Outlook for M&A
In 2019 global M&A was $3.9tr (-3%), the fourth highest ever year according to Refinitiv. 13% of this was private equity backed buy-outs, the highest level since before the global financial crisis.
In 2019 Japan related M&A was ¥19.8tr (-37%), the second highest year ever according to Recof. By volume Japan M&A totalled a record 4,854 transactions (+3.7%). Data for Japan is distorted by the Takeda acquisition of Shire – the largest global M&A transaction in 2018.
Japanese M&A has seen an interesting shift in focus. In the last decade there has been a rising trend of outbound M&A as Japanese companies have been eager to look for new markets, technologies or production bases. However, in 2019 there were many large domestic transactions and domestic M&A was at the highest level for the last decade.
The conglomerate business model is coming under increasing scrutiny. Companies cannot continue to nurture so many different activities and remain competitive internationally. The process of conglomerates focussing on core businesses gained pace in Germany about 20 years ago and now we are witnessing a similar trend in Japan, which shares several economic characteristics. 20 years ago 20% of the German index was industrial conglomerates, which have either specialized, disappeared or been kicked out like ThssenKrupp in 2019.
Up until recently major Japanese companies have typically only made disposals when things have gone wrong. Semiconductor companies have needed to merge, Toshiba sold prize assets after its financial crisis, Nissan once sought investment from Renault. What has changed now is that companies are looking to sell good businesses as part of a proactive strategy to focus on the core. Hence the sale by Hitachi of Hitachi Chemical to Showa Denko in 2019 (¥976bn, third largest Japan related transaction of the year). An early mover in this trend was Panasonic, selling its medical business to KKR.
The cultural shift in the thinking about M&A is every bit as important as economic factors. In the next 18 months here are trends we see emerging, largely reflecting new attitudes.
M&A for regeneration. Nihon M&A Center is the leader by volume of M&A in Japan with 908 transactions in 2019 (albeit not included in Recof data, see our article). The company supports companies with no successors and regions of Japan where there is need for support to continue and grow.
CVC. So many companies in Japan are now turning to corporate venture capital as a way to gain new technologies in areas such as IA, batteries, autonomous vehicles and robotics. Israel has become a hunting ground like Silicon Valley (see our article).
Inbound. Cross-border M&A has been one-way traffic. Expect more inbound as attitudes towards foreign ownership become more open and Japan more attractive as a core part of strategies for a presence in Asia.
Supply chain. Every big crisis gives the impetus for a change in supply chain – Fukushima and Brexit are examples. The coronavirus is likely to provide a reason for companies to diversify production, which can be a powerful argument for M&A.
New wave. Japanese corporates which have enjoyed success in M&A outside Japan will do follow-on transactions. Asahi Group Holdings is a prime example – its ¥1,214bn acquisition in Australia followed a string of others and was the largest Japanese M&A transaction in 2019.
Japan related M&A by volume
Source: Recof / Gideon Franklin