目次
The Japan M&A Market
Overview - Inbound vs Outbound M&A
Japan 2019 Outbound vs Inbound M&A
The Japan M&A market continues to be vibrant in the recent years, where outbound M&A dominates the M&A scene. According to International Financial Law Review (IFLR), which quoted data from Dealogic, Japan M&A deal volume in year 2019 reached 818 transactions with a total deal value of over USD113 billion, which is only surpassed by the US and the UK in terms of total deal value. To put things in perspective, outbound M&A account for over 90% of the total deal value in Japan, which is approximately USD105billion as shown in Figure 1.
The top sectors which contributed to the outbound deal value are in Industrial goods; Telecoms, media and technology; Financial services. Where else, the top sectors which contributed to the inbound deal value are in Healthcare and Infrastructure and public services.
Although the outbound deals in Japan are much larger as compared to the inbound deals in terms of deal value, the total inbound deal value in year 2019 has increased over 400% as compared to year 2018 according to IFLR.
Uniqueness of M&A Deals in Japan
Similar to the culture of Japan, Japanese M&A has traditionally been friendly deals, where hostile transactions are rarely seen.
In the context of the SME landscape in Japan, when SME targets are considering M&A, they are usually looking at succession planning. This might be partly attributed to the higher than average age of Japanese companies' business owners/CEO at 60 years old, which is near retirement age (source: TDB), as compared to American companies' business owners/CEO with an average age of 50 years old, according to data from Microsoft.
Conventionally, the bulk of the domestic SME deals in Japan are mostly intermediary deals and typically, the advisor can get an exclusive mandate from the sell-side targets. These factors are advantages for all parties as the advisors would be able to better facilitate the deal and communicate clear intentions of the principles.
Why foreign strategic/financial investors should consider investing in Japanese companies?
1. Many good profitable businesses which has no successor
According to Financial Times, which quoted the Japan’s Ministry of Trade, Economy and Industry, “private-sector research suggests that many thousands of companies currently opting to shut down fall into the category of either “profitable” or “high earning”: good businesses that just cannot find new leaders.”.
This pose a golden opportunity for foreign investors, be it strategic or financial, to acquire businesses which are already established and take over and run from the retiring owners.
Nihon M&A Center Inc. (NMAC) has been at the forefront, since our inception in 1991, in carrying out our mission to help these companies, mainly SMEs, to do succession planning and explore the M&A option rather than winding up the company. Till date, we have successfully assisted over 5,500 companies’ owners to exit via M&A.
However, there are still a lot of good SMEs out there in Japan which are facing succession issue. Our portfolio has grown over the years as more companies are seeking our services and we currently have over 1,400 exclusive sell-side mandates in Japan across all industries. Most of the targets in our portfolio are stable and profitable companies, but with no successor. The industries that the targets are mainly in are Construction, Healthcare, Manufacturing, F&B, Distributor, Hospitality, etc. The revenue size of the targets is typically within USD50million, with a handful above USD50million.
Portfolio Industry Breakdown
Targets’ Revenue Size Breakdown [in USD Million]
2. Diversification of portfolio (concentration risk)
Another angle on why foreign investors should consider investing in Japanese companies is the diversification of their portfolio. NMAC has spoken extensively to investors out of Japan which are either MNCs, Listed companies or Private companies with regional presence, on their M&A buying requirements.
Often, we hear from these investors that they find that their business is too focused on certain countries and a significant part of their revenue, about 30-40% of their total revenue, comes from there. Some companies’ sales mostly come from developing countries like Vietnam/Cambodia/Myanmar/Russia, etc, and these developing countries’ economy are generally not as stable as compared to developed countries. Many a times, these investors face significant exchange rate fluctuations doing business there, which will eventually impact their profit margin.
This poses a concentration risk, where they would usually consider hedging the risk by shifting the business into a new market, which is more stable and developed. Japan, in this context, would be a good candidate if they are not already there.
Japan is the world’s 3rd largest developed country, with a stable government which is very pro-global business. The Japanese Yen is also commonly considered as a safe-haven currency, which is often used as a hedge as the Yen is considered very stable and safe under uncertain times.
3. Access to world-leading R&D technology and high-quality R&D facility
World's second largest number of patents in force
World's second largest number of patents in force
Source: World Intellectual Property Organization “WIPO Statistics Database” 2017
Japan is recognized for its world-leading R&D capabilities with quality IP assets, which can provide foreign investors with new value creation opportunities. Furthermore, the government of Japan is working towards the new initiative, Society 5.0, a societal transformation plan of Japan, to overcome social challenges and create growth potential for businesses in emerging growth sectors including robotics, AI and IoT.
4. M&A is the easiest way to enter the Japanese market instead of greenfield investment
The Japanese market is generally tough to enter via greenfield investment, if the investor does not have a good grasp of the Japan business landscape, especially the unique business culture, customs and protocols. Therefore, greenfield posses a very high risk if the business eventually did not take off, when the resources like capital, manpower and time has all been spent there.
However, entering the market via M&A would be a different story. The groundwork of setting up the office/factory, logistics and clientele would have already been established. The risk would be much lower as compared to greenfield as the resources needed to manage an existing business will be much lesser than building the company from ground up.
What services NMAC can provide for foreign investors?
Matching with the exclusive targets in our portfolio
NMAC can be the gateway to connect foreign investors to targets in Japan. We maintain a large proprietary database of both listed and private companies in Japan, accumulated through more than 53,000 field visits every year by our sales consultants to provide updated information and direct access to decision makers of target companies. Once we understand the investors’ requirements, we can potentially find a match in our current pool of over 1,400 exclusive sell-side mandates, which are spanning across all industries.
Proactive search
Other than providing matching services in our current portfolio, NMAC is also able to do provide proactive search services for foreign investors. We will do a deep dive into the investor’s M&A requirements and through our proprietary database, come up with a list of possible targets for their consideration. After which, we will approach the targets and guide the investors throughout the M&A process using our knowhow in the Japanese M&A industry.
Case Study
Ramen Restaurant Chain x Overseas Private Equity
One inbound M&A case study that NMAC would like to highlight is a privately owned ramen restaurant chain in Japan with an overseas private equity fund.
The owner of the Japan ramen chain has been in the business for more than 20 years and has successfully grown his business to a significant number of stores in Tokyo. However, the owner has a dream all along to take his brand overseas but lacked the expertise to do so. He then approached NMAC to help him with finding a suitable partner, who can take his brand to the next level of growth and expand into the overseas market.
The cross-border team in NMAC heard about this requirement and understand that in our network, there is an overseas F&B focused private equity fund which is looking at investing in scalable F&B business internationally. They have a team who has the expertise to take brands international. They have already acquired a few F&B brands in their portfolio and a ramen brand is currently not in their portfolio at that time. Furthermore, they do not have a presence in Japan too.
We see a very good match in terms of the intentions of both principles and facilitated a meeting of the two principles. Sparks flew and both principles were very positive about working together to bring the brand overseas together. At that time, there was also another potential Japanese buyer in the F&B restaurant chain business pursuing the deal. However, the owner eventually chooses the overseas private equity as he can see potentially more synergy and believed that they would be a better choice in bringing his brand overseas.
The deal was a 100% acquisition, where the owner volunteered to stay behind for a minimum of 5 years to help in the transition and work together with the private equity to see his brand takes off overseas. The support and commitment from the owner gave a lot of comfort to the private equity and this helped in facilitating the deal.
Enquiry details
If you are a foreign investor, be it strategic or financial, and are looking at investing in Japan, please feel free to contact NMAC for a free initial consultation.
Camelia Ong (Consultant)
Cross Border M&A Division
Office: +65 6817 5493
Email: camelia@nihon-ma.co.jp
Naohiro I (Deal Manager)
Cross Border M&A Division
Email: naohiro.i@nihon-ma.co.jp
Nihon M&A Center Inc. (NMAC) is an independent mergers and acquisitions advisory firm headquartered in Tokyo and listed on the Tokyo Stock Exchange.
Website: https://www.nihon-ma.co.jp/en/
References:
IFLR,M＆AReport2020:Japan
Manasa Reddigari,Small Business Ownership Statistics You Should Know
FINANCAL TIMES,Succession crisis stalks Japan’s family businesses
JaoanGov,Evolving Innovation
