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M&A opportunities for U.S. companies.

The prospect of significant corporate restructuring in Japan will serve up many more real acquisition possibilities than ever before.

American companies have recently been seeing more acquisition opportunities in Japan than ever before. Companies long frustrated by the seeming impenetrability of the Japanese market can now more realistically consider some form of acquisition in Japan as a step toward building a stronger competitive position locally.

True, large acquisitions are still very rare, and transactions involving less than 100% control are still the norm. It is also true that any U.S. company contemplating a hostile acquisition in Japan in today's environment would have to be very brave or very foolish. As in the past, most recent acquisitions in Japan have been friendly, negotiated deals between parties that have had some past business relationship.

Through July 1992, there have been 18 announced acquisitions of all or part of Japanese companies by foreigners, equal to the total number in all of 1991. Examples include Hasbro's acquisition of Nomura Toys, Pfizer's acquisition of Koshin Medical, and an acquisition of just under 20% of Japan Systems by EDS. In contrast, Japanese acquisitions of foreign firms are down 33% in the first half of 1992.

Most M&A specialists in Japan believe that these trends are likely to continue. Foreigners are eager to take advantage of depressed acquisition pricing in Japan and what they perceive to be a greater willingness on the part of the Japanese companies to do deals.

It seems clear that a much more receptive attitude has emerged in the Japanese business community toward the notion of selling all or part of a business to a foreigner. This partly reflects the fact that the national insularity alleged by Japan's critics seems to be giving way to a new internationalism, or at least a pragmatic recognition by government and business leaders that more harmonious relations with Japan's trading partners are necessary to defend the nation's economic position in the world.

The difficulty foreigners have had historically in acquiring Japanese companies has long been cited as a hidden trade barrier. It now appears that Japan may be much more willing to let this barrier gradually diminish. For example, the government-owned Japan Development Bank has increased its program of lending to foreign companies investing in Japan, and the Diet passed legislation earlier this year providing preferential tax treatment to companies at least one-third owned by foreigners.

But the driving force of these changed attitudes toward foreign acquisitions of Japanese companies relates to the cold reality of the country's current financial condition. The Japanese government has underplayed the seriousness of the ongoing collapse of the "bubble economy."

As of this writing (mid-August 1992), the Nikkei 225 on the Tokyo Stock Exchange has fallen below 15,000 for the first time in six years, down from a peak of over 38,000 at the end of 1989. The real estate market continues to be in a deep slide, with greater chaos averted only because lenders, encouraged by the regulators, seem determined to postpone write-offs as long as possible. Moribund borrowers, some quite large, are therefore propped up by elaborate financial life-support systems. Everyone seems to be hoping that the Japanese economy will pick up momentum soon enough to absorb these accumulating financial stresses before the situation gets really messy.

Reappraisal of Strategies

In this environment, many Japanese companies are undergoing a complete reappraisal of their business strategies. Gone are the days of low-cost capital. Earnings are under pressure. Foreign markets are more resistant to aggressive export practices, while the domestic market seems too often saturated. Lifetime employment has left many companies seriously overstaffed after the euphoric expansion of the 1986 to 1990 "bubble" era. In the same period, capital investment and business diversification spending were often much too excessive.

On top of all of these fundamental problems, many companies with no particular expertise in financial markets decided in the "bubble" years to earn a little extra by playing in the stock market with their excess cash. The magnitude of losses -- realized and yet to be realized -- from these speculative misadventures are threatening the survival of a number of companies.

Gloomy as this assessment may be, the underlying strength of Japan's economy and society leaves no danger that the system will become unglued. Instead, there will be a steady process of adjustment lasting several years.

During this period, U.S. companies that wish to improve their position in Japan should take a systematic look at acquisition opportunities. Stock market values will be low by historical standards, and many private deals are likely to be done at prices well below valuations implied by the public market. Sellers will be willing to sell or joint-venture businesses they unwisely expanded into during better times. Others will need to restructure their entire balance sheet. Some will simply need the cash. The notion of focusing corporate resources on core businesses and getting out of peripheral businesses will become as popular a business strategy here as it has been in the U.S. in recent years.

The most common reasons for purchasing a Japanese company continue to be the need to establish an initial beachhead in this market, to acquire or improve an existing distribution capability, to access Japanese technology in a particular field, or, for established companies, simply to build greater critical mass for the future.

Many foreign companies are quite dissatisfied with their position in the Japanese market yet are determined to be viable players over the long run. For such companies, the recent emergence of more varied acquisition possibilities at reasonable prices is an opportunity not to be overlooked.

Source of Supply

Japanese sellers, also, will emerge from a variety of circumstances. Privately owned businesses will continue to be a principal source of supply, either because they are no longer competitive as independent companies or because elderly owner-entrepreneurs have no children able or willing to carry on. A number of industries are already in the process of consolidation -- pharmaceuticals, for example -- and foreigners are welcomed as participants in the process.

But it is the stress of the current economic environment that is producing the most interesting new opportunities for foreigners, and the prospect of significant corporate restructuring in Japan over the next several years will serve up many more real acquisition possibilities than ever before.

Maynard Toll is President and Tokyo Branch Manager of CS First Boston (Japan) Ltd. He was First Boston's Tokyo representative from 1978 to 1981. Before returning to Japan in his current position in 1990, he was a Managing Director of CS First Boston Inc. in New York, heading the divestitures and corporate sales group.
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Title Annotation:Accessing the Japanese Market; merger and acquisition
Author:Toll, Maynard
Publication:Directors & Boards
Date:Sep 22, 1992
Previous Article:A turning point for Japan Inc.
Next Article:Developing a joint venture.

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