April.02.2012
In recent years, inbound M&A in Japan has slowed to a trickle while outbound acquisitions have rapidly increased, reaching a record $86 billion in 2011.[1] While the rapid rise of the Japanese Yen against other currencies can partially explain this trend, demographic pressures are causing Japanese companies to focus more on the international component of their growth strategies. This trend is not limited to global Japanese companies; Japanese companies with a traditionally domestic focus are now also pursuing international growth strategies.
This article discusses some of the recurring issues (legal, cultural and otherwise) that a practitioner is likely to encounter when working with Japanese companies — particularly with companies that traditionally have had a domestic focus — on outbound M&A transactions. While some of these issues may be familiar to M&A practitioners regardless of the clients they represent, others — such as the important role often played by trading companies — are somewhat unique to Japan. Finally, this article discusses how this shift to outbound transactions is affecting the services Japanese clients are expecting from law firms.
Attractiveness of Outbound Transactions
In Japan, most of the M&A activity is now driven by Japanese companies seeking to make acquisitions abroad whereas inbound M&A has slowed to a trickle. One important factor explaining this shift has been the rise of the Japanese Yen against most global currencies, particularly the United States Dollar and the Euro. The high Yen makes Japanese targets unattractive to foreign buyers and incentivizes Japanese companies to invest overseas. In fact, the rise of the Yen has been so strong that the Japanese government has implemented a program supporting outbound M&A to combat the strength of the Yen. In connection with this program, the Japanese government has extended some of its foreign currency reserves and made available to Japanese companies a $100 billion dollar credit facility administered by the Japan Bank for International Cooperation. Half of the facility is earmarked for general M&A, the remainder being allocated for energy-related acquisitions.[2]
In addition, low interest rates enable Japanese banks to provide long-term financing at favorable rates, thereby providing Japanese companies with additional financial leverage.
For many Japanese companies, there is a perception that due to demographic pressures — i.e., a rapidly aging and declining population —, the Japanese market is unlikely to provide meaningful room for additional growth in the future. Many companies therefore feel that the only way to expand — and in some cases, to survive — is to seek growth abroad.
Thus, for many Japanese companies, international growth is becoming an integral part of their expansion strategy. Japanese companies have been seeking opportunities abroad more aggressively than before. Cash-rich Japanese companies, which have spent years shedding non-core assets and restructuring to become more profitable, are now more eager and willing than at any time since the late 1980s to pursue M&A strategies overseas and they are winning bids with increasing frequency.
Cultural Challenges for Japanese Companies Involved in M&A Deals
One of the cultural challenges in handling M&A transactions for Japanese companies is that few companies are able to provide a team of experienced M&A managers or legal personnel with the English fluency necessary to negotiate an outbound M&A transaction. Traditionally, Japanese companies have been relatively insular and less aggressive than their western — particularly American — counterparts. While Japanese companies appear to have become more aggressive in recent years, finding appropriately experienced personnel with English fluency remains a challenge. This lack of resources is more problematic for more domestically focused Japanese companies that do not have the global presence or experienced bilingual personnel that some of the global Japanese companies have.
Many expect this problem to worsen in the future. In recent years, fewer Japanese have been interested in studying abroad and companies are having trouble finding employees willing to work in foreign offices.[3] As a result, unless they seek non-Japanese employees, Japanese companies may have trouble hiring employees with the M&A, linguistic and cultural know-how to meet their global expansion strategy and M&A needs.
Impact of Trends on Client Expectations for Legal Support
Many Japanese companies are now seeking legal counsel that can provide services globally with multi-language capability. Most of the larger Japanese law firms do not have that ability because they have no or very few offices outside of Japan. Depending on the nature of the transaction, many Japanese companies will hire one or several legal counsel in connection with a transaction. For Japanese companies that may not have a sizeable legal department capable of coordinating counsel in multiple jurisdictions, the ability to rely on a single advisor that can satisfy all their legal needs — so called “one-stop” shopping — is becoming an important tool for their international expansion and M&A strategy. Without the resources to manage several legal counsel, such Japanese companies need one counsel to act as a “control center” that manages and addresses legal issues seamlessly on behalf of the client.
With most of the focus being on Japan outbound transactions, the demand for advice on M&A related Japan law issues has diminished. Nevertheless, there is an important role to play for English-speaking bengoshi (Japan-qualified attorneys) who can function as a member of the global M&A team by (i) explaining the legal issues of the transaction to the management of the acquirer in Japanese and (ii) communicating the client’s needs and perspectives to non-Japan qualified attorneys working on the project.
There is not a single type of client or industry that is focusing on outbound M&A. Moreover, many companies with strong domestic businesses are trying to increase their international footprint through M&A, thereby expanding the range of businesses targeted by Japanese companies. The investment targets of Japanese companies include renewable energy assets, including wind and solar, nuclear assets, minerals and other natural resources, as well as cleantech investments (e.g., energy control, smart grid, demand/response and energy storage (i.e. battery) technology). Many Japanese investors are also interested in agricultural chemicals (product lines or businesses), automobile parts technology and businesses and fine chemicals, including those in demand for cleantech applications. Pharmaceutical assets continue to be in high demand as well, driven in part by expiring patent portfolios and the demand for healthcare products from Japan’s aging population.
Financial and Legal Advisors
For outbound transactions involving Japanese companies, the selection of the financial advisor can have a critical impact on the relative importance of the role of each advisor. Traditional Japanese financial advisors may not have the global footprint and language skills necessary to run the deal on behalf of the client in foreign jurisdictions. In such cases, the financial advisor or the client may rely more on the legal advisor to coordinate the transaction with the seller and its advisors, including financial advisors, if such legal advisor possesses the local resources that the financial advisor lacks.
For further information on this topic, please contact L. Mark Weeks.
[1] Emergingmoney.com, Have yen, will travel: record M&A for Japanese buyers, http://emergingmoney.com/currencies/have-yen-will-travel-record-ma-for-japanese-buyers-fxy-uup-fxe/ (last visited February 21, 2012).
[2] Wall Street Journal Online, Japan Rolls Out New Yen-Stopping Measures, http://online.wsj.com/article/SB10001424053111903461304576527412989096014.html (last visited February 21, 2012); Wall Street Journal Online, A True 'Japan Inc.' Could Be on the Way, http://online.wsj.com/article/SB10001424052748703548604576037613109454224.html (last visited February 21, 2012).
[3] See e.g., Japan Real Time, Study Overseas? Business Group Tempts Homebodies, http://blogs.wsj.com/japanrealtime/2011/06/15/study-overseas-business-group-tempts-homebodies/ (last visited February 21, 2012); Japan Real Time, Japan’s Workers: Please Don’t Send Me Abroad. Ever., http://blogs.wsj.com/japanrealtime/2010/09/16/japans-workers-please-dont-send-me-abroad-ever/ (last visited February 21, 2012); Japan Real Time, Home Schooling: Fewer Japanese Head to U.S. Universities, http://blogs.wsj.com/japanrealtime/2010/11/18/home-schooling-fewer-japanese-head-to-us-universities/ (last visited February 21, 2012).