With the yen at a 34-year low against the dollar, the costs of overseas acquisitions are higher than usual.
Still, the drive for Japanese companies to diversify revenue streams by looking for growth in less volatile currencies such as U.S. dollars and euros is creating an incentive for dealmaking that is likely to fuel even more activity moving into next year, especially for businesses that have supply chains with a material portion in currencies other than Japanese yen.
In addition, a shift in Japanese demographics is driving increased demand for outbound investment. With a decreasing and ageing population, businesses are being pressured to seek growth through M&A activities.
Given a historic focus on top-line expansion, taking market share from rivals can be difficult in a mature market, driving the impetus for global expansion.
Benefiting from strong balance sheets and some of the lowest interest rates in the world, Japanese borrowers sense an opportunity to steal a march.
Further, in 2023 Japan was an outlier as the only major market in the world to record growth, seeing a 23% year-on-year increase to hit USD123 billion of deal value, according to Bain & Company.
A prolonged slowdown in several key markets and geopolitical tensions globally are highlighting the strength of the U.S. and Japan's relationship. U.S. regulatory enforcement is shining a spotlight on all inbound investors, with Japanese buyers generally finding favor amidst a shifting and increasingly politicized landscape.
As they seek out attractive deal opportunities, Japanese acquisitions will present stronger competition to U.S., investors in the global M&A markets, while also opening up an additional exit route for U.S. sellers looking to offload strategic assets.
Challenges for Japanese buyers
Japanese corporates do not always have a strong track record when it comes to effective and meaningful integration in the wake of transactions. Buying a company is the easy part – being sure to understand the real strengths of a target and the best practices that can be imported to the combined group is critical to success.
Language and cultural barriers continue to create additional hurdles for Japanese acquirers. Many struggle to retain talent outside Japan and must work hard to convince young talent in target overseas businesses that they can offer them a rewarding long-term career path.
Japan’s business leaders have too often found cost-cutting and creating synergies difficult. In recent years we have seen a number of foreign targets acquired, managed as separate entities and ultimately sold on without ever delivering the hoped-for boon to the enlarged business.
Japanese bidders must also navigate an increasingly complex and sophisticated foreign direct investment landscape, dominated by America’s Committee on Foreign Investment in the United States (CFIUS) but increasingly a feature elsewhere.
The high-profile struggles endured during Nippon Steel’s bid to buy U.S. Steel are atypical here, with that case attracting particular attention as an acquisition impacting blue collar workers in a swing state during a U.S. presidential election year.
Most countries remain open to Japanese investors, so foreign investment regimes are processes that must be carefully navigated but should not cause undue issues with the right advice.
Tougher merger control enforcement
Perhaps more challenging for outbound dealmakers is the antitrust environment, where more and more agencies are now looking closely at cross-border deals.
While in the past it was sufficient to consider the concerns put forward by key regulators such as the European Commission and the U.S. Department of Justice, a growing number of countries are now setting up competition regimes with authorities getting up to speed and antitrust screening becoming more complex.
Our data shows antitrust authorities frustrated more deals in 2023, adopting an increasingly tough approach to merger control enforcement. In all, 20 deals were prohibited and a further 18 abandoned last year as a result of antitrust action, a 54% rise in inhibitions and a 15% increase in overall intervention from the year before.
Antitrust authorities focused on novel and evolving theories of harm in 2023, particularly for non-horizontal deals in the digital and life sciences sector. An effective strategy is therefore much earlier preemptive analysis of potential antitrust hurdles, particularly where there are competitive overlaps, in order to get ahead of issues.
Strategic considerations for future success
As we start the fourth quarter of 2024, in which well capitalized Japanese bidders embark on more outbound M&A deals, acquirers would be well advised to give much earlier consideration to integration strategies and plans to drive synergies.
Businesses are largely driven by people and attracting and retaining the best talent requires an acknowledgement that senior executives too often become disenfranchised in the aftermath of an acquisition.
Buyers must therefore pay close attention to extracting best practices from all constituent parts in order to ensure two plus two equals more than four, while working hard to inspire and empower future leaders on both sides.
Conclusion
Delivering cross-border transactions is never easy and current geopolitical and macroeconomic headwinds make it unsurprising that global M&A volumes have been depressed.
Antitrust and foreign investment oversight is as intense as it has ever been, so bidders must give careful consideration to potential issues across jurisdictions as soon as they embark on transaction planning.
With the theories of harm that authorities are willing to entertain changing all the time, acquisition strategies need to be mindful of overlaps from day one and timetables need to be built with realistic approval processes embedded.
As Japanese firms look to access new markets and revenue streams, they will need to work to improve post-merger integration. This may require meaningful investment in strategic integration plans that include clear road maps, initiatives such as cultural awareness training for middle managers, and mindful development of blended governance structures.
Talent retention will also need to be prioritized, with a focus on competitive pay and benefits packages, coaching, mentoring and talent development, and careful communication of a new employee value proposition.
Still, informed and well prepared Japanese bidders have nothing to fear and much to gain as the international deal market returns to health – as long as they take critical steps to identify risks and implement robust strategies to mitigate them.
This article has been previously published on October 1 in the following publication: www.law360.com/articles/1882773
