Corporate Japan back in hunt for US deals

According to an article by Financial Times, overseas expansion is seen as vital for lenders and companies dealing with shrinking domestic market. Caliber.Az reprints the article.

Approaching the peak of Japan’s asset bubble in 1988, after Japanese companies had bagged Columbia Records, InterContinental Hotels and Firestone Tire, the government in Tokyo warned everyone to curb their appetite for US assets.

Undeterred, Mitsubishi Estate two years later took control of New York’s Rockefeller Center. The deal marked a stark misreading of financial conditions and the start of a sea change in Japanese investors’ engagement with foreign deals.

This June, some property veterans were reminded of that Rockefeller moment when developer Mori Trust bought a 49 per cent stake in Manhattan’s 245 Park Avenue tower. The deal valued the tower at $2bn at a time when most of the focus in commercial property was on an impending collapse in prices.

Other large Japanese developers are also on the prowl, three merger and acquisition lawyers told the Financial Times. Other advisers in Tokyo said the rest of corporate Japan was on the hunt for assets, with the end of pandemic travel curbs allowing up-close due diligence of potential targets again.

Against a backdrop of a global downturn in dealmaking, the apparent Japanese appetite for transactions is driven less by a desire for signature deals and more by appreciation of unprecedented pressure to diversify, advisers said.

“It’s not about trophies this time,” said Rochelle Kopp, managing principal at the M&A advisory boutique Japan Intercultural Consulting in Tokyo. “More and more Japanese companies are saying that they want a specific percentage of their revenues to come from overseas . . . it is front and centre of their strategy.”

Japanese companies “are going to be doing more outbound M&A, that is clear”, said Masahiko Ishida, a senior M&A lawyer at DLA Piper in Tokyo. “They are in a shrinking domestic market, with a shrinking population. They have to expand overseas. There is no choice.”

Japan’s financial groups appear to take the same view. In May, Mizuho paid $550mn for US investment bank Greenhill. The deal will generate a $78mn windfall payout for the boutique bank’s chief executive, Scott Bok, but will also fill what analysts said was an obvious gap in Mizuho’s US deal advisory expertise.

A month earlier, Sumitomo Mitsui Financial Group said it would raise its stake in the US investment bank Jefferies to 15 per cent and combine forces on their M&A businesses.

Analysts said Mizuho and SMFG were trying to replicate the success of MUFG’s partnership with Morgan Stanley — which began in the depths of the 2008 financial crisis when the Japanese bank bought a 20 per cent stake in the US giant — and had two potential revenue sources in mind.

First, Japanese banks want a bigger chunk of the general investment banking fee pool for grabs in the US market, the world’s largest, said Ken Lebrun, a senior M&A partner at Davis Polk in Tokyo.

The opportunities there contrast with their expectations that lending at home will continue to be slow because of the Bank of Japan’s continued policy of ultra-low interest rates and because Japanese companies have accumulated significant stores of cash, damping their need to borrow.

Second, the banks are also positioning themselves for a longer-term trend of Japanese companies buying overseas at a time when they are flush with cash and valuations of acquisition targets are low.

“Japanese companies have an increasingly favourable view of M&A, and certainly many CEOs now think that this is a more important aspect of their business,” said Lebrun. “Everyone . . . recognised that there has historically been a problem with low corporate metabolism and low return on investment at Japanese companies, and that the solution is to promote more M&A.”

An additional tailwind is the comparative welcome that Japanese companies can expect to receive in the US at a time of rising tension with China, said Jeff Acton, the Tokyo co-head of M&A advisers BDA Partners.

“Even before the recent geopolitical tensions arose, there were factors that were playing against Chinese bidders in international M&A markets,” said Acton, citing longstanding US concerns over the potential leakage of high-end technology and intellectual property.

“Right now, Chinese buyers are at the bottom of the priority list for most sellers . . . If the Japanese can work at a good pace, they actually are at an advantage now.”

Kopp said banks had recognised a need to move quickly, since their Japanese corporate clients would need financial services during their anticipated M&A push. The Japanese banks are “building their investment banking sides and thinking ‘why leave it to Goldman Sachs?’”, said Kopp.

But if Japanese banks are expanding investment banking capability, it is also with an eye on conditions at home — in particular the rising interest in Japanese assets from potential foreign buyers, said other people directly involved in recent Japan-based deals.

Private equity firms such as KKR and Bain have long viewed Japan as rich in targets. That view has become more mainstream as pressure from shareholders and other factors has prodded Japanese companies to offload more non-core assets and property.

Jeremy White, an M&A lawyer at Morrison Foerster in Tokyo, said there had been an increase in the volume of inbound M&A deals. The prevalence of strong companies with low valuations, improved corporate governance and a cheap yen is spurring more foreign buyers to look at Japanese assets.

“We would certainly expect that to continue, and again, this is going to be a trend where the Japanese banks sense that there is an opportunity for financing and advisory work,” said White.