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Japan's lopsided M&A boom

Nation's companies invest record amounts abroad, but foreign groups steer clear of Japan

| Japan

Shinzo Abe's "Japan-is-back" pledge was much in evidence in the corporate world in 2018 as the country dominated mergers and acquisitions in Asia.

Outbound M&A deals reached an all-time high of 777, up nearly 16% and a fifth straight record for Japan Inc. Executives spent roughly $175 billion last year tapping overseas growth to offset a shrinking and tepid domestic market, in a buying surge that was second only to the U.S.'s.

Yet the boom is a notably one-way affair. Inbound M&A fell last year to $7.6 billion, according to data company Refinitiv.

If Asia's second-biggest economy is really back from decades of deflationary funk and gearing up for a bright future, how come investors are not rushing to Japan?

To be fair, there have been significant nibbles. The 2016 purchase of Sharp by Taiwan's Foxconn Technology Group certainly turned heads. Yet that $3.5 billion transaction is far more exception than rule. It pales in comparison with Takeda Pharmaceutical buying Ireland's Shire last year for $62 billion. The lack of similar headline-grabbing bids for cash-rich Japanese companies betrays the limits of Abe's turnaround efforts.

Takeda Pharmaceutical President Christophe Weber, pictured at a news conference in Tokyo on May 9 2018, has his sights set firmly on the U.S. (Photo by Wataru Ito)

Indeed, things are turning out very differently than Abe telegraphed in 2012. Nine months after his return to the premiership, in September 2013, he took his reform message to the New York Stock Exchange. As Abe implored traders to "buy my Abenomics," he even cited Gordon Gekko, the corporate-raider at the heart of Oliver Stone's 1987 "Wall Street" film. "Today, I have come to tell you that Japan will once again be a country where there is money to be made."

The 57% surge in the Nikkei Stock Average that year punctuated the point. Missing, though, is the long-term foreign direct investment needed to enliven a rigid and insular corporate culture. Buying shares in a Japanese company is one thing. Taking one over is quite another.

Abe's limited ambition on this score is part of the problem. From the very beginning, Abenomics set a 35 trillion yen, or $314 billion, goal for the cumulative stock of FDI by 2020. In 2017, it was still well short at $256 billion. It is important to consider how low that is for a $4.9 trillion economy. On average, Organization for Economic Cooperation and Development members have secure an accumulated stock of FDI equivalent to 38% of gross domestic product. Abe's target would put Japan's take at about 4% of GDP.

What is turning off the Warren Buffetts of the world? A shaky revival, for one thing. Yes, Abenomics helped deliver the longest expansion since the 1980s. But caveats abound. Abe was lucky enough to roll out his reflation program amid the most robust synchronized global recovery in decades. China's boom, and its voracious demand for Japanese goods, also helped.

Abenomics has not, however, given workers the sizable raises the government promised. It relied too heavily on Bank of Japan stimulus and a weak yen, not enough on deregulation. More than six years on, Abe's government has taken few significant steps to loosen labor markets, reduce bureaucracy, incentivize new research and development or grow the nation's startup scene. Nor has Tokyo sufficiently addressed its demographic time bomb.

The biggest turnoff is a blinkered corporate culture in the news for all the wrong reasons. The stunning arrest of Carlos Ghosn of Nissan Motor in November dented the Japan brand. Since then, the indefinite incarceration of the nation's best-known non-Japanese CEO has given food for thought to executives considering top jobs in Japan. Bad timing, considering Abe's hopes of diversifying boardrooms with foreign talent.

And yet it points to the reason for the glacial pace of change. Abe's 2013 Wall Street sales pitch centered on the corporate governance revolution he claimed to be cooking up. And, credit where it is due, Abe did introduce initiatives to internationalize practices. They include a U.K.-styled stewardship code of conduct and calls for more outside directors.

But the upgrades are largely voluntary and have been insufficient to avoid scandals at Kobe Steel, Nissan, Olympus, the camera maker, air bag manufacturer Takata, Toshiba and others. Tokyo is not policing cross-shareholdings between friendly companies. Little has been done to incentivize productivity and innovation. Companies are not scrapping the intricate takeover defenses that scare away Buffett and his kind.

Masayoshi Son, too, is less than enthused. Japan's answer to the Sage of Omaha is busily remaking the global venture-capital game with his $100 billion SoftBank Vision Fund. The nation's richest man is lavishing cash from Silicon Valley to India to Saudi Arabia to Singapore -- just not at home.

Not surprisingly, Son is hedging against Japan's aging population. So are many of Japan's most charismatic CEOs, including Tadashi Yanai of Fast Retailing, operator of the Uniqlo casualwear chain.

The reach for overseas growth is intensifying. Takeda Pharmaceutical's blockbuster last year helped Japan leapfrog over China in outbound M&A deals. And bankers are preparing for another boom year as trade-war tensions hit domestic growth.

The good news is that Japan appears to have learned from past stumbles. In the 1980s, the last time Japan Inc. rushed abroad en masse, executives snapped up California's Pebble Beach golf course, Manhattan's Rockefeller Center, Hollywood studios, and Vincent Van Gogh's Sunflowers masterpiece. They often overpaid, leading to billions of dollars of write-downs once Japan's asset bubble burst.

Those purchases were often trophies. Today's are strategic bets on where the economic growth is. And this time, the pricing is more responsible. Last year, Japanese executives paid a roughly 23% premium in acquisitions, the lowest since 2013, according to Bloomberg.

Record profits, a product of a 30%-yen depreciation on Abe's watch, left Japan Inc. with an embarrassment of riches. In fiscal 2017, cash reserves of Topix-listed companies reached an eye-popping $994 billion. Under pressure to deploy that cash, executives are wisely picking targets abroad.

It is odd, though, that corporate Japan is not attracting more bids from abroad. Consider it a wake-up call that Abe's reform efforts are not impressing long-term investors. It is great that corporate Japan is globalizing, but the Japan-is-back narrative would be more convincing if cash flowed in both directions.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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