Japan: Ageing population continues to drive outbound M&A activity

  • Due to lack of mega deals outbound Japanese M&A value fell by 70% year-on-year in the first half of 2019
  • Shrinking domestic market setting tone for outbound M&A activity

Deal Dynamics data shows that in 2018, Japanese corporates invested nearly US$185 billion in foreign assets. Outbound transactions accounted for the vast majority of the activity. It was a record-breaking year, which saw Japanese companies ending close to the top of league tables in terms of volume and value.

This trend of purchasing foreign companies is expected to continue in the near-to-medium term. Sluggish domestic growth forecasts, supportive political environments for business investment, an ageing population, a rise in shareholder accountability, and cheap funding costs all continue to be factors expected to drive M&A activity in Japan.

Whilst for 2019, outbound M&A is unlikely to reach the heights of last year, the H1 2019 Deal Dynamics data highlights that at the midway point of this year, outbound activity stands at a very healthy US$38.7 billion. In addition, Japanese companies have so far spent US$33.5m on their domestic counterparts.

Ageing population driving M&A activity

Japan is at a key moment in its history, with 27% of the population over the age of 65 – making its population the oldest in the world. Combined with a native population rate that is in steady decline, this figure will continue to grow over the next decade and means that the domestic market is shrinking as the older population ceases to contribute to the labor force and consumer spending at the same rate. Therefore, for many companies, overseas deals represent the only option for growth.

Japanese pharmaceutical companies, however, can benefit as the population ages. Many are actively looking to acquire overseas assets and drug makers, with generic manufacturers being particularly appealing to larger healthcare businesses. Certain Japanese healthcare companies are also considering divestitures, and the sale of non-core assets to channel resources to core areas. This refocusing will bolster balance sheets to pursue further cross-border deals and help to ensure that companies are well placed to support an increased demand on the country’s healthcare system.

Furthermore, with a diminishing labor force, companies need to come up with innovative solutions to continue to lead in industries that traditionally require a large work force to produce goods. For example, some of Japan’s biggest employers are in the automotive and high-tech manufacturing sectors. Their leadership is searching for proprietary technological solutions to help future-proof their businesses. This has been most evident in the automotive sector, where Japanese car manufacturers are buying technologies to better compete with their Western peers in the mass production of autonomous and electric vehicles.

Automation is also taking place in the high-tech manufacturing sectors, which have historically required a large factory-based labor pool. Executives in this space recognize that robotics businesses can help ensure their rate of production does not decline as the workforce moves from the production line to retirement homes.

Unique set of sociopolitical factors

During his tenure, Japan’s Prime Minister Shinz┼Ź Abe has been supportive of investment transactions. The monetary and fiscal policies that underpin his economic policies, coined ‘Abenomics’ by economists, have been squarely focused on encouraging private investment.  

As a consequence, many government and financial institutions provide the private sector with advice and cheap funding, particularly to management teams looking to make their first exterritorial transaction. It is not a coincidence that the Japanese outbound M&A boom has taken place on Abe’s watch. This shift in mindset has encouraged firms to venture further afield in search of inorganic growth.

Larger Japanese entities can fund their transactions with little to no leverage, as most of them have cash-rich balance sheets, whereas their European and North American counterparts are rarely afforded this luxury. Traditionally, the mentality for Japanese shareholders has been to avoid putting pressure on management to return cash in form of dividends. In addition, the wage growth of Japanese workers has remained static for the past decade. These circumstances have resulted in companies having large war chests primed for acquisitions.

Sea change in shareholder mentality

There has also been a sea change in shareholder mentality over the past few years. As foreign investors have become more prominent, they have brought with them new standards of corporate governance, which are focused more on providing value to shareholders. The ripple effect has been that outbound M&A has increased, as executives strive to generate value and increase market share. 

The prime acquisition targets remain entities in more developed markets, such as the United States, UK, and Germany, rather than emerging markets. Executives sitting in Tokyo and across the country are more comfortable buying a business from mature markets, particularly if it is their first overseas acquisition. More mature markets tend to offer a more transparent culture of business and have ‘predictable’ economies. Importantly, there is also a sense of national pride and duty in these deals. There remains a collaborative effort to restore Japan’s reputation as the financial powerhouse of East Asia.

Outbound M&A boom set to continue

Despite many economies being accustomed to private equity firms and foreign raiders, we do not expect to see a significant rise in inbound M&A in Japan. The employment laws, customs, and cultural norms make it more difficult for these companies to operate in this market.

But equally, we do not foresee any slowdown in cash-rich Japanese corporates looking beyond their domestic shores in search for growth.

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