After two years of relentless buying overseas, Japanese companies are taking a breather in mergers and acquisitions

Jun 11, 2013

Japanese M&A Takes a Step Back

By Isabella Steger

After two years of relentless buying overseas, Japanese companies are taking a breather in mergers and acquisitions.

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Japanese outbound M&A has dropped 67% this year from a year earlier, according to data provider Dealogic, with just $11.9 billion in announced deal volume, the lowest level since 2009. In the same period in 2012, $35.3 billion in deals had been announced.

Deal sizes have also become noticeably smaller this year. In the same period last year, the biggest deal was the $5 billion acquisition by advertising giant Dentsu Inc. 4324.TO -2.38% of U.K.-based Aegis PLC, followed by a string of multibillion-dollar deals. Only two transactions announced this year by Japanese companies were valued at more than $1 billion—the biggest being the $2.6 billion acquisition by Orix Corp. 8591.TO -4.34% for Dutch asset manager Robeco Group ROBA.AE -1.02% from Rabobank in February.Although the high value of the yen has been a big incentive for Japanese companies to go abroad in recent years, bankers say the yen’s softening this year hasn’t dented Japanese companies’ M&A appetite.

“For companies seeking growth outside of Japan, the yen devaluation doesn’t change their stance on overseas acquisitions,” Yuichiro Wakatsuki, head of M&A at Bank of AmericaMerrill Lynch in Tokyo said.

A bigger factor, say bankers, may be “Abenomics,” the stimulus measures announced by Prime Minister Shinzo Abe this year that have made Japan’s domestic growth prospects the rosiest they have been in years.

The stock market is up 28% year to date, despite a recent correction, and “many companies are evaluating whether they should look at equity financing,” said Kenji Kimura, global head of M&A at Nomura Holdings Inc. 8604.TO -3.40%

Many Japanese companies are taking advantage of the rally in Japan’s stock market. According to Dealogic, Japanese share sales, whether initial public offerings or block trades, are at their highest level since 2010 at $23.1 billion year to date.

If companies are busy looking at raising equity, it is “very difficult to do significant M&A at the same time,” he said.

Separately, rising valuations in popular target regions such as Southeast Asia are also hampering deal activity. Japanese financial institutions have snapped up minority stakes in banks and insurers in Southeast Asia, attracted by its rapidly expanding middle-class population. However, the scarcity of high-quality assets in regions with rapid growth is putting upward pressure on valuations.

In one recent deal, Japanese bank Sumitomo Mitsui Financial Group Inc. 8316.TO -2.49%agreed to pay about $1.52 billion to acquire a 40% stake in Indonesian lender PT Bank Tabungan Pensiunan Nasional BTPN.JK -1.01%. That price represents a value of nearly five times the price-to-book ratio, according to a person with knowledge of the deal, well above where other banks are trading. Indonesian lender Bank Mandiri BMRI.JK -2.21% is trading at 2.62 times and Bank Tabungan Negara BBTN.JK -3.79% at 1.3 times to book, according to FactSet data.

Even developed markets, where growth is slower but deals carry less risk, are becoming increasingly competitive. Some big overseas deals from Japan into developed markets last year included Dentsu’s Aegis investment Marubeni Corp. 8002.TO -2.21%’s $2.6 billion acquisition of U.S. grain trader Gavilon Holdings LLC, and SoftBank Corp. 9984.TO -1.64%’s$21.6 billion offer for Sprint Nextel Corp. S +2.37%

But domestic players are also becoming competitors to the Japanese. Deal making got off to a strong start in the U.S. this year, including a $25.5 billion competing bid in April byDish Network Corp. DISH +0.80% for Sprint Nextel Corp.

And while the falling yen isn’t changing the long-term rationale of Japanese buyers seeking growth in overseas markets, it has affected some deals.

“We observed a potential Japanese [acquisition] in a recent auction fail to go through the initial round because it could not offer a competitive price, a phenomenon that was rarely observed in years past. I believe the very rapid decline of the yen against other currencies had a significant impact on what the bidder could offer,” said Hideo Norikoshi, a partner at law firm Baker & McKenzie in Japan.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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