Overview of Japanese Cross-border M&A

November 2016
Outline

I. Japanese outbound M&A trends

II. Japanese outbound rationale
III. Post-deal challenges
IV. Post-deal integration: Communication is key
I. Japanese Outbound M&A Trends
• Outbound M&A trending at high levels: All-time high in 2015 in terms of value and
volume of deals. Latest value for 2016 already surpassing entire year of 2014:(1)
– FY 2014: 557 deals worth Y5.8 trillion (~US$55.4 bn)
– FY 2015: 560 deals worth Y11.2 trillion (~US$106.4 bn)
– Jan-Jul 2016: 363 deals worth Y5.9 trillion (~US$56.2 bn)
– Largest foreign acquisition ever made by a Japanese company: Softbank’ Group’s Y3.3
trillion (~US$31 bn) purchase of British chip designer ARM in 2016
• Driven by strategic rationale (rather than purely financial arrangement)(2):
– The steady increase in the number of transactions over nearly a decade, and the diversity
of companies and industries that are involved indicate that deals are being put together
carefully on a case-by-case basis(3)
– First two buying sprees (late 1980s and late 1990s) were arguably notable for their hubris as
much as their success. Rather than buying "trophy assets“*, Japanese buyers now seem
more likely to take full control of businesses overseas in areas of core strength, for a variety
of sound strategic reasons(3)
– Higher numbers of smaller firms are also contemplating and executing overseas M&A(3)

(1) Nippon.com, Sep 2016 , “Japanese firms accelerate outbound M&A” (3) The Economist, 2012 ,“Buying up the world”
(with info from Recof, a Tokyo-based company that proposes and
executes M&A for clients) *Such as the Rockefeller Center , Universal Studios, and Pebble Beach
(2) PwC, Aug 2015, “Approaching M&A with Japan” 3
II. Japanese Outbound Rationale
• Matter of survival: An ageing population and growing competition force the nation’s
companies into an overseas acquisitions boom(1):
– A shrinking consumer base: The population is [expected] to drop from 125 million to 100
million, and then to 90 million in between 30 and 40 years.(2)
– Foreign inroads: Foreign competitors have penetrated Japan’s once-insular market, taking
advantage of the Japanese consumer’s enthusiasm for digital commerce and new openness
to foreign products(3)
– A tired innovation model: Japanese companies once were leaders in providing innovative
products appealing to consumers in developed markets. But consumers in fast-growing
emerging markets have different needs. Japan has found that trying to identify them in R&D
labs at home—the typical approach—is a challenge(3)
– Emerging markets focus: Emerging markets have rapidly growing populations and
therefore large markets(4)
• Bold growth aspirations: Japanese firms willing to use their balance sheet are
strengthening their position globally / “dare to be great” (5)
– Piles of cash: Decades of frugality and debt-slashing following the crash of the 1980s asset
bubble left Japanese companies sitting on US$2.6 trillion in cash, according to central bank
figures (against(6)
– Abenomics influence: Prime Minister Shinzo Abe’s new corporate governance code means
companies are under intense pressure to raise their return on equity and justify their vast
stockpiles of cash(1)
– North America and Western Europe focus: Outbound deal flow are concentrated in North
America and Western Europe as Japanese acquirers search for reputable brands, industry
best practices and high-tech innovation(6)

(1) Financial Times, Dec 2015, “Japan Inc: M&A’s big spenders” (4) Center for Japanese Legal Studies, Dec 2014, “M&A in Japan: Reenergized”
(2) Japan Today, Nov 2015, “Strategy key as Japan’s M&A (5) WSJ, May 2012, “Cash-rich Japanese firms go on global buying spree”
(3) McKinsey, Jun 2011, “Japan’s globalization imperative” (6) Deloitte, Oct 2014, “Deals and divestitures: Trends in Japanese M&A”
(4) Financier Worldwide, Feb 2015 , “Japan cross-border M&A”
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 III. Post-deal Challenges
Many processes recommended for successful outbound M&A go against established
Japanese business culture.
Observations Japanese perspective

“Slow to take action”(1) / • Japanese companies tend to have complex internal approval
“An ambiguous power processes and decisions have to be discussed and approved by many
structure”(2) / different layers of management(2)
“[Slow] speed of decision • Departmental fiefdoms in effect wield veto power that demands
making”(3) consensus must be built for all decisions ; and departmental bosses
must confer with lower line managers, who then must consult with those
who are technically involved(1)
• Japanese prefer indirect and implicit communication (“hear one,
understand ten”); avoidance of conflict and open communication(4)
• A more risk adverse business culture is prevalent in Japan(3)
“Off-course strategic time • Japanese investments are made with long term vision – they are
horizon”(1) / generally supportive of the long term growth plans of the company, even
“ Hands-off approach”(2) / if it means no or inadequate profits in the first few years (4)
“Sudden metamorphosis • Japanese refrain from being intrusive and allow relationships to
from friendly partner to build slowly over time(1)
distant boss”(2) / • Traditionally, Japanese companies have been relatively insular and
“Laissez-faire post- less aggressive than their western — particularly American —
acquisition”(2) counterparts (5)
• Japanese management tends to hesitate to take drastic steps to
restructure when certain parts of the [target] do not fit the parent’s
strategy(1)

(1) The Economist, 2012 ,“Buying up the world” (3) Financier Worldwide, Feb 2015, “Japanese cross-border M&A” (5) Orrick, Apr 2012, “Managing
(2) McKinsey, Aug 2012 ,“A yen for global growth” (4) PwC, Aug 2015, “Approaching M&A with Japan” Outbound M&A for Japanese Cos. 5
 IV. Post-deal Integration: Communication is key(1), (2)
• Decision-making:
– Ringi system (roughly: “request for approval”): bottom-up approach to decision-making based on a
cultural value of group orientation
– Nemawashi (consensus-building): process of informally making a proposal, getting input, and
solidifying support
• Information-sharing:
– “Getting too much information”: In a high-context culture, “nice to know” is “need to know”
– “Getting too little information”: This may happen when the relationship is not good, or when the
foreigner is perceived as junior or an outsider. The better the relationship, the freer the flow of
information
• Meetings:
– Honne/Tatemae: Because of the collective nature of Japanese society and the need to maintain
relationships, Japanese often make a distinction between their true feeling or personal opinion
(honne) and what they know they should say in public because it is the appropriate thing to say in the
situation (tatemae)
– “Not speaking up”: Lack of confidence in English / Impolite to interrupt / Japanese feel that it is
important to give reliable information to other people and that they are responsible (at least partially)
for the results of the information they give to another
– “So many meetings”: Holding regular meetings helps to instill confidence, trust and commitment in
the people involved. In a high-context, group-oriented culture, meetings serve to establish a shared
context and group cohesiveness.
• Feedback:
– Indirect feedback: Japanese find an indirect, private way to give that feedback, avoiding
confrontation or loss of face
– Use of intermediaries: Japanese will sometimes use an intermediary to give feedback to try to
maintain harmony within the organization (this is considered professional behavior)
– Focus on the negative: Japanese businesspeople feel that this is the most effective way to improve
either themselves or the company

(1) JETRO, 1999, “Communicating with Japanese in business”

(2) In relation to information above, please refer to print-out containing “Advice for foreign businesspeople”, from the same 1999 JETRO report
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