ASIA MARKETS: Japan Inc Heads Abroad In $180bn Deal Rush
December 19 2018 - 7:24AM
Dow Jones News
By Lina Saigol
Japanese companies have embarked on the biggest overseas
acquisition spree in more than 20 years, echoing the deal boom of
the 1980s as they race to buy growth to offset a shrinking domestic
market and ageing workforce.
Corporate Japan splashed out nearly $180bn on 621 outbound deals
so far this year, compared with 685 deals with a total value of
almost $80bn for the whole of 2017, according to financial data
provider Dealogic. The highest recorded value of overseas deals for
the last 23 years was in 2012, when it hit more than $110bn.
Hitachi (6501.TO) added another $6.4bn to Japan's tally of deals
on Monday after it bought an 80.1% stake in the power grids
division of its Swiss-Swedish rival ABB (ABBN.EB) . Just days
earlier, Takeda Pharmaceutical (4502.TO) had announced the $62bn
takeover of its Dublin-based rival Shire (SHPG) , marking Japan's
biggest-ever foreign takeover.
The frenzied pace of dealmaking, which has taken place across
all sectors, comes amid a long-term demographic shift in Japan
where the ageing population -- traditionally defined as people who
are aged 65 and over -- and the nation's shrinking labour force
have put a drag on the nation's economic growth.
"Many Japanese companies are disproportionately exposed to their
home market, which hasn't been growing for a long period of time,
and so a new generation of Japanese corporate leaders are showing a
renewed determination to find external growth opportunities in
different foreign markets," said Hernan Cristerna, co-head of
global M&A at JPMorgan (JPM) .
Cristerna added that Japanese acquirers are not presently
subject to the same level of regulatory scrutiny as their Chinese
rivals. "So, with all other things being equal, this puts them at
an advantage when competing for any particular asset."
Some Chinese deals have come under resistance from western
governments on national security grounds. In its global M&A
forecast for 2019, international law firm Baker McKenzie said that
dealmakers have largely overlooked the acceleration of trade
tensions between the US and China and could "severely undermine"
the ability of companies to do carry out cross-border deals.
Key changes to Japan's corporate governance reforms have also
been a driver of M&A as companies come under scrutiny from
shareholders to boost their productivity and improve their
profitability. Corporate Japan's return on equity -- a measure of
profitability -- stands at an average of 9% compared with the
mid-teens for US companies.
However, mixed results from previous foreign buying sprees have
triggered concern about some of the prices Japanese firms are
paying to expand internationally. Between 2010 and 2018, companies
paid an average 49% more than the value ascribed to their acquired
company by the stock market one month before the bid. That compares
with an average 42% premium for similar deals paid by Chinese and
US acquirers and 39% paid by European acquirers, according to data
from Dealogic.
Recent examples of ill-fated deals include Toshiba, which in
January drew a line under its disastrous foray into the US nuclear
business when it sold Westinghouse Electric to Canada's Brookfield
for $4.6bn. Westinghouse, which Toshiba paid $5.4bn for in 2006,
had been forced into bankruptcy after losing billions of dollars
from delays and cost overruns. Similarly, Japanese brewer Kirin
(2503.TO) entered the Brazilian beer market in 2011 with the $3.9bn
acquisition of Schincariol, but sold it to Heineken (HEIA.AE) for
$700m just five years later after failing to turnaround the
loss-making business.
Typically, companies justify such high premiums by claiming cost
synergies but these have often been elusive and integrating
businesses which straddle a wide cultural divide has proved to be
challenging.
The high levels of debt Japanese bidders are taking on has also
caused some concern among investors. Companies have taken advantage
of low-cost of funding, with near zero interest rates, under Prime
Minister Shinzo Abe's stimulus programme.
Hitachi will need to extract significant synergies from the
acquisition of ABB's power grids division to make a reasonable
return on its investment, according to analysts.
"Corporate Japan is focused on buying quality assets and that
means pursing them vigorously and paying higher premiums for them,"
Frank Aquila, M&A partner at global law firm Sullivan &
Cromwell said. "This is a long-term trend and we will continue to
see Japanese firms engage in this level of activity for a while,"
Aquila said.
(END) Dow Jones Newswires
December 19, 2018 07:09 ET (12:09 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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