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Stocks

Corporate Japan offers ripe acquisition targets for 2016

TOKYO -- While Japanese stocks sagged Friday on news of disappointingly modest monetary easing in Europe, investors welcomed companies that are working on industry realignment.

     Fujitsu managed to advance about 2%, while Toshiba -- with a 1% slip -- still outperformed the Nikkei Stock Average's 2.18% decline. The two companies' shares were propped up by the news that they, along with Vaio, will integrate their personal computer businesses.

     Energy giant JX Holdings, which has reached a general accord with TonenGeneral Sekiyu to merge, also remained solid.

     "Corporate managers are increasingly having an eye toward capital efficiency, and now there is no sanctuary" for businesses vulnerable to a merger or sale, said Shunsuke Uchikawa, managing director of Citigroup Global Markets Japan.

     Still, investors are not big fans of corporate Japan's overseas acquisition frenzy, which exceeded 10 trillion yen ($80.8 billion) for the first time this year. Shares of Japan Tobacco and Tokio Marine Holdings, which made massive investments to buy U.S. peers, have been shown lackluster performance since announcing their purchases.

     Investors are apparently taking a wait-and-see stance as the buyers are paying for higher premiums on their targets' stock prices amid the acquisition craze worldwide. It is not easy to assess synergy in transactions involving overseas companies, either.

     Acquisitions generally do not serve as an investment theme because their results tend to differ case-by-case. But now, a scenario of Japanese companies becoming acquisition targets is looking more realistic than ever.

     "They are now mulling whether to take a frontal approach or not rule out a hostile takeover," said a foreign investment banker, referring to an overseas client's plans to reach for Japanese companies.

     Corporate Japan boasts solid earnings and looks undervalued amid the weak yen.

     "Foreign interest is growing in the health care, food and other fields where players are highly competitive," said Masatoshi Kikuchi at Mizuho Securities. There are indications that businesses in the Middle East and Asia are approaching manufacturers that possess appealing technologies about buying up shares that long-time bank stockholders are unloading.

     The chief of a U.S. investment fund who visited Japan this week said he had crafted a meticulous Japanese strategy. He looks to invest in non-core operations that big companies are spinning off. "If they accept experienced foreign owners, this can be an opportunity for new growth," he said.

     Sanae Sakai at Sumitomo Mitsui Asset Management is incorporating the theme of mergers and acquisitions into her investment strategy. Japanese companies are not immune to becoming targets in the pharmaceutical and other industries where big international purchases often take place. Fearing such a possibility, many in these industries are boosting returns to shareholders, she said, noting that it might be a wise idea to buy these stocks ahead of time.

      As Japanese companies themselves acquire foreign businesses, such moves send a message that their management is "open." Whether corporate Japan will turn out to be an acquisition target could become a key theme for the Japanese stock market in 2016.

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