Key drivers in Japan’s appetite for acquisitions

For quite some time, Japan has been suffering from a declining GDP[2] — an ongoing trend likely due to an aging population, lack of consumer consumption, and long-term deflation.[3] Additionally, the country’s interest rates have been at the near-zero level - occasionally even in the negative range - for over two decades, as a result of efforts to stimulate the economy and provide easier access to growth capital.[4] As a consequence of these low interest rates, Japanese ‘megabanks’ continue to look for opportunities to lend excess cash for their clients’ expansion, either as a bridge loan or for longer durations. Needless to say, there is a hunger for growth.

This lack of domestic market growth and access to cash has investors urging Japanese corporates to find growth outside of Japan by making investments, including acquisitions. Japanese corporates have nearly 5x the amount of total dry powder held by US private equity firms that could be deployed for growth investment.[5] Subsequently, there’s been a strong desire to invest in the US, resulting in a substantial increase in cross-border deal volume.[6]

Why industrials for Japan?

Japan’s top three exports are motor vehicles, which is its largest, followed by machine tools and electrical equipment.[7] As one of the world’s largest and most technologically advanced producers of cars in the world, the industrials sector has been one of the key drivers behind Japan’s economic growth over the years.[8]

Within that space, we’ve also seen traditional industrials sub-sectors, such as transportation, HVAC, tools and automation, continue to be key areas of interest for investment for Japanese corporates. As economic areas of strength for the Japanese, investing in these sub-sectors in the US is seemingly a strategic approach designed to expand geographic reach and capabilities.

Japan is also one of the leading investors in manufacturing in the US, and has reaped the benefits of those partnerships, such as the capital gains received from auto dealerships that sell Japanese cars made in the US.[9] That said, we believe many Asian industrials-focused corporates are looking to balance portfolios by diversifying in a multitude of ways, including:

  • Expanding aftermarket and service offerings to capture lost revenue and profitability, as many capital goods lines slow in growth
  • Expanding infrastructure related products & services and tapping into broader municipal / government spend where practical
  • Seeking a toehold into software offerings – complementary software products to hardware / equipment lines tend to lift overall valuation multiples

Japan is an important trading and investment partner for the US. As the US’ fourth-largest export market and trading partner, it is no surprise that there’s strong interest in building on that partnership by advancing cross-border transactions between the two countries.[10] We believe there is a natural draw to the US as a whole because of the US’ large consumer market and transparent regulatory environment. On the flip side, Japan’s unique and strong commitment to research and development makes them an ideal partner for US-based sellers.

From a business perspective, we believe Japanese acquirers are looking for a few key elements:

  • An experienced management team
  • Healthy businesses – turnarounds, even in ideal targets, tend to be harder for most Japanese acquirers to access
  • Steady growth – the investment horizon is such that discounted cash flow is the primary driver of approach to valuation
  • Strategic investments for organic re-investment, rather than looking at capital expenditures as a percentage of revenues
  • Having both a local and global presence — having true access to local decision-makers facilitates timely and healthy participation from relevant Japanese corporates

The Asian decision-making process

There are important points of differentiation in the decision-making process for Japanese strategic buyers. This process can often seem like a ‘black box’ to US sellers, raising questions on how to best guide transaction discussions toward a successful outcome. 

We believe there are a number of important process considerations for US sellers looking to maximize buyer engagement, such as:

  • Leveraging a thoughtful identification of the best point of contact at each buyer organization
  • Supporting the buyers’ internal process through local relationships and dialogues
  • Bridging any cultural gaps to find points of commonalities between the buyer and the US target company

Conclusion

Japan is ripe with opportunity to invest in cross-border industrials targets, which US strategic sellers are well-positioned to take advantage of. We believe there is growing opportunity for sellers to partner with Japanese acquirers not only in the automotive space, but electronics, plastics & rubber and construction parts manufacturing areas as well.

The key is to start early to begin the building consensus and partner with a firm that has boots on the ground. The upside of cultivating buyer interest in Asia can be substantial, and can be an important portion of a global dialogue with parties in the US and globally to optimize the potential outcome for US-based companies.

 

References

[1] Japan Companies Are Sitting on Record $4.8 Trillion in Cash, Bloomberg, September 2, 2019

[2] GDP growth (annual %) – Japan, the World Bank, November 2020

[3] The World Factbook Country Profiles, Central Intelligence Agency, November 2020

[4] How Japan (Eventually) Changed the World With Zero Rates, Bloomberg, February 5, 2020

[5] A decade of growth for U.S. private equity, Factset, April 28, 2020

[6] Japan on track for biggest M&A spree in the US, Financial Times, September 16 2018

[7] Japan (JPN) Exports, Imports and Trade Partners, Observatory of Economic Complexity (OEC), August 2020

[8] Japan (JPN) Exports, Imports and Trade Partners, Observatory of Economic Complexity (OEC), August 2020

[9] Japanese Investments in US: No Kabuki, Global Trade, February 14, 2017

[10] Japan Market Overview, Select US, September 2019