Expert Spotlight: Japan Deal Momentum

Analysis by Mergermarket, an Acuris company owned by ION Group

Japan dealmakers are seeing a strong rebound in M&A following the initial impact of COVID- 19 with the current momentum backed by an uptick in corporate divestitures, low-cost financing, and activism among others, according to industry experts speaking at a recent webinar hosted by Datasite and Mergermarket.

At the start of the discussion, Yasuhiro Hirabayashi, partner from PwC Singapore, noted that in Q1, Japan-targeted M&A (domestic and inbound) increased in value to US$15.6bn over 125  deals, from US$13.013bn across 136 deals year-on-year, citing Mergermarket data.

Industrials & Chemicals and Technology were the most active sectors in Japan with US$ 4.348bn over 28 deals and US$2.905bn over 16 deals, respectively. Meanwhile, outbound  M&A soared in terms of value to US$19.4bn over 37 deals in Q1 2021, compared with US$9.276bn across 74 deals year on year.

M&A insights from the experts

The expert panel agreed that COVID-related valuation mismatches between sellers and buyers that had earlier been obstacles during deal negotiations had largely been overcome.

Deal volumes have been recovering sharply since the third quarter of last year and continues to improve, said Atsushi Tatsuguchi, managing director, Mitsubishi UFJ Morgan Stanley Securities (MUMSS). Visibility has improved after companies recorded their financial results through the COVID-19 situation and this will encourage companies to take bolder actions, he added.

Nobuki Watanabe, executive officer at ORIX Corporation, said that a number of private equity  firms and business owners appear to be seeking exits now as it is a good time to sell businesses due to higher valuations.

However, in auction situations, private equity firms tend to submit aggressive offers backed by inflow of funds from long-term institutional investors (as limited partners), accumulated dry powder, and LBO loans that have favorable terms, Watanabe pointed out. Therefore, it tends to be difficult for ORIX to beat these players in auction situations, he added.

Meanwhile, the experts agreed that hostile takeovers should increase in number. Already, the number of hostile TOBs launched this year has reached seven cases so far and has already exceeded last year’s total of five cases, according to Yusuke Sahashi, partner, Anderson Mori & Tomotsune. More Japanese companies may consider launching hostile TOB attempts fueled by recent successful examples, he pointed out.

As such, the circumstances are favorable for activists, he said. Following the renewal of the Corporate Governance Code, the amendment to the Cabinet Office Order on Disclosure of Corporate Affairs, the renewal of voting guidelines among proxy advisors, and the planned reorganization of Tokyo Stock Exchange’s market sections, companies are expected to reduce their cross-shareholdings and as a result lose stable shareholders, Sahashi said.

This helps activists increase the chances of getting approvals from other shareholders for their proposals, he noted.

Japan Inc’s non-core divestiture drive and ORIX’s strategy

The pace of non-core divestitures conducted by Japanese corporates is expected to continue fueling M&A, experts said. (Global) private equity firms are focusing on the Japan market and expected to be accelerators to prompt Japanese companies to conduct non-core divestitures, MUMSS' Tatsuguchi pointed out.

Companies are being put to the test by engagement of shareholders and pressure from the market on whether their diversified businesses are contributing to maximize the shareholders’ value, as well as whether they can continue investments to keep their competitive edge in the global market, Tatsuguchi added.

ORIX’s Watanabe echoed this view, but said that it is not actively pursuing non-core divestiture deals, as private equity investors are submitting aggressive offers.

Instead, ORIX is seeking founder-backed companies with succession issues regardless of sector in Japan, according to Watanabe.

Overseas, ORIX is focusing on renewable energy targets and alternative asset management companies in the US, Europe, and China as these countries have many such opportunities and large markets, he continued.

For renewable energy targets, ORIX has been engaged in PV power generation businesses, real estate securitization, and infrastructure so far and wants to expand asset under management (AUM) by accruing asset management companies, he added.

The company has M&A teams in these areas and can complete deals including sourcing, execution, and value-up post investment, according to him.

Cross-border difficulties

Meanwhile, it will take some more time to see reactivation of cross-border M&A, the experts said. Yoichiro Shimizu, head of Japan, Datasite, said that 90% of VDR usage in Q1 2021 was for domestic deals. The usage of VDR for cross-border deals remains only 10%.

PwC’s Hirabayashi pointed out that it should take some more time for travel bans to lift as vaccinations have just started. Under the current circumstances, it is a big challenge for Japanese dealmakers to think about how to conduct cross-border deals and what tools they should use.

There seem to be a few cases where dealmakers travelled overseas and met management teams in-person, but in many cases, the travel ban remains a large hurdle to move the deal forward, Anderson Mori & Tomotsune's Sahashi said. As alternative measures for site visits, some of the dealmakers conducted virtual tours using cameras, but such cases are still rare, he added.

ORIX’s Watanabe echoed this view and said there is a limitation to doing everything remotely. ORIX tried such virtual tours before to see the inside of facilities on video, but it could not replace in-person due-diligence, he noted. There was a deal it was able to close using local staff, but other deals were put on hold as they could not conduct site visits, according to Watanabe.

The lift of travel bans will be the turning point to resume pending cases, he added.

Datasite’s Shimizu noted that the necessary time for due diligence tends to be prolonged for various aspects, and the usage of AI can be a key to help dealmakers move the deal forward efficiently.

This webinar coverage article was originally published by Mergermarket on June 4, 2021; it has been republished with permission.