Big in Japan

Aug 20, 2018
Greater M&A activity leading to higher valuations

Japanese merger and acquisition (M&A) volumes have set new records in the first half of the year as companies continue to seek growth outside their home market.

Now, moves to improve corporate governance and focus on capital efficiency are spurring further consolidation in domestic industries, leading to more M&A activity and – vitally – higher valuations. Hiromi Suzuki of Goldman Sachs Research covers Japanese strategy and discusses what this means for the wider market.

Looking at M&A trends in Japan, there have been a number of high-profile examples of companies acquiring or investing in firms outside of Japan. Will this activity continue?

In short, yes. M&A activity in Japan has picked up noticeably in recent years, with the total value reaching an all-time high of more than ¥20 tn ($181 bn) at the end of June. That said, Japanese companies still account for only 2 percent of global M&A transactions by value in 2017. Given that Japan makes up 6 percent of the global economy, we think there’s potential for that 2 percent figure to triple in the future, fueled not only by outbound activity, which accounts for 60 percent of the total, but also by increased domestic activity.

What have been some of the broader drivers behind M&A in recent years?

Japan’s ageing population and slow-growing economy have spurred companies to pursue outbound acquisitions to tap into new markets, products and innovation. Many firms are simply expanding into nearby Asian countries with growing populations or rising wealthy and middle classes, such as China, the Philippines and Indonesia.

Fast-moving technological advancements – ranging from blockchain to electric vehicles and artificial intelligence – are also forcing Japanese companies to realign their operations through M&A.

Meanwhile, Japanese firms, which have historically focused on increasing their domestic market share, are turning to capital efficiency and profitability measures – a shift in mind-set that is facilitated by the government’s reforms in corporate governance and other legislative and tax law changes.

How will this focus on profitability affect M&A?

By focusing on profitability and efficiency measures instead of market share, management teams have been downsizing or withdrawing from established businesses to focus on core operations. The number of companies that exited from or scaled back established businesses this year suggests the total for the full year may exceed the record set in 1999.

Combined with an uptick in business start-ups and shutdown rates, and a sharp rise in acquisitions targeting domestic venture companies, these trends suggest a gradual but steady realignment occurring across Japanese industry, which could translate into ongoing M&A activity.

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