UK-Japan M&A outlook: Macroeconomic trends and market impacts

Jonathan Aiken, Partner and Head of London, discussed the global M&A market and the impact of macroeconomic and geopolitical conditions on UK-Japan business in a recent UK Japan Connect Newsletter.

As our report shows, 2023 was another challenging year for the global M&A market. APAC in particular saw decreased levels of activity. Japan, however, appears to have outperformed the rest of the region, especially for outbound transactions. This looks to be continuing through H1 2024. What is driving this activity?

We’re excited by what we are seeing in Japan: both inbound into Japan and outbound into the rest of the world. We’ve seen a rekindling of animal spirits driven by a host of factors:

Inbound

• The continued rise of private equity, both local Japanese sponsors but also international financial investors. The recent approach by Alimentation Couche-Tard for Seven & I is the latest manifestation of increasing fluidity and movement of investment options into Japan. BDA hosts a range of private equity conferences events in Asia, including in Japan, and the nature and depth of participation has expanded significantly in the past few years.
• Low cost of acquisition capital (compared to Western markets with constrained lending), buoyant equity markets, and the view of Japan as a safe strategic partner have combined to supercharge deal activity.
• Japanese companies and assets, when they become available, typically hold premium market share positions or technology leadership; they are also offer highly sought after domestic customer market access.
• With a clouded view of the Chinese market, Japan has become the preferred developed economy of choice for international investors in Asia.

Outbound

• Weak domestic aggregate demand has traditionally pushed Japanese companies to invest overseas. This is coupled with significant megatrends including an ageing society; increasing footprint of large Japanese groups with significant exposure to developed economies such as the USA and Europe; continuing need for raw material, and production access to Southeast Asia and China.

Geopolitical stressors, including the war in Ukraine and the Israel-Gaza conflict have had a heavy impact on the global M&A market. Supply chain interruption, workforce displacement, inflation and interest rate rises have challenged boardroom confidence and resulted in a lack of available finance. How are you seeing this impacting Japan inbound and outbound M&A?

There is no doubt that getting deals is much harder than a few years ago. To take a few examples, post COVID we saw a deep acceleration in technology valuations followed by a spike in luxury and consumer investment related to home living. The COVID and energy shocks gave rise to increased inflation, squeezed margins and missed budgets. Forecasting became challenging, and buyer-seller valuation expectations diverged.

What we see now is a return to more normal, prosaic forecasting. But normal is good and this paves the way to increased deal flow. The relative political and economic stability in Japan has also contrasted well with a gyrating political landscape in Europe and North America which impacted confidence. Predictable economic policy and support has set the foundation, in many ways, for the favourable outcomes we see today in Japan.

A decade of loose monetary policy, including quantitative and qualitative easing and negative interest rates, has led to a steady depreciation in the value of the yen. Recent rate hikes by other central banks has only exacerbated the problem, notwithstanding a recent rate rise from the Bank of Japan and indications that more are likely to follow. How is the value of the yen impacting the Japanese economy and Japan M&A?

For private equity, low acquisition financing cost of capital is attractive. Japanese companies are seldomly overleveraged and there is certainly a capital efficiency arbitrage opportunity. The relative magnitude of rate rises in Japan compared to the West is modest and we do not expect any short term negative effects.

One theme in our report is heightened regulatory scrutiny of transactions. As antitrust and foreign investment (national security) regulators have become more aggressive, we are increasingly seeing transactions subject to detailed review, remedies and in some cases being prohibited entirely. In terms of national security reviews, in our experience, Japanese buyers have historically been viewed by regulators as “safe” owners of sensitive assets and infrastructure. Are you seeing any change in perception here?

In the West we see increasing scrutiny of mega mergers. Regulators, to take one example, largely regret earlier technology mergers that were allowed to go ahead when understanding was poor of the possible implications. This has led to more aggressive review and challenges of blockbuster deals in the West. Added to this are increasing tensions and blocking of transactions on national security grounds, such as MAN Energy’s blocked sale to a Chinese buyer. The recent historical experience in Japan is different, with fewer regrets and less national security concerns.     

As a final question for our readership that may be looking at doing a Japan-outbound transaction in the next 12-24 months, what advice do you have for a Japanese company looking to acquire a foreign target? How can a Japanese company maximise its chances of success?

As a general rule, we find corporate groups have limited M&A teams and constrained post integration capabilities. Added to this is the relative cultural, language and sector challenges of seeing through a successful deal. An experienced advisor that can bridge these differences is therefore essential.
 
BDA specializes in deploying teams across the world: one team in close proximity to the shareholder with another team adjacent to the target. By working seamlessly together and leveraging key sector insights, local knowledge and best practices we enhance and maximize the prospects of success and minimize the all too common pitfalls that befall even the most experienced corporate deal team.

---

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services, Sustainability and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese Government-owned bank with US$150bn of assets. bdapartners.com