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Business trends

Amid US uncertainty, Japan Inc. turns its M&A attention to Asia

Growth-hungry companies inked more deals in SE Asia and China than North America in 2019

TOKYO -- For the first time in four years, Japan logged more outbound mergers and acquisitions in Asia than in North America, a sign of growing unease over U.S. trade policy and ongoing friction with China.

Japan Inc. sealed a record number of foreign M&A deals in 2019, though total value was down, as companies sought young, fast-growing markets to offset an aging population and stagnant growth at home.

Of those, 303 deals were in Asia, up 17% on the year and surpassing the total for North America for the first time since 2015, according to data from M&A consultancy Recof. Southeast Asia proved particularly attractive with its large populations and robust growth, though China remained an important destination despite the trade war and other headwinds.

In terms of single markets, Singapore had the most deals, at 64, followed by China (including Hong Kong) with 50.

"More Japanese companies are wanting to access Asia, not only for cheaper costs but also because of the attractive demographics," according to Shinichi Imai, section chief for Japan's largest independent M&A firm, Nihon M&A Center.

By contrast, the number of deals into North America dropped to 258, compared to 276 in 2018, as anxiety rose over what U.S. President Donald Trump's trade policies mean for the restructuring of Asian supply chains, which in turn will affect Japan's.

"It's possible that many of the Japanese companies are waiting to see what happens with the situation surrounding President Trump and are having difficulty structuring their supply chain," said Atsushi Kanzawa, executive vice president of global accounting firm AGS Consulting in Japan.

Japanese companies have been looking abroad more and more over the last decade, both for sources of talent and for faster-growing markets to tap. The total number of transactions has nearly tripled since 2009.

In terms of value, the bumper year for Japanese M&As came in 2018, with 18 trillion yen ($164 billion) worth of deals doubling what it was 10 years prior, according to Recof. The figure was more modest for 2019, with the total coming to 10 trillion yen. The value of U.S. deals dropped 24% last year to just under 4.4 trillion yen, which analysts attribute to a lack of big-ticket transactions. While there were over 30 deals with a transaction value of more than 100 billion yen in 2018, the number fell to 27 last year.

The value of Japanese deals in Asia fell even more sharply to 951 billion yen, down 65% from a year ago, but analysts say this figure likely represents just the tip of the iceberg as many deals are between private companies, which go unreported.

Asahi Printing Group, maker of printed packaging materials, mainly for the cosmetic and pharmaceutical sectors, made its first substantial move into Asia last year when it acquired Malaysian peer Harleigh to establish an oversea production and sales base.

"Global expansion is unavoidable since Japan's population is declining and the market is shrinking," Hisashi Hama, president of Asahi Printing, told Nikkei. The company is also considering future acquisitions in Vietnam and other Southeast Asian countries.

Meanwhile, Itochu Techno-Solutions, commonly known as CTC, has been ramping up its Asian deals in recent years. The IT services company purchased two Indonesian systems firms for about 8 billion yen last year, taking in around 300 new engineers. CTC has acquired IT companies in Malaysia, Singapore and Thailand in the past seven years with an eye toward expanding its business in countries with rapidly growing tech hubs.

Europe, like Asia, saw more but smaller deals. Total value came in at 4.3 trillion yen -- roughly half what it was in 2018 -- while number of transactions rose slightly to 195.

The latest data highlights the relative strengths and weaknesses of target markets. While questions may be growing over the health of Singapore's economy, its legal and political climate helped the city-state attract more deals from Japanese companies in 2019 than anywhere else did.

"It is mainly due to the country's well-organized legal system," said Kan Suzuki, Singapore branch president of AGS Consulting.

"For industries like restaurants and retail, Singapore, as well as Malaysia, Thailand, and the Philippines, has a big enough population to give Japanese companies the chance to expand their businesses," he said, adding. "ASEAN countries are mostly pro-Japanese, so it is also easier for them to accept Japanese-brand products."

China remains to be a significant market for Japanese companies, according to Suzuki. "The country has a massive market with rising income levels. There is a certain amount of demand in China, which is a big opportunity for Japanese companies, particularly those in the service field."

Despite its size, China's slowing economy and shaky relationship with Washington since 2019 is giving many companies pause. The recent outbreak of the coronavirus, which has disrupted economic activity across the country, could further dampen its appeal as an M&A destination.

"We can't feel confident about the country's economic growth, and there is also political fear due to the absence of freedom," said Nihon M&A Center's Imai. "Compared to young ASEAN countries, China is not very attractive."

Rising costs are another drawback, according to Ritsuko Nonomiya, managing director at global M&A advisory GCA Advisors. "The cost advantages of a made-in-China products that existed in the past have disappeared due to rising labor costs."

While China's appeal dims, Vietnam's is rising, according to Nonomiya, who says the country shares "a certain compatibility with Japan in terms of work ethic. "The market size, cost, and talent are all stable, which has also prompted Japan to accelerate acquisitions there," she said.

BIZIT, operator of online investment matching platform Bizit M&A, which helps Japanese companies expand into Asia, sees a similar trend. "Inquiries about Vietnam have continued to surge," it said. "Aside from logistics, construction and food companies, Japan's regional banks are also beginning to set up offices in Vietnam."

In addition to Vietnam and India, "we are seeing more inquiries about Myanmar, Laos, and Cambodia," BIZIT added, "mostly from Japanese firms in the construction, real estate, and air conditioning or electrical construction sectors."

According to Nonomiya, companies' motivation for going overseas is also changing. "The aim for many of these companies is not just to expand market share but to buy overseas talent," she said. "They are acquiring things they don't have and cannot make. And Japan certainly doesn't have growth or innovation right now."

And while Japan's M&A activity has been brisk, Imai points out that many companies still hesitate to take the plunge. "Japan is still rigid in the sense that many firms are unable to make speedy decisions," he said. "I think this M&A acceleration is more due to outside pressure and global trends rather than their own initiative."

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