It is important to note that an appetite rating of ‘5’ does not mean that the whole of that sector is desired, but that within such sector there is an indication of interest in particular subsectors where there are heightened M&A activities. Consumer, Leisure & Retail sector, for example, is suffering as much in Asia as in the West, and very little outbound M&A will be expected over the next months if not years. However, sub-sectors within the space, for example the food segment and high-end branded consumer goods, have seen increased appetite from the majority of Asian markets, raising the overall rating to as much as ‘4’ for some regions. Full sector commentary is below.
Factors affecting M&A in each sector
Business & Tech-Enabled Services
Industrials (incl. Aerospace, Defense & Government Services)
Business & Tech-Enabled Services
- Within this sector, logistics management has seen an uptick in M&A activity driven by the need to address supply chain changes throughout the pandemic – an example of which is MonotaRO’s recent acquisition[2] which was successfully executed during the lockdown
- Similarly, the personal mobility market has seen an increase, with Japanese trading houses continuing to seek innovative electrified and connected mobility solutions, spanning traditional leasing, fleet management, and mobility as a service (MaaS) platforms. We believe this is a future-proof theme that could continue
- Several construction services players are also seeking opportunistic acquisitions abroad, as they believe they are in a stronger financial position than their Western peers
Consumer, Leisure & Retail
- Although not to the extent seen in some of the world’s other major cities, the retail, leisure and hospitality industry has received a serious blow in Asia, while online and food delivery services have thrived
- We cannot yet see the shape of post-Covid-19 world for these sectors and subsequently, the buy-side appetite will be unlikely to recover for a long time
- In sharp contrast, we believe that the Asian food sector has seen an increase in M&A activity throughout Covid-19, in particular in outbound deal activity. High quality food supply, particularly seafood, branded food and food additives, we believe, will continue to attract Asian investors in this space for some time, which is seen as both fundamentally important as well as being relatively pandemic-proof
- It’s the food sector and high-end branded consumer goods - well-established brands are crucial both for the Chinese plans to bring them back home, or for the Japanese desires for further international expansion - have pushed up our heat-map score for this sector overall
“Opportunity to pick up high-end brand in the US” “We have several search-and-buy projects ongoing in distinctive fashion brands on a world-wide basis”
Education
- There has been a continued interest from China in the UK education space. Due to the continued political stand-off between the US and China, the UK has become a more favourable option amongst Chinese students
- Despite the impact of Covid-19, 2020 marks a record year for Chinese students’ application to UK higher education[3], driven by the high quality education offering and the opportunity to upskill by learning English – the universal language - for students trying to gain a competitive edge
- While traditionally this interest has mainly been focused on K12 education in the UK, we are starting to see this extending to provisional & higher education (HE), and to other European countries as well. This reflects the greater mobility of Chinese students and awareness of HE opportunities outside English-speaking countries, but also due to US-China tensions
- We believe that this is less of a theme for Japanese investors, but we are starting to see a number of education players participating in recent US processes. This is likely due to recent increase in the Japanese interest towards EdTech, as well as small but steady demand for alternative overseas HE opportunities from Japanese university students, although compared to China, India and South East Asia, the proportion remains small
“The UK will be our major focus for acquisition in the near to medium-term. 2019 was record year for Chinese students’ total enrolment in the UK. I believe such a trend will continue for the foreseeable future.”
Financial Services
- We believe that large Japanese commercial banks and fund managers all operate a Fintech fund of some sort, to support their ‘pay-to-learn’ activities as part of their digital transformation agenda
- It’s these funds that have driven strong investment into online consumer finance tools, payment technologies, asset management and consumer lending portals, both in emerging markets and in the Western markets so far this year
- We believe this trend will endure, particularly in an ‘outbound’ context – recent successes include Japanese Fintech CVC making it to Silicon Valley’s Powerlist 100[4] - it’s clear Japanese investors see the opportunity to learn from the Western Fintech innovators who are running well ahead of their own FIG sector
- The need to pursue digital transformation across all financial services is a universal theme across Asia. Singaporean FIG buyers, for example, have pursued several online asset management and trading platforms, as well as investment funds
Healthcare
- Outbound M&A activity from all four Asian regions has continued steadily in Healthcare - in some cases deal activity has actually grown by around 50%+ compared to the same period last year, based on our views of the market
- Activity related to a virus vaccination has created a significant uptick across the board, from government-led investment to stock market activity
- As an example, BioKangtai (China), after securing the collaboration with AstraZeneca on the development of a Covid-19 vaccine, saw a more than doubling of their share price from early 2020, to 200x P/E[5]. A clear indication of investor appetite for the seemingly limited pandemic-resilient assets
- Other healthcare-related businesses have also proven to be resilient during the pandemic. We believe that med-tech, consumables, IVD equipment, imaging systems and healthcare services have all demonstrated strong acquisition interest throughout and will likely continue to be of interest to investors as the pandemic continues
- This is also a market, amongst high-growth and high-margin sectors, where Chinese investors have been able to acquire in Europe, Israel and even in the US
“We have recently raised a c.$1bn fund and we have been looking to optimize these funds by targeting pan-European assets. We have engaged with a few target and remain hopeful that following a relaxation of lock-down measures, these situations will accelerate.”
Industrials (incl. Aerospace, Defense & Government Services)
- Chinese ‘hybrid PE’ investors - often based offshore - have managed to secure Western high-tech offerings e.g. semi-conductor and high-end devices, and industrial materials and processing technologies, demonstrating flexibility and pragmatism in investors – avoiding politically sensitive assets but determined to achieve overseas growth. Examples of these are Tztek’s acquisition of MueTec[6], a German wafer test equipment supplier and Wise Road Capital’s acquisition of Huba Control from Siemens[7]
- Following discussions with Chinese executives, we found that the industrials focused PEs are most active, followed by non-state owned strategic players, who are less concerned about restrictions in various territories
- All of these investors are driven firstly by the ‘classic’ M&A rationales – a need to acquire intellectual properties, brand, customer channels - but increasingly also in an anticipation for a globally re-configured manufacturing footprint, where China will no longer be a default solution
- Japanese companies have increasingly reallocated resources to focus on areas of strength – they have achieved this by reshaping business portfolios via M&A activity, especially within the Industrials space
- We have seen notable increases in equipment-related overseas M&A and dialogues, particularly within the automotive (EV & Autonomous), semiconductor, factory & warehouse automation sub-sectors - crucial to retain Japan’s global relevance
- Aerospace applications and carbon technologies are some examples of markets which have seen similar dynamics which are globally consolidated, and where several acquisitive Japanese leaders have emerged – an example of activity in this space is Carbone Savoie’s disposal to Tokai Carbon, where the second half of the process was conducted during the full lock-down[8]
Infrastructure
- Japanese investors have continued to increase their relevance in the global renewable space. This investment class is extremely popular in Japan, as they provide an ideal alternative to a low-risk government fixed income, as well as addressing many corporates’ ESG goals
- Japan has focused mainly on solar and wind power, with offshore wind power becoming very popular
- Both energy companies and Japanese trading houses are actively investing directly into overseas projects. Increasing number of financial institutions, from large pension funds, insurance companies and commercial banks, are investing as LPs in Japanese and global infrastructure funds
Media & Telecom
- Japan’s status as a global leader in technology has recently experienced embarrassing set-backs when it became widely regarded as a ‘5G roll-out follower’[9] including by its own government
- No longer being viewed as tech-leaders in telco, coupled with Prime Minister Suga’s fee structure challenges for existing providers[10], M&A is being viewed more favourably as a profit stream and a means to keep up with the key technology trend: shift towards software and virtualisation
- In respect to media and entertainment, much like in the rest of the world, digital streaming emerged strong from Covid-19, leaving traditional broadcasters wanting. As a result of this, alliances between Japanese domestic streaming players with a captive audience, and Western studios producing content, may be expected
- Several Japanese online gaming platforms have reaped the benefit of increased activity too – with their position of strength potentially leading the sector’s consolidation in coming years, targeting areas such as eSports and content popular with Gen-Z (like most ‘smart investors’, globally) because we believe that this is the fastest growing / most profitable
- In order to capitalise on these online media (e.g. gaming) opportunities, Japanese investors are very active in sourcing in the US tech market, still the dominant source, through their CVCs
Technology & Software
- Increased demand and remote working, as has been seen globally, has led to IT, cloud-based technology and managed security players post record growth and profits in Japan. The longer-term needs for digital transformation enablers including AI, IoT and SaaS solutions for the workplace are clear – and will continue to drive investment and M&A activity in the coming months
- Traditional Software and IT acquisitions have grown during this period too, with data and digitization platforms, collaborative software, process automation and HR and business support software being popular choices
- Regionally, Japan is maintaining their eyes in both the global innovation centres, as well as picking up on different geographical nuances of local user-bases and applications. This means M&A target regions have become truly global, encompassing China, SE Asia and Europe, in a bid to keep up with the global innovation centres
- Tech ventures especially in the US continue to be the most frequently targeted by Japanese CVCs. Japanese which has become the mainstream presence in Silicon Valley is continually competing for high quality deals
- Fuelled by the surge in demand by remote-working, cloud and other BPO solutions in which India excels, IT and software acquisitions by Indian companies have grown during Covid-19, and compared to the year before[11]. The US – the ‘setter of’ global technology standards - remains the most popular destination, followed by Europe, with M&A activity focused on web-enabled technologies, including IT consultancy, network optimization, search and recommendation engines and device verification
"Despite Covid-19, $bn+ acquisitions are still on the cards."
Next: 'Smart money' pours into Japan and China
References
[2] DC Advisory advised MonotaRO on its e-commerce JV with Emtex Engineering, DC Advisory, October 2020
[3] UCAS Undergraduate releases. UCAS, 2020
[4] MS&AD’s Corporate Venture Capital Recognized in GCV Top 100 Powerlist 2020, MS&AD, September 2020
[5] Shenzhen Stock Exchange, Factset, 2020
[6] MueTec acquired by Tztek Technology, Crunchbase, 2020
[7] Wise Road Capital’s Acquisition Of Huba Control AG, Global Legal Chronicle, September 2020
[8] DC Advisory advises Carbone Savoie on its disposal to Tokai Carbon, DC Advisory, July 2020
[9] Japanese firms lag in launch of 5G services amid global scramble, The Mainichi, April 2019
[10] Japan’s cosy telecoms firms are being told to lower prices, The Economist, October 2020
[11] According to announced volumes Q1-Q3 2019 vs Q1-Q3 2020, Mergermarket data, 8 October 2020
