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China's lost M&A from trade war can be Japan's gain: Goldman COO

Shareholder activism offers 'big opportunity' for bank to guide baffled companies

The U.S.-China trade war presents an opportunity for Japanese companies to buy assets overseas, Goldman Sachs Group President and COO John Waldron told Nikkei. (Photo by Hideki Yoshikawa)

TOKYO -- U.S.-China trade tensions have sharply curtailed Chinese mergers and acquisitions overseas, giving Japanese players an opening for global deals, says John Waldron, president and chief operating officer of Goldman Sachs Group.

"So two to three years ago, we saw quite a lot of outbound Chinese M&A flow. That has substantially reduced," Waldron told Nikkei in a recent interview, adding that "we're not planning for that to start to come back any time soon." The drop-off stems from concern about China's economic outlook amid the trade war, as well as what amounts to a freeze on Chinese merger and acquisitions in America.

Meanwhile, "in Japan, we see substantial Japanese interest in continuing to buy assets outside of Japan, both corporate assets and institutional assets," Waldron said. "And I think some of the dynamic that's going on with U.S. and China does present an opportunity for Japanese companies."

He cited both reduced competition for acquisition targets and the realignment of supply chains sparked by tariffs that have driven some production out of China.

The trend of mergers and acquisitions are of particular interest to Goldman, which leads the market for advisory services. Waldron noted that global M&A activity has declined 15% by value so far this year. "We started on the back of the market volatility in December with a little bit more caution, and the pace of transaction flow at the start of this year versus last year was more muted," he said.

But Waldron downplayed concerns about the environment. He said deals are still underway as companies respond to a changing technological and competitive environment, but with somewhat smaller deals than in 2018.

"We feel good about our backlog," he said. "The M&A environment I would characterize as still very strong."

The Goldman COO also discussed the rise of shareholder activism in corporate Japan -- something that the financial giant has helped such Japanese companies as Toshiba and Olympus deal with.

"We're seeing some of those activists that have been successful in the U.S. come to Japan and really push companies to unlock capital, look at M&A, look at fit and focus in terms of their own asset base," he said.

Waldron linked the trend to the persistence of wide-ranging conglomerates in Japan, which activists, who engage directly with management and the board of directors, likely see as an opportunity to create value through breakups and spinoffs.

"To my mind, [conglomerates are] still owning a number of assets in a lot of different industries, almost in a holding company construct, versus what I think has happened more in the U.S. and, to a lesser extent, in Europe, where fit and focus has become a big driver of how you run a company in the public markets," he said.

This has created a "big opportunity" for Goldman, which considers itself the leading adviser on shareholder activism to Japanese companies, Waldron said. "We think we can play a very important role on the ground here in helping Japanese corporations navigate that dynamic with their shareholders."

Asked about Goldman applying for a banking license in Japan, Waldron declined to comment on the application itself but said the company is launching a "transaction banking platform." The plan is to create a global cash management system for multinational corporations -- focusing initially on those based in the U.S. -- to replace what the COO called the "antiquated" options available now.

"What we see is an existing infrastructure of payments that has been in place a long time, is fairly legacy in its architecture, doesn't have a lot of technology at the core of it, not a lot of analytics," he said.

Waldron acknowledged that technological and regulatory change have disrupted Goldman's markets business -- areas such as bond trading that had been a cornerstone of its earnings. "There's real dynamism in those ... probably to the downside dynamism from a returns standpoint," he said.

The investment banking business, including M&A advisory services, has been more stable. Waldron specifically cited wealth management services as a "great opportunity."

Goldman now offers such services in the U.S. to individuals with at least $30 million in investable assets, and Waldron suggested it could expand to Japan. "We see a longer-term opportunity, particularly in the ultrahigh net worth market here, to do what we do in the U.S."

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