Boom In Japanese M&A Deals

Japanese merger and acquisition (M&A) deals have surged to a level not seen since Japan's 1980s economic boom. According to data collected by Thomson Reuters’ research unit, Japanese companies were involved in 2,950 deals totaling $290 billion in the first nine months of 2018, more than double the total for 2017. This activity represents the strongest nine months for Japanese M&A since records began in 1980.

The healthcare and telecommunications sectors account for 28% and 20% of these M&A deals, respectively, according to the same report. The two best illustrations of this trend are Takeda Pharmaceutical, which made a $62 billion bid for Dublin-based competitor Shire, and Sprint Corp—the US telecom giant controlled by Japan’s Softbank—which is putting up $26 billion to buy T-Mobile.

Outbound deals account for the lion’s share of this surge in Japanese M&A. The total value of outbound M&A deals for 2018 so far is $146.9 billion while inbound deals are worth a total of $3.37 billion according to the latest figures from Thomson Reuters unit Refinitiv. While the dollar amount of inbound deals in 2018 is relatively small, the number of deals is high (209) and follows a blockbuster year in which inbound M&A value reached $31.5 billion. Further dealflow is expected to be driven by the banking sector, the most high-profile example being the merger between Fukuoka Financial Group and Eighteenth Bank, two regional banks in Nagasaki.

“Consolidation among Japan’s regional banks has started to gain momentum,“ noted KPMG's global financial services deal advisory lead Stuart Robertson in his 2018 global M&A outlook. ”Japanese banks’ recent performance reflects the challenges of shrinking customer bases amid low birth rates, a shift of economic activity and population to major cities, and ultra-low interest rates squeezing the profitability of regional banks.”  

The surge in Japanese M&A activity is also due in part to a friendlier business environment nurtured under Prime Minister Shinzo Abe whose economic program (dubbed “Abenomics”) comprised of “Three Arrows”: fiscal stimulus, monetary policy and longer-lasting structural reform.

“If the government gets the structural reforms in place and we have more deregulated markets, looser labor laws and cheap financing, this trend could continue,” says Jacky Scanlan-Dyas, a corporate partner at the Tokyo office of international law firm Hogan Lovells which has been at the forefront of the recent deal-making boom. Speaking to Global Finance, she describes a “magic maelstrom” that is driving outbound activity. With a population in decline and a forecast for low economic growth, companies are seeking more overseas opportunities with the support of the government. “In a competitive world, especially when you look at the alternatives, Japan as the third largest economy really stands out as an interesting location to invest in.”

“There is a hugely supportive political environment. [Prime Minister Abe] is really encouraging Japanese companies to go overseas,” says Scanlan-Dyas. “There is also a very supportive financial environment where you have JBIC (the government-backed Japan Bank for Economic Cooperation) and other banks supporting Japanese companies going overseas with very low costs of funding. Companies have a surplus of cash and are investing it in M&A.” 

Scanlan-Dyas notes that two of the biggest groups targeting overseas assets are trading houses and companies looking to make strategic acquisitions.  The former—being focused on energy and infrastructure—have been particularly active in emerging markets while the latter have focused on building distribution chains and manufacturing facilities in more developed markets. Although data shows that outbound M&A activity vastly outstrips inbound activity, there are indications that inbound activity may be experiencing a surge of its own.

“Typically 80% of the work we do is outbound and 20% is inbound. However, over the last 18 months we have seen an unprecedented surge in inbound deals,” adds Scanlan-Dyas. “This has tipped the scales and our primary focus is now on inbound instead of outbound transactions. There are a few drivers for this surge in inbound activity; some are economic, while others are social.”