JAPAN: An Introduction to Corporate/M&A: International

Given the global slowdown in M&A in 2023, Japan’s M&A market stood out as a bright spot thanks to a surging domestic deal market underpinned by (among other things) the Bank of Japan’s continued easy monetary policy.

Activity 

Despite the global slowdown in M&A activity and the double-digit decline in other Asia-Pacific markets, Japan saw a different dynamic and bucked this trend with a jump in M&A in 2023.

Transactions in Japan jumped by 29% in value compared to 2022, with Japanese M&A deals being worth USD160.55 billion. Domestic deals led growth in M&A activity in Japan, with deal value standing at USD90.13 billion – an increase of 52% compared to 2022. Inbound deals for 2023 saw a decline of 42% to USD12.76 billion, while outbound deals grew 79% to USD57.65 billion. In terms of outbound deals, the United States was the most active destination for Japanese companies seeking acquisitions, with over 25% of deal volume; followed by Singapore and the United Kingdom with 7% each, and by India with 6% and Australia with 5% of deals.

Among the driving forces behind the surging domestic deals were stricter governance rules and pressure from activist shareholders to produce higher returns, forcing companies to explore strategic options. Low interest rates and low inflation also created a stable investing environment – in contrast to tepid deal making globally under more a challenging economic environment. Reflecting global patterns, the geopolitical and regulatory dynamics have further created impetus for Japanese entities to divest assets in difficult markets or assets that require a disproportionate amount of management attention.

Sectors 

Private equity firms maintained their enthusiasm for Japan-based targets, and for 2023 the rise in the transaction value in Japan was largely contributed by a few big-ticket private equity buyouts – including Japan Industrial Partners’ takeover of industrial powerhouse Toshiba and JIC Capital’s acquisition of JSR Corporation, a semiconductor materials manufacturer whose value totalled over USD20 billion.

Tech remained an active sector in Japan for 2023, with Itochu’s buyout of IT service subsidiary Itochu Techno-Solutions being one of the biggest deals (besides the above-mentioned Toshiba take-private deal), as was SoftBank’s investment in Cubic Telecom for USD514 million for a 51% equity stake, at a valuation of over USD985.6 million for the company.

The energy sector continues to witness a steady level of deal activity in Japan, motivated by global megatrends such as ESG and energy transition – with a major deal in Japan being the acquisition of renewable energy company Green Power Investment by NTT and JERA. We continue to see a trend of consolidation and diversification into low-carbon and other clean solutions, consistent with global patterns.

Another area of buoyancy is the healthcare industry, with Japan-based Astellas Pharma announcing its acquisition of US-based IVERIC Bio for USD6 billion, and with Kirin Holding purchasing Australian vitamin manufacturer Blackmores for USD1.2 billion in an attempt to diversify its portfolio. The consumer and financial services sectors have also remained relatively active in Japan.

Legal Trends 

Warranty and indemnity (W&I) insurance has been around for many years, but is now seeing an increasing take-up in Japan – particularly for cross-border M&A transactions involving either Japanese sellers or buyers, as Japanese entities become more familiar with this solution.

The use of W&I insurance in domestic M&A transactions is less common, primarily due to language issues, which has a subsequent negative effect on time and costs for transactions overall. That said, the situation has gradually been changing, with insurance companies actively seeking to provide W&I insurance in Japan based on Japanese-language documents.

Outlook for 2024 

We are optimistic that the M&A market in Japan will remain active from a deal-making perspective throughout 2024, as conditions are ripe for M&A activity in Japan to gain momentum.

The cheap yen and low interest rates will be a significant driver for the ability to perform inbound M&A deals. Despite growing expectations that the Bank of Japan will end its negative interest rate policy, it is unlikely that the central bank will raise rates quickly. On the other hand, while this seems to have not yet hindered Japanese corporations, a weak yen may eventually have a negative impact on outbound M&A activity.

Recent corporate reforms (including the increased scrutiny of decisions on unsolicited bids and corporate takeovers) and the promotion of shareholder value are likely to drive domestic deal activity going forward.

The trends of increased corporate restructuring, carve-outs and management buyouts will likely continue into 2024, making Japan a favoured hunting ground for global private equity.

Finally, Japan’s long-term demographic trends (ie, a shrinking, aging population) means that its (comparatively cash-rich) big corporates will need to look overseas for growth, driving outbound M&A.