Japanese Deals: Shades of ’89? The recent Beam and Sprint acquisitions bring back memories of the Rockefeller Center disaster. Why it’s different this time

SATURDAY, JANUARY 18, 2014

Japanese Deals: Shades of ’89?

By ASSIF SHAMEEN | MORE ARTICLES BY AUTHOR

The recent Beam and Sprint acquisitions bring back memories of the Rockefeller Center disaster. Why it’s different this time.

Nearly a quarter century after Mitsubishi Estate‘s ill-fated acquisition of Rockefeller Center and Sony‘s overpriced purchase of Columbia Pictures, the Japanese again are shopping in the U.S.On Jan. 6, Osaka-based brewer Suntory Holdings bought U.S. bourbon maker Beam(ticker: BEAM) for $13.6 billion, creating the world’s No. 3 spirits company. The deal follows SoftBank’s $21.6 billion acquisition of Sprint in June. Backed by SoftBank’s big coffers, Sprint is now pursuing rival carrier T-Mobile (TMUS).

Should investors in Japanese stocks be nervous? After all, Mitsubishi Estate has seen its shares drop 62% since the October 1989 purchase of the Manhattan landmark while Sony stock is still down about 12% since buying the Hollywood film maker that same year.

No need to panic, says Naoki Kamiyama, Bank of America Merrill Lynch’s Japan equity strategist in Tokyo. “Corporate Japan has gone through a lot of pain over the last 20 years and has learned its lessons” from its hunt for U.S. trophy properties, says Kamiyama. Closely held Suntory, whose Suntory Beverage & Food unit (2587.Japan) is public, and SoftBank (9984.Japan) are making strategic acquisitions and have been careful so far not to overpay, he notes.

Right now, Japanese companies are sitting on more than $2 trillion in cash. And because of Tokyo’s big stock-market gains, $50 billion in new equity was raised last year so companies have plenty of resources to make deals, says Nat Ishino of Macquarie Securities in Tokyo. Acquisitions can be a good use of capital. “Japanese companies don’t have a tradition of share buybacks or big dividend increases,” she notes. “They would rather invest in plants in Asia or buy companies in the U.S. or Europe,” says Ishino.

It’s also a reflection of Tokyo’s renewed confidence. “When the economy is growing, managements tend to be more aggressive,” says Kamiyama.

Japan’s challenges also argue for deal-making. “It’s not just to diversify, but because the companies want to be in more-profitable businesses,” he says. Profit margins in Japan are generally far lower than those in the U.S., Europe or even other Asian countries, he notes. “When Suntory buys Beam, the combined company suddenly becomes a higher-margin company,” says Kamiyama.

Ishino points out that consumer businesses, particularly in the food and beverage industry, are hard-pressed to expand sales when the local market has an aging population. “Chinese companies want brands, market share, technology, and expertise from the U.S. and Europe” via big-ticket deals, but the Japanese just want higher margins, says Kamiyama.

In 2010, Suntory attempted an unsuccessful merger with local rival Kirin Holdings(2503.Japan). But intra-Japan mergers in the consumer sector don’t make much sense, says Kamiyama, “because you are just combining two low-margin companies.” He adds, “You could do more cost-cutting and restructuring, but there is a limit to how much of that you can do or how far it will take you.”

These deals pressure rivals to shop abroad, too. Kirin and another Suntory competitor,Asahi Group (2502.Japan), are expected to respond with Asian purchases, says Nirgunan Tiruchelvam, analyst for Standard Chartered in Singapore.

Japanese machinery and financial firms are candidates to make overseas purchases, says Ishino. She notes that Japanese banks recently have bought Thai and Indonesian banks. That’s still a long way from Hollywood or Manhattan.