ABB ABB Ltd

By Lina Saigol

Japanese companies have embarked on the biggest overseas acquisition spree in more than 20 years, echoing the deal boom of the 1980s as they race to buy growth to offset a shrinking domestic market and ageing workforce.

Corporate Japan splashed out nearly $180bn on 621 outbound deals so far this year, compared with 685 deals with a total value of almost $80bn for the whole of 2017, according to financial data provider Dealogic. The highest recorded value of overseas deals for the last 23 years was in 2012, when it hit more than $110bn.

Hitachi (6501.TO) added another $6.4bn to Japan's tally of deals on Monday after it bought an 80.1% stake in the power grids division of its Swiss-Swedish rival ABB (ABBN.EB) . Just days earlier, Takeda Pharmaceutical (4502.TO) had announced the $62bn takeover of its Dublin-based rival Shire (SHPG) , marking Japan's biggest-ever foreign takeover.

The frenzied pace of dealmaking, which has taken place across all sectors, comes amid a long-term demographic shift in Japan where the ageing population -- traditionally defined as people who are aged 65 and over -- and the nation's shrinking labour force have put a drag on the nation's economic growth.

"Many Japanese companies are disproportionately exposed to their home market, which hasn't been growing for a long period of time, and so a new generation of Japanese corporate leaders are showing a renewed determination to find external growth opportunities in different foreign markets," said Hernan Cristerna, co-head of global M&A at JPMorgan (JPM) .

Cristerna added that Japanese acquirers are not presently subject to the same level of regulatory scrutiny as their Chinese rivals. "So, with all other things being equal, this puts them at an advantage when competing for any particular asset."

Some Chinese deals have come under resistance from western governments on national security grounds. In its global M&A forecast for 2019, international law firm Baker McKenzie said that dealmakers have largely overlooked the acceleration of trade tensions between the US and China and could "severely undermine" the ability of companies to do carry out cross-border deals.

Key changes to Japan's corporate governance reforms have also been a driver of M&A as companies come under scrutiny from shareholders to boost their productivity and improve their profitability. Corporate Japan's return on equity -- a measure of profitability -- stands at an average of 9% compared with the mid-teens for US companies.

However, mixed results from previous foreign buying sprees have triggered concern about some of the prices Japanese firms are paying to expand internationally. Between 2010 and 2018, companies paid an average 49% more than the value ascribed to their acquired company by the stock market one month before the bid. That compares with an average 42% premium for similar deals paid by Chinese and US acquirers and 39% paid by European acquirers, according to data from Dealogic.

Recent examples of ill-fated deals include Toshiba, which in January drew a line under its disastrous foray into the US nuclear business when it sold Westinghouse Electric to Canada's Brookfield for $4.6bn. Westinghouse, which Toshiba paid $5.4bn for in 2006, had been forced into bankruptcy after losing billions of dollars from delays and cost overruns. Similarly, Japanese brewer Kirin (2503.TO) entered the Brazilian beer market in 2011 with the $3.9bn acquisition of Schincariol, but sold it to Heineken (HEIA.AE) for $700m just five years later after failing to turnaround the loss-making business.

Typically, companies justify such high premiums by claiming cost synergies but these have often been elusive and integrating businesses which straddle a wide cultural divide has proved to be challenging.

The high levels of debt Japanese bidders are taking on has also caused some concern among investors. Companies have taken advantage of low-cost of funding, with near zero interest rates, under Prime Minister Shinzo Abe's stimulus programme.

Hitachi will need to extract significant synergies from the acquisition of ABB's power grids division to make a reasonable return on its investment, according to analysts.

"Corporate Japan is focused on buying quality assets and that means pursing them vigorously and paying higher premiums for them," Frank Aquila, M&A partner at global law firm Sullivan & Cromwell said. "This is a long-term trend and we will continue to see Japanese firms engage in this level of activity for a while," Aquila said.

(END) Dow Jones Newswires

December 19, 2018 07:09 ET (12:09 GMT)

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