Japanese Outbound Acquisitions

Explaining What Works

Shigeru Matsumoto

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN: 9789811313639
• eBook ISBN: 9789811313646
• Topic: Betriebswirtschaft
• Subtopic: Unternehmensstrategie

This book reviews the past 116 Japanese outbound acquisitions in three decades and determines success and failure, with the goal of explaining what works. Dr. Matsumoto emphasizes that such acquisitions are part of a long-term strategy and should not be judged based short-term gains and losses, especially short-term changes in company stock prices. The book also highlights common pitfalls hidden within the expected benefits of these overseas acquisitions.

Dr. Matsumoto provides valuable insights for executives, corporate managers working on strategy, finance and overseas development, practitioners, researchers and MBA students trying to succeed in cross border merger and acquisitions using 16 case studies and careful investigation.

© The Author(s) 2019

Shigeru MatsumotoJapanese Outbound Acquisitionshttps://doi.org/10.1007/978-981-13-1364-6_1

Begin Abstract

1. Introduction

Can Japanese Companies Succeed in Outbound Acquisitions?

Shigeru Matsumoto¹

(1)

Graduate School of Management, Kyoto University, Kyoto, Japan

Shigeru Matsumoto

End Abstract

1.1 Discussion in the Board Room and the Landscape Outside the Company

When a company considers a deal, its only choice is either to conduct the acquisition or not.

The strategic objective of acquisition is to achieve sustainable profit growth by incorporating external business and then creating synergies. Therefore, the acquiring company should think in advance about how the outbound acquisition can help the company’s overseas business take a leap forward compared to its green field investment option.

In reality, it is not possible to find a target that will perfectly meet the acquiring company’s requirements; moreover, the company faces time constraints in conducting its due diligence on the proposed acquisition. There are also limits to the access of information before completing a transaction, especially cross-border M&A , because of remote locations and different management environments. After a potential acquirer has clarified the actual situation of the target company and identified any issues it may have through due diligence, using accountants and lawyers, opinions within the acquiring company will sometimes be divided, even for promising deals. The target may have initially been seen through rose-colored glasses; but, upon entering the final stage of a deal, a more cautious opinion may in fact begin to sound more convincing.

Proponents of acquisitions are keenly aware of actions taken by competitors, and not wanting to miss the opportunity, consider the deal in front of them to be a golden opportunity. They are certain that their company will become a global market leader through acquisition, and they fear that their company will lag greatly behind if a domestic rival acquires the target company. These advocates insist that outbound acquisition is the best tool for the company’s growth strategy; especially when the company has budgeted for a potential acquisition as a part of its growth plan, they feel they cannot subsequently back down.

Conversely, the more cautious faction points to problems it will face following the acquisition, saying, for example, “While the target company has an excellent brand, it has become caught up in price competition and its profitability has been going down,” “The capacities of its production and research and development are limited; we will need to make a large capital investment after the acquisition,” and “If the current target management team resigns, we may not be able to carry out the management ourselves.” Both groups tell only one side of the story.

Even if the relevant business unit believes that an overseas acquisition will expand their influence, this may not be true for the other business units. Thus, apart from determining whether an acquisition is a good or a bad deal, deciding to pursue an acquisition is also tied to the power balance within the acquiring company. An acquisition, additionally, can clarify which businesses within the company are priorities and where the respective regions rank in order of priority.

When an acquiring company makes progress in its negotiations, then the company starts to consider financing for the deal. However, voices within the companies sometimes ask, “Why should hard-earned funds from the domestic businesses be generously spent on the acquisition of overseas business, and should not the domestic businesses be rewarded first?” In addition, finance departments worry about their companies’ credit rating being downgraded if they take on a large amount of debt to fund the acquisitions.

In the meantime, a new bidder may appear to compete for the acquisition, prompting the seller’s shareholders to demand that the acquisition price be raised. The target company’s management, which has been friendly since the start of negotiations, may say, “We want you to acquire us, as we do not want to be taken over by the other company.” Thus, this sense of obligation to rescue the management of target company is an added complication.

Finally, the significant decision of whether or not to conduct the acquisition is left to the top management. A large-scale acquisition will have a major impact on a company’s financial performance, and a highly profiled outbound acquisition will often put a spotlight on the top management responsible, whose capability to fulfill his or her obligations to the company may be called into question if the acquisition does not go well. Thus, an acquisition could either make or break the reputation of the top management. Please refer to Fig. 1.1.

Fig. 1.1

Management decision making process for outbound acquisitions

How does this situation appear when viewed from outside of the company? A commercial bank sees a client’s potential outbound acquisitions as an excellent financing opportunity. Such large-scale financing would lead to more revenue for the bank and allow the bank greater influence over the client.

Under a monetary easing policy led by Bank of Japan, commercial banks have actively attempted to increase their financing. However, the best companies are cash rich and virtually debt-free, and they are not keen to leverage themselves. Therefore, banks have few other opportunities for lending, so they actively pursue acquisition finance offering significantly attractive interest rates. Presently, a very good environment for raising funds is in place for Japanese companies.

What about the sellers? Recently, more Japanese outbound acquisitions are sourced through private equity. Those financial investors, who have carefully improved target performance after their investment, are always on the lookout for exit opportunities. Japanese companies are interesting acquirers, for while they tend to be cautious up to the time of conducting the deal, they also tend to offer an attractive price once they decide that they want to purchase the target company. Financial investors know their competitors have earned significant gains following sales to Japanese firms. Thus, Western private equities, which are keen on delivering high returns to their investors, welcome the participation of the Japanese in the bidding process.

Apart from a company’s motivation for business growth overseas, banks and financial investors play a significant role in increasing the volume and price of Japanese outbound acquisitions.

1.2 Trillion Yen Deals: The Likelihood that an Acquisition Will Succeed

Takeda Pharmaceuticals , SoftBank , and Suntory.

The Points in Common Among One-Trillion-Yen Acquisitions

As Japanese outbound acquisitions increase, large-scale deals of over one trillion yen have become less rare. The acquisition of the major Swiss pharmaceutical company Nycomed by Takeda Pharmaceuticals was worth 1.1 trillion yen (9.6 billion euro),¹ that of the US mobile phone company Sprint Nextel by SoftBank was worth 1.8 trillion yen (21.6 billion dollars),² and that of the US liquor and spirits distiller Beam Inc. by Suntory was worth 1.65 trillion yen (16 billion dollars),³ see Table 1.1. There are great expectations on performance after such acquisitions from both domestic and overseas investors.

Table 1.1

Acquisitions exceeding one trillion yen

Acquirer	Target	Price
Takeda Pharmaceuticals	Nycomed	1.1 trillion yen
SoftBank	Sprint Nextel	1.8 trillion yen
Suntory	Beam	1.65 trillion yen

Company press releases and Thompson Reuters

These one-trillion-yen acquisitions have three points in common in their backgrounds.

The first point in common is that the acquiring companies are Japan’s leading and most profitable players in their respective sectors, such as pharmaceuticals, mobile phones, and beverages. They considered the overseas market to be a new frontier since they have been focused on the domestic market and had not ventured overseas before that time.

The second point is that major Japanese banks have provided significant financing for these outbound acquisitions. The three companies that conducted the one-trillion-yen acquisitions had stable domestic businesses and, thus, were able to secure the funds for the acquisitions at favorable rates . Takeda Pharmaceuticals borrowed 600 billion yen, including from Sumitomo Mitsui Bank. SoftBank obtained 1.5 trillion yen in financing from three banks—700 billion yen from Mizuho Corporate Bank, and 800 billion yen from Tokyo-Mitsubishi UFJ Bank and Sumitomo Mitsui Bank—at the agreed upon rate of 1.4%. For Suntory’s acquisition, Tokyo-Mitsubishi UFJ bank provided the largest ever independent financing to a private sector company—1.4 trillion yen.⁴ Thus, all three companies were able to obtain low-interest-rate financing to fund their acquisitions, one of the benefits of the quantitative easing policy conducted by the Bank of Japan.

The third point in common is that the main shareholders of the target companies were financial investors, including private equities. The shareholders of Nycomed acquired by Takeda shareholders included Nordic Capital Funds V and VI and DLJ Merchant Banking Partners (a Credit Suisse affiliate).

Nycomed had planned an initial public offering but finally settled on the sale to Takeda. One of Sprint’s major shareholders was the investment management company Paulson, which supported the acquisition by SoftBank once it raised the acquisiti...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• Part I. The Nature of Failure
• Part II. Ways of Fighting for Success
• Part III. Lessons from Failure and Success
• Back Matter