Japanese Surge Ahead In Mergers

On Nov. 11, Japan's Mitsubishi Rayon Co. announced that it would pay $1.6 billion for the unlisted British chemicals manufacturer Lucite International Group, in a deal that says quite a lot about where financial power is held in the world today. Set against the current financial downturn—with its emergency bailouts and stimulus packages tallying in the hundreds of billions—the transaction looks tiny to the point of insignificance, yet in fact it reflects an important trend: Japanese companies are now spending more than $1 billion a week in outbound mergers and acquisitions, making them a critical source of new investment in a global M&A industry battered by this year's financial crisis.

Japan's foreign purchases have surged some 365 percent in value so far in 2008, pushing the country past China to become the top source of outbound M&A investment in Asia and among the top seven in the world. Japanese firms have spent $61 billion overseas since Jan. 1, according to Thompson Reuters, or roughly half the total of outbound M&As from the market leader, the United States. And its spending spree runs counter to a sharp retrenchment globally; cross-border M&As have slumped some 60 percent compared with 2007, to about $1 trillion total worldwide, as leveraged buyouts (the industry's growth engine from 2003–07) become all but impossible to finance. "The slowdown of the credit markets has completely shut down debt financing for a lot of the large private-equity funds," says Anjali Naik, head of private-equity coverage in Asia for the M&A intelligence service Mergermarket. In contrast, "Japanese companies are extremely cash-rich, and now they're increasingly looking abroad for what they can't get domestically."

Export titans like Toyota and Sony built their overseas operations organically through decades of careful spadework. In contrast, companies that rely primarily on Japan's domestic market are leading today's outward expansion. These include prominent banks, telecoms, trading houses, chemical companies and food processors, all of them heavily beholden to Japan's aging population and sluggish national economy, but cognizant that overseas acquisitions now offer a shortcut to future growth. Their biggest advantage: they're flush with money at a time when many Western companies are dangerously overextended, and as asset prices continue to fall globally, Japanese buyers have "a window of opportunity to expand overseas," says prominent financial analyst Naoto Odagiri.

Kirin Holdings, parent to one of Japan's premium breweries, exemplifies the change in focus. Its demographic predicament is particularly pronounced because Japanese drink less beer as they age, which has taken the fizz out of its core business. Kirin's response: rebrand itself a "beverage and health company" and seek foreign markets. In 2007 it spent $3 billion to acquire Australia's National Foods, and this summer it purchased Aussie rival Daily Farmers for $840 million, making it a major player in the foods market in Australia. Managing director Yoshiharu Furumoto aims to boost overseas earnings from 18 percent of the total in 2006 to 30 percent by 2015 and vows "to make any investment deemed essential to achieving high growth in the future."

Today's playbook isn't the one Japan Inc. used back in the 1980s, when acquisitions targeting Hollywood studios, flashy Manhattan real estate and precious artworks earned it a reputation for profligate spending. This time, Japanese companies are selecting M&A targets "mainly within their core businesses," says Shinsuke Tanimoto, head of the corporate finance group at Moody's Capital in Tokyo. Examples include Nomura Holdings' $2 billion purchase of the Asian and European operations of the now defunct U.S. investment bank Lehman Brothers, Takeda Pharmaceutical's $7.4 billion takeover of Massachusetts-based Millennium Pharmaceuticals and Daiichi Sankyo's $4.6 billion buyout of India's largest and most important generic drugmaker, Ranbaxy Laboratories, which exports to 49 countries. Hiroshi Saji, an analyst at Mizuho Securities, says recent deals "indicate that [Japan's] cash-rich companies are becoming aggressive."

Most analysts expect that pattern to hold. With strong balance sheets and a clear desire to expand overseas, they say, Japan Inc. will likely continue bargain-hunting despite the ongoing turmoil in global financial markets. Hiroyasu Kato, a partner at M&A advisory firm GCA Savvian, believes the time is now right "for those companies that have been planning and studying an acquisition for years." In his view, "many could not take an action until recently because of high valuations. Now that's changing in their favor." Kenichi Watanabe, president and CEO of Nomura Holdings, said as much when he opted to snap up parts of Lehman after its collapse. He called today's financial crisis a "once-in-a-generation opportunity" for Japan Inc.