Acquisitive Japanese companies with an increasing appetite for global dealmaking are taking advantage of the cooling competition from trade and private equity rivals in European auction processes, according to deal advisers and recent data.

Having traditionally struggled to compete in tight auction processes abroad, Japanese investors are now seeing an opportunity to swoop in on attractive European assets as vendors redirect their attention away from traditional private equity buyers, many of whom are struggling both on the fundraising and deal financing fronts.

According to Mergermarket data, Japanese cross-border activity in Europe is picking up from the COVID pandemic lows in 2020, with at least EUR 8.9bn in deal volume across 103 transactions inked year-to-date.

And more activity is envisaged in the coming years. Rainmakers are expecting cash-rich trading houses and corporates, which are benefitting from a boom in Japanese equities, cheap domestic financing and portfolio divestments, to pursue acquisitions abroad in a bid to build market share outside their shrinking domestic market.

“Japanese buyers are gaining relative strength in competitive situations for European and US assets against European and US private equity buyers compared to before,” said Atsushi Tatsuguchi, head of M&A at Mitsubishi UFJ Morgan Stanley Securities.

They are likely to keep this advantageous position, Tatsuguchi argued, as the pricing power of European financial buyers is being reduced because of the rise in interest rates on leverage buyout loans.

Yuzo Otsuka, head of Japan M&A Advisory at Barclays, agreed, noting that non-Japanese trade buyers are also moving to the sideline, giving Japanese players even more bargaining power for European assets.

“Japanese buyers are regarded as natural buyers as they can get cheaper financing, while many CEOs of non-Japanese strategic players seem to remain cautious and are looking for targets more selectively because of the global economic uncertainties,” Otsuka said.

And this activity is happening despite the Japanese yen trading at its lowest level against the euro since 2008.

“Japanese companies seem to be considering cross-border M&A again despite the currency disadvantage, as they are aware of the necessity to expand into overseas market to achieve further growth,” said Otsuka.

Need to be ‘less conservative’

But for Japanese investors to maintain their current favourable position in the market, especially when the uncertain macroeconomic environment turns, lawyers and bankers are encouraging their clients to shed some of their innate conservatism.

“All our clients are very conservative, which is very different from Western bidders,” said Ritsuko Nonomiya, the Tokyo-based Asia corporate finance head at Houlihan Lokey. “Japanese clients are always asking what the minimum price is, which means that they are always at risk of losing a bid,” she added.

“If you want the asset, you need to really bid aggressively,” Nonomiya stressed. “You need to be the highest bidder because there’s only one person who can get the asset.”

Japan’s ongoing corporate governance reforms, particularly around inviting outside directors with limited M&A experience to join company boards, is also proving to be a major hurdle for Japanese companies to get foreign transactions done, said Nonomiya.

Some external directors, for example, prefer to “play it safe” by keeping cash in the bank instead of taking the risk of making foreign acquisitions – a point with which Nonomiya disagrees. “It’s not really true that cash is safe in Japan’s low-interest rate environment and amid rising inflation. Unless you take the right risk, you can never grow and be competitive. You need to take calculated risks,” she said.

Nonomiya uses education as the key plank to help her clients understand the rationale of foreign acquisitions, addressing their concerns on how to control non-Japanese management teams and succession planning, among other issues.

“The biggest mistake you can make is to ask a Japanese company’s board for approval just as an auction enters its final bidding round – they won’t be able to make any decisions,” she said. “Instead, we need to take the time to sit down with the board members early, take them through the rationale and allow them to have quality discussions, while leaving the auction timeline to us.”

Vendors would be advised to afford patience to Japanese bidders that may have an extensive list of questions on a target, while at the same time guiding them to “prioritise and focus their questions,” said Shigeo Yamaguchi, founding partner of the ARQIS law firm, which has a German-Japan cross-border M&A practice.

“There are cultural differences,” said Yamaguchi. “Japanese tend to raise a lot of direct and indirect questions in order to understand the core of a problem and its context, while the German approach would be to directly address the core of a problem.”

One way forward for European vendors who are considering Japanese acquirers could be to allow them a head-start in preparing for a bid before a process officially kicks off, giving them time to seek comprehensive approvals internally, said Yamaguchi.

“Japanese companies are in a strong position in auction processes right now because they can offer attractive prices in this environment, while sellers are willing to wait,” Yamaguchi said. “But if the market environment changes, then decision speed will once again become a decisive factor for winning auctions.”

Small- and mid-cap focus  

In a reflection of the caution applied by some Japanese acquirers, much of the Japanese buyers’ hunt for deals in Europe is now centered around small- and mid-cap assets. This is in contrast to the peak in 2018 when multibillion euro deals dominated the scene, most notably the GBP 46bn (EUR 52.8bn) take-private of Shire by Takeda Pharmaceutical [TYO:4502] – the largest Japanese cross-border transaction to date – and Softbank Group’s [TYO:9984] EUR 28bn takeover of UK chip designer ARM Holdings.

“Large deals usually require financing, which is difficult in this environment,” said Yamaguchi. “But in turn, Japanese companies that have saved lots of cash during the pandemic are looking at mid- and small-cap deals, which are more suitable for the all-cash transactions that are very common now.”

The largest publicly disclosed deals involving Japanese bidders in European targets year-to-date are only slightly above EUR 1bn in value. Japanese power company JERA’s acquisition of Belgian offshore wind developer Parkwind for EUR 1.55bn in March tops the list, followed by logistics operator Nippon Express’s [TYO:9147] EUR 1.4bn acquisition of Austria’s cargo-partner in May, and the EUR 705m takeover of Finland-based angry birds maker Rovio by Japanese gaming group Sega Sammy Holdings [TYO:6460] in April.

While 2018-19 was a “particular” period in terms of cross-border activity and it is unlikely that deal volumes and numbers will return to similar levels anytime soon, Sabine Krause, Germany-based counsel and head of the Japan desk at Simmons & Simmons, said she is still encouraged by the continuous strong interest in European targets from Japanese buyers.

“Compared to [2018-19], I think we will now see Japanese companies continue to streamline their existing portfolios by divesting their non-core assets and investing in strategically relevant targets,” she said. “The COVID and supply chain crisis drove companies in Japan to re-evaluate their portfolios and focus on their core, well-performing assets, which are able to weather the storm of future crises.”

ESG, logistics and industrials 

So far, the lower average deal value has not reduced the strategic value that particular European companies have for Japanese corporates, said DC Advisory’s Managing Director Tosh Kojima. The Parkwind/JERA deal, for instance, highlighted the latter’s increasing focus on energy transition and decarbonization.

“Japanese corporates are probably more ESG-focused than many other nationalities, given the experience of the Fukushima nuclear accident in 2011 and are keenly aware of energy safety and security issues. They are also conscious of the geopolitical situation surrounding them, such as the ongoing Ukraine conflict and intensifying instabilities in the Middle East” Kojima said.

The cargo-partner/Nippon Express deal, meanwhile, highlighted the increasing activity in the logistics sector by Japanese companies, owing to Japan’s and the wider Asia region’s role as a manufacturing hub.

“If you look at global logistics M&A deals, around half of the 10 most frequent purchasers of overseas assets are Japanese,” said Kojima. “Things that get made in Asia are usually consumed elsewhere, and the Asia-Europe corridor has become one of the fastest growing areas in the sector.”

Industrials, which forms the bedrock of Japan Inc, is also a significant area for cross-border deal activity as Japanese companies look to expand their market position in Europe and bring new technological know-how back home.

“To meet European compliance, Japanese manufacturers tend to have a footprint in Europe, such as in Germany, which acts as a distribution centre for Europe,” explained Krause. “Usually, they form joint ventures with local players who are familiar with the market, and over time they proceed to buy out their joint venture partners,” she said.

Among the most significant deals in the industrials sector this year is trading house Mitsui & Co’s [TYO:8031] recently announced 70% acquisition of artificial sweetener manufacturer Nutrinova Netherlands from US chemicals group Celanese for USD 472.5m.