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The US dollar dipped to a historical low against the Japanese yen on October 31, with one dollar equivalent to ¥75.35 on October 31, before the Bank of Japan intervened and pushed the exchange rate back above ¥78. Even so, the yen is down almost 4% against the dollar for the year to date, while the euro is flat.
The firmer yen has been robbing Japanese exporters of overseas earnings, but it also works to boost the relative value of the war chest at medium-size companies looking to buy offshore companies with US dollars or euro. For the purposes of overseas M&A, these medium-size companies may be broadly defined as those with a market capitalisation between $1 billion and $5 billion.
Nisshinbo Holdings, a Tokyo-based textile and auto brake maker, anticipated an exchange rate of ¥120 to the euro when it set out to buy Luxembourg-based TMD Friction Group for €440 million. But when the euro rate hit ¥105.07 amid confusion over aid for Greece towards the end of October, it significantly reduced the amount of yen needed to close the deal.
As we went to press, the deal had not closed, but Kiyohiro Kida of the investor relations and public relations group at Nisshinbo Holdings, told us at the time: “If the rate holds we can expect a yen-based merit of between ¥5 billion and ¥6 billion.”
Other companies heading offshore to make acquisitions are also likely to benefit from continuing firmness in the Japanese yen, especially with the US dollar unlikely to be in a position to buy more than ¥80 out to 2014, according to Tony Morriss, senior markets strategist at ANZ in Sydney.
It is also true that many Japanese companies are shifting manufacturing facilities offshore on subdued domestic growth outlooks, and as the firm yen makes overseas labour costs much cheaper than at home. The triple disaster of March 11 also made many manufacturers more keenly aware of the effect on their businesses of power outages and disruptions in the supply chain.
But it takes comparatively longer to establish overseas plants than the general six-month incubation period for M&A deals, and the risks are higher economists say.
“I am not saying it is easy to make an overseas acquisition, but from the point of view of business continuity it is the relatively easier path forward,” said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute in Tokyo.
On top of this, a unique Japanese business etiquette makes it difficult to find worthwhile M&A candidates in the home market, analysts said.
“The way business is done in Japan, it is difficult to radically adjust market share through aggressive M&A in the way that might happen in the US, or Europe,” said Steven Thomas, managing director and co-head of Japan M&A at UBS Securities in Tokyo. “You cannot ‘take out’ your competitors, though you can potentially do mergers of equals.”
That means the M&A battleground is overseas and one further positive for medium-size Japanese companies looking for potential targets is that a number of private equity companies are ready to sell companies bought earlier in the decade.
“PE firms tend to hold their purchases for a minimum of three years, but after five years or so those assets start to feel heavy and they look to exit,” Thomas said. “So right on schedule, what they bought in 2005, 2006 and 2007, at the height of the last cycle, they are now ready to sell.”
Deals done with private equity companies also tend to be transparent and have clearly defined bidding processes that nurture the transactions as friendly rather than hostile purchases.
For their part, Japanese companies have become more adept at handling this process.
“PE companies are deal machines, and they expect their counterparts to be deal machines, as well,” Thomas said. “Way, way back PE sellers might have told us ‘we won’t even speak to Japanese parties, because they are too slow!’ But now normal market discussions include the Japanese, who have become highly expert M&A buyers, able to deal with international standard tight timeline auction processes.”
The key driver in the Japanese desire to complete M&A deals is strategic merit, and Japanese companies have developed a reputation for doing thorough due diligence, with an emphasis on operational due diligence, Thomas notes.
“As well as the usual legal and accounting reviews, Japanese buyers like to do repeat factory visits and send in teams of engineers to look at the plant and machinery,” he said.
At least three overseas purchases by Japanese companies to date this year have involved buying from private equity companies.
Nisshinbo made its purchase of TMD Friction from Pamplona Capital Management, a UK-based PE firm. Kyoto-based Murata Manufacturing bought Finland’s VTI Technology Oy, a sensor maker, from EQT III, linked to EQT Partners with funds mainly based in Guernsey in the Channel Islands, while Tokyo-based Terumo Corporation announced the purchase of US medical device maker, CaridianBCT from a group including EQT IV.
UBS advised TMD on the Nisshinbo deal and Murata on the VTI Technology deal.
Apart from cheaper price tags, Thomas points out that medium-size Japanese firms have been on a quest to buy technology and replicate successful business strategies employed elsewhere in the world. On paper, at least, a number appear set for success.
Terumo said purchasing CaridianBCT would catapult it to the top of the global blood transfusion market from its number five ranking, while Nisshinbo is set to emerge as global leader in the auto brake materials field, controlling more than 15% of the market after buying the number two maker in the field.
And more players are likely to join in, Dai-ichi Life’s Kumano said. “Japan’s material makers have integrated technological capabilities, and have survived the fierce competition of Japan’s domestic markets,” he said. “Now they can expand through offshore M&A.”
All of which suggests more medium-size Japanese companies are likely to join the majors in seeking out overseas M&A target.
