Japan Inc. splurged a record $70 billion on foreign acquisitions last year, taking advantage of a strong yen, big cash reserves, attractive valuations and some willing sellers, especially in Europe.
Many of these Japanese acquirers are already multinationals but a growing number are embarking on their first big foreign adventure, a trend that partly reflects two longer-term factors: a stagnant domestic economy and a shrinking population.
“We want to keep growing,” said Hitoshi Motohara, managing executive officer of Recruit Co, Japan’s largest recruitment firm, which was founded in 1963 but has only begun in the last two years to really make major bets on offshore markets.
“Having had control of a dominant share in Japan, we have to seek the next opportunity somewhere else,” said Motohara, 54, who leads the unlisted firm’s expansion in the United States, the world’s largest recruitment market.
In January, Recruit bought Advantage Resourcing America and Advantage Resourcing Europe for $410 million in its third foreign deal since 2010, giving it a global footprint.
“If there is a good opportunity, we want to conduct more acquisitions in the US,” Motohara said by phone from Norwood, Massachusetts. “A company based in the US with global presence would be ideal.”
Recruit is one of a growing number of previously stay-at-home businesses looking to spend more of their capital offshore.
Takara Tomy Co, a Japanese toymaker, made its first overseas foray in March last year, buying US toymaker RC2 Corp. for $640 million to pit itself against the world’s top makers, Mattel Inc. and Hasbro Inc.
In September, packaging firm Toyo Seikan also made its first big step offshore, buying US firm Stolle Machinery for $775 million. And Nisshinbo Holdings, a maker of textiles, paper and auto brakes, became the world’s largest maker of brake pads with its purchase in November of Luxembourg-based TMD Friction Group for 440 million euros ($577 million). It was Nisshinbo’s first overseas acquisition since 1999.
“We’re seeing an increase in the number of Japanese corporations considering M&A overseas, including corporations with almost no past experience of acquisitions,” said Jeremy White, a lawyer specializing in mergers and acquisitions at law firm Allen & Overy in Tokyo.
Japan’s offshore acquisitions jumped 84 percent last year, with some familiar multinationals leading the way, encouraged by a 5.5 percent appreciation in the yen against the US dollar and a 9 percent run-up versus the euro.
Though 10 major deals by Japanese multinationals accounted for around half last year’s deal value - led by Takeda Pharmaceutical Co, Kirin Holdings and Tokio Marine Holdings Inc. — the number and breakdown of acquisitions tells a slightly different story, according to Thomson Reuters data.
The volume of deals jumped by more than a fifth in 2011 as many smaller, varied and often more domestically focused firms took the plunge in the face of increasingly tough domestic markets.
Last year, strongly Japan-focused sectors such as health care, telecoms and retail featured more prominently in the outgoing tide than in 2010. Healthcare topped the list with $20.6 billion worth of acquisitions.
Even excluding Takeda’s $13.7 billion purchase of Swiss-based Nycomed, Japan’s health care sector spent 50 percent more on foreign acquisitions last year than in 2010. Retail and telecoms, though still relatively small foreign acquirers, more than doubled their share of outgoing M&A.
It’s not hard to see why.
At home, not only have consumer prices been falling - down 0.2 percent in 2011 - but the actual number of consumers also now appears to be in long-term decline.
Japan’s population of 128 million is expected to fall 30 percent by 2060, with the working-age population shrinking to almost half its current size.
Unable to raise prices or easily ramp up sales volumes, because consumers are themselves scarcer, domestic businesses do not have a lot of options. But they do have two key advantages: the strong yen and plenty of cash.
CASH CUSHION
Japanese companies typically sit on more cash than US or European firms, with their cash piles amounting to 5.8 percent of gross domestic product in the third quarter of 2011, compared with 2.7 percent in the United States and 1 percent in Europe, according to UBS Securities in Tokyo.
Daiju Aoki, an economist at UBS, suggests Japan has only just begun to flex its muscles abroad, and this trend is unlikely to go into reverse, even if the yen weakens.
“Japanese companies’ direct overseas investment has not been increasing seriously yet,” he said.
“But we can expect Japanese companies will become more active in foreign investments, driven by the expectation that the US economy will improve. The move won’t be deterred even if the yen loses its strength against the dollar.”
So far this year, Japan’s big financial institutions have led the way, picking up assets from struggling European banks.
Sumitomo Mitsui Financial Group, Japan’s third-largest banking group by assets, and trading firm Sumitomo Corp. are buying the aircraft leasing business of Royal Bank of Scotland in a deal worth $7.3 billion.
This was a blockbuster deal from well-known Japanese firms with experience in global markets. And in its wake, lesser-known companies are expected to keep following, supported in some cases by the very Japanese lenders that are showing the way.
“Japanese banks have been less affected by the European crisis and are very aggressive in M&A financing,” said Yuichiro Wakatsuki, head of M&A business at Bank of America Merrill Lynch in Tokyo.
“Combined with the strong yen (and) a willingness to grow internationally, that has boosted the position of Japanese companies as global acquirers.”
However, Japanese banks and their domestic clients will proceed cautiously, given the uncertain international economic outlooks, especially for Europe and the United States.
“What’s challenging for CFOs (chief financial officers) in Japan this year is how to maintain a balance between strategic investments and balance sheet management,” said Yuichi Jimbo, head of investment banking at Citigroup Global Markets Japan Inc.
“Because we have to be cautious about what’s going on in Europe, so they have to seek growth - but at the same time they have to be cautious about risk.”
