Estate purchased New York's Rockefeller Center
(later sold off for a loss). The peak was reached
in 1990, when Japanese companies bought 429
foreign companies for a combined $25.3 billion.
Most of these high-flying deals turned bad by the
early 1990s, leaving many Japanese investors
feeling burned by the experience of foreign
M&A.
That was then; this is now. Japan
is emerging from a lengthy period of economic
stagnation. Large parts of the economy have been
restructured and corporate balance sheets are
looking their most robust in many years. Even the
construction and real-estate sectors appear to be
enjoying renewed growth, something significant
considering the depths they plunged during the
lengthy years of deflation.
There are
compelling reasons for Japanese companies to buy
foreign companies, chief among them that economic
life has become far more globalized. For example,
in the international steel industry, consolidation
is occurring at a rapid pace, something that was
signaled by Mittal Steel's purchase of
Luxembourg's Arcelor Steel last year, creating the
world's largest producer of steel. And the
consolidation process is not stopping - this month
it was announced that Mittal was one of four
bidders for Mitsui & Co's 51% stake in Sesa
Goa Ltd (an Indian iron-ore exporter) and that
US-based Nucor was buying Canada's Harris Steel.
In today's globalized markets, standing
still means being overtaken. Nippon Steel
president Akio Mimura noted this month, "An
increasing number of business managers see
M&As as an option in Japan as well ... I
believe that it is natural for M&As to be used
as a means for achieving growth."
There
are other reasons for Japanese companies to look
overseas for acquisitions targets. Demographics
are a consideration, as the aging population means
fewer younger people to consume services and
goods. A senior M&A banker at Daiwa Securities
SMBC stated, "Opportunities for growth are limited
in Japan, given the decreasing population. The
domestic market is saturated, so companies are
looking overseas for further growth." One of the
drivers in the Gallaher deal for Japan Tobacco was
the British company's strong presence in Russia
and Eastern Europe, growth markets for tobacco and
related products.
Moreover, Japan's banks
are now more flush with cash. Years of
restructuring and consolidation have brought
Japanese banks back to cleaner balance sheets, the
need to generate profits, and put money to work.
Consequently, Japanese companies are finding ready
partners in seeking acquisition targets overseas.
This was evident in the use of loans when Nippon
Sheet Glass bought British rival Pilkington PLC
for $3.8 billion last year.
Another factor
to take into consideration is that there is an
increasing presence of foreign shareholders in
Japan's equity markets. The proportion of Japanese
stocks held by foreigners climbed from 6% in 1991
to 24% in 2005. Institutional Investor magazine
noted in September, "These investors are more
outspoken than their Japanese counterparts in
demanding growth, prodding managements to do more
deals ..."
One last factor pushing the
M&A wave is geopolitical. Considering that
Japan lacks natural resources, particularly
energy, and that both China and South Korea are
equally resource-hungry, there is a pressing need
to acquire energy and commodity assets that can be
linked into global networks. And the competition
for resources has become fierce, adding a
nationalistic element to M&A activity,
especially in the energy field.
Will
Japanese companies replay the failures of the
1980s? Our bet is that they will be a little
savvier this time around. The 1980s saw the first
surge of Japanese business managers overseas; they
were proud, aggressive - and lacking in
experience. Their track record was disappointing
to say the least.
The current generation
of Japanese business managers is more cosmopolitan
and more sensitive to the way globalization has
changed business around the planet. They are also
returning to the global M&A scene at a very
different time - after a lengthy period of painful
restructuring. Many of the skill sets used in the
1990s and early part of this decade are very
applicable to today's M&A scene.
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