Toshiba woe holds lessons for Japanese buyers

As Japan’s cross-border M&A boom continues, buyers should learn from Toshiba, Kirin, and Japan Post’s mistakes, which are creating new inbound M&A opportunities.

The recent boom in overseas acquisitions by Japanese companies has led to predictable regrets and recriminations.

Among those ruing their international boldness is Toshiba. Having written off some $6.3 billion after overstating earnings at US nuclear unit Westinghouse Electric, which it bought in 2006, the marquee Japanese company said on Wednesday that it has chosen a preferred bidder for its chip business as it rushes to raise shareholder equity and avoid a humiliating delisting from the Tokyo Stock Exchange.

Japan Post has also been left red faced after a 400 billion yen ($3.6 billion) write down on its ill-advised 2015 purchase of Australian logistics firm Toll Holdings for A$6.5 billion ($4.94 billion) at a hefty 49% premium to Toll's share price.

And drinks company Kirin this month sold its struggling business in Brazil to rival Heineken, after only owning it since 2011 and reporting a writedown of R$3.88 billion ($1.17 billion) in 2015. 

The general advice from deal makers to acquisitive-minded Japanese boardrooms is that they should take the time to conduct due diligence, understand the business model, and carefully integrate the target company.

However, more basic than that is to keep a check on the price. A write-down happens when the price paid is substantially higher than the target’s intrinsic value.

“Price discipline is the simplest but most important thing,” Koichiro Doi, head of Japan M&A at JP Morgan, said in an interview with FinanceAsia. “It’s easy to say and difficult to do.”

Japanese boards often designate an overseas target as a “must-have” asset and order the M&A working team to acquire it at any cost. The team will then quickly tap Japan’s banks for the financing that will help them to win the auction.

Japanese banks have been more than receptive to such requests since the Bank of Japan
announced it would push interest rates below zero in January last year, after years of keeping them low but positive.  

One Japanese company that has a solid reputation for a successful cross-border acquisition strategy is Tokio Marine Holdings, Japan’s largest property and casualty insurer by revenue.

Tokio Marine has stuck to a strict philosophy: don’t buy companies that could embarrass or damage the company down the road. To ascertain this Tokio Marine monitors potential targets from a distance, sometimes for years.

To minimise the risk of a blow-up post acquisition, the insurer employs foreigners to manage overseas assets. In August 2016 it made Don Sherman, president of Delaware-headquartered Delphi Financial Group, an executive officer and co-chief investment officer globally. That was after Tokio Marine acquired Delphi in 2012 for $2.7 billion and then undertook the biggest-ever purchase by a Japanese insurer, when it acquired Houston-based HCC Insurance for $7.5 billion

Executive meetings at Tokio Marine, which this fiscal year is expected to roughly generate 43% of its earnings overseas, are now conducted in a mix of Japanese and English.

Opportunity knocks 

Japan's cross-border M&A boom looks set to continue, driven by the need of corporates to invest in growing markets with the support of the government and banks. Extrapolating full-year M&A volume from the deals in the first quarter, JP Morgan forecasts a total outbound volume of $74 billion.

But Japan Inc.’s troubles and a slowly growing focus on creating shareholder value means there are additional inbound M&A opportunities for international buyers and private equity firms to buy non-core assets from Japanese conglomerates.

Toshiba said the preferred bidder for its chip business is a consortium comprising US private equity firm Bain Capital, a Japanese state-backed fund, the Innovation Network Corp of Japan (INCJ), and the Development Bank of Japan. South Korea’s SK Hynix and Mitsubishi UFJ Financial Group are putting up the finance.

“Private equity now has an opportunity because of the changing corporate psychology to bring some assets in house, grow them and list them in Japan, thereby keeping them as part of the fabric there,” Kerwin Clayton, regional co-head of M&A at JP Morgan, said.

Buyers should closely communicate with the Japanese government and remain mindful of post-acquisition employment considerations and different shareholder dynamics in Japan, according to a recent Japan M&A report by JP Morgan.

In the case of Toshiba, the Japanese government needs the company to survive, partly because it is deeply involved in the Fukushima cleanup, which may take decades. The INCJ is a public-private partnership aimed at promoting innovation and enhancing the value of businesses in Japan. 

Toshiba said in a statement, when it chose a buyer, that it took into consideration creating value for the company, technology leakage to foreign countries, and maintaining domestic employment. It also mentioned it was mindful of navigating Japan’s competition law in order to complete the acquisition in a timely fashion. 

The Ministry of Economy, Trade and Industry has become increasingly vocal and powerful about protecting Japanese industry in recent years and its approval is required when acquiring companies that make products related to national security and aerospace. 

Another global fund that has been particularly active in Japan of late is New York-headquartered KKR. The firm said on Wednesday that it has hired Go Yamashita as head of KKR Capital Markets Japan. This unit has arranged financing for KKR's acquisitions of Japanese companies Panasonic Healthcare, Pioneer DJ, Calsonic Kansei and Hitachi Koki, as well as Panasonic Healthcare's acquisition of Ascensia Diabetes Care.

“Japanese corporates started to change their minds and are accepting the fact that selling the business might be a good thing for shareholders and also for the management of the business,” Doi said.


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