Japanese Firms Ramp Up Overseas M&A After Lost Decades: Is the Economy Ready for Another Takeoff?
Japan's stock market, overlooked by investors for decades, is making a furious comeback. The benchmark $Nikkei 225(.N225.JP$ broke past the 36,000 mark for the first time since 1990 and is edging closer to the record it set on Dec. 29, 1989, which effectively marked the peak of Japan's economic ascendancy before a collapse that led to decades of low growth.
Meanwhile, Japanese companies have increasingly been turning their attention abroad again over the past year.In two recent high-value acquisitions, $Nippon Steel(5401.JP$ has agreed to purchase $United States Steel(X.US$ for $14.9 billion at a 40% premium, marking its largest acquisition in the US market and positioning the combined entity as the third-largest steel manufacturer globally. At the same time, $SEKISUI HOUSE(SKHSF.US$ has announced its acquisition of $M.D.C. Holdings(MDC.US$, the fifth-largest residential construction group in the US, for $4.9 billion, representing a 14% premium.
Armed with substantial cash reserves, Japanese corporations have initiated a series of notable overseas acquisitions, reminiscent of the aggressive investment strategies witnessed prior to the deflation of Japan's economic bubble in the 1990s. To fully understand these developments in cross-border mergers and acquisitions, it is essential to review Japan's past economic experiences, which provide critical context.
Review: Japan's Three Lost Decades
Following the signing of the Plaza Accord in 1985, the Japanese yen appreciated significantly. In response to the slowdown in GDP growth due to hindered exports, the Japanese government successively introduced expansionary fiscal policies and loose monetary policies.
In 1989, Japan tightened its monetary and fiscal policies, puncturing the bubble underlying the economic boom. The Japanese stock market experienced a significant decline, and the real estate bubble burst. The following year, the Nikkei Index tumbled from an early-year peak of 38,713 points to 23,849 points by year-end, a drop of 38.4%. Similarly, the Tokyo residential property price index fell 58.6% from the beginning of 1990 to the end of 1999.
Over the subsequent three decades, the Japanese economy suffered from prolonged stagnation, with growth rates consistently lower than other developed economies. The country faced persistent issues such as high unemployment, significant deflationary pressure, increased strain on social welfare, and severe population aging. A series of economic policies implemented by the Japanese government, including zero interest rate policies and fiscal stimulus measures, failed to effectively address these challenges, resulting in no significant improvements.
Overlooked: Overseas Investment Mitigates Economic Downturn Pressure
Cross-board Acquisitions in the Late 1980s
Japan was once the star of the global acquisition scene. In 1990, at the height of the asset bubble, "Japan Inc." completed 463 acquisitions of foreign firms, including notable purchases such as $Mitsubishi Estate(8802.JP$'s $1.4 billion purchase of an 80% stake in New York's Rockefeller Center and $Sony(SONY.US$'s $3.4 billion purchase of Columbia Pictures. However, following the bursting of Japan's economic bubble, overseas M&A activity waned significantly after 1991.
Overseas Investment After 1990s
Despite scaling back on aggressive overseas acquisitions after the economic bubble's burst, Japanese firms continued their global expansion endeavors. This enduring commitment to growing their international presence can be directly linked to the "Maekawa Report" from 1986, which was designed to stimulate significant foreign direct investment by Japanese firms. As a result, even in the face of a domestic downturn, the appetite for international expansion remained undiminished, with Japanese companies seeking alternative avenues to maintain their global presence and competitive edge. Key industries such as automotive and electronics led the charge, establishing production bases and industry chains abroad, and solidifying their global dominance.
Overseas investments allowed Japanese companies to expand their balance sheets internationally, with the gap between GNI and GDP continually rising. According to the METI's "Basic Survey on Overseas Business Activities", from fiscal year 1997 to 2020, the net profits of Japanese subsidiaries abroad steadily increased.The expansion of overseas economies effectively offset domestic balance sheet contraction, helping Japan navigate through the deflationary period and potentially ending the "Lost Three Decades".
What Does the Current Surge in Cross-Border M&A Mean?
On the Verge of Economic Recovery
The world's third-largest economy is stirring from years of sluggishness. Following a prolonged period of deflation or minimal inflation, Japan is experiencing the fastest increase in prices it has seen in over three decades, with its core CPI remaining above the Bank of Japan's 2% target for 21 straight months. Salaries, which have been static for an extended period, are now ascending more rapidly than they have at any point since 1990s.
According to Morgan Stanley, Japan has "convincingly emerged from three decades of economic stagnation". Kyodo News surveyed 113 major firms, including Toyota and SoftBank Group, revealing that over 70% anticipate Japanese economic growth in 2024, with solid consumer and capital spending expected to mitigate the effects of inflation, signaling heightened optimism compared to last year.
Economic Revival Still Faces Uncertainties
Nevertheless, in the face of continued uncertainties such as currency weakness, shrinking population and a cloudy outlook overseas, Japan's economic recovery remains quite fragile. In order to seek new growth opportunities, Japanese firms have embarked on a surge of cross-border mergers and acquisitions. Masahiko Ishida, a senior M&A lawyer at DLA Piper in Tokyo, said that
Japanese companies are going to be doing more outbound M&A, that is clear. They are in a shrinking domestic market, with a shrinking population. They have to expand overseas. There is no choice.
In addition, the factors driving their accelerated engagement in M&A include:
Abundant cash reserves：Japanese firms have the necessary financial strength to pursue mergers and acquisitions. With the domestic economy having experienced slow growth for many years, a number of companies have built up significant cash reserves. Japanese companies are poised to deploy their cash reserves, as evidenced by the projected growth rate for capital expenditures reaching its highest level since the BoJ began collecting survey data in 1983.
Corporate Governance：Recent changes to corporate governance regulations require companies to either meet specific ROE benchmarks or provide shareholders with explanations for not doing so. Maintaining large cash balances presents difficulties in adhering to these new standards; therefore, acquiring a merger and acquisition asset has emerged as a preferable alternative for meeting regulatory requirements.
Here are the companies that may benefit from this round of Japanese overseas M&A wave:
1) $United States Steel(X.US$ is a leading steel producer with competitive advantages in low-cost iron ore, mini mill steelmaking, and best-in-class finishing capabilities. Last December, the company has agreed to be bought by Nippon Steel, Japan's largest steelmaker, in a $14.1 billion deal, with a premium of 40%. President and Chief Executive Officer of U. S. Steel, David B. Burritt, said,
U. S. Steel and NSC create a truly global steel company with combined capabilities and innovation capable of meeting our customers’ evolving needs. Our shared decarbonization focus is expected to enhance and accelerate our ability to provide customers with innovative steel solutions to meet sustainability goals.
2) $M.D.C. Holdings(MDC.US$ is the fifth-biggest homebuilder in the US. On January 18, 2024, Japanese homebuilder $SEKISUI HOUSE(SKHSF.US$ announced a deal to purchase MDC Holdings for approximately $4.95 billion in cash, at a price of $63 per share. This price represents a 19% premium to MDC's closing price on the day prior to the announcement.
Sekisui's chief executive, Yoshihiro Nakai, stated in a press conference that the purchase of MDC will result in the doubling of Sekisui's presence in the United States, expanding to 16 states. Additionally, the acquisition will accelerate Sekisui's progress towards achieving its objective of delivering 10,000 homes each year in foreign markets by 2025.
3) $Jefferies Financial(JEF.US$ and $Sumitomo Mitsui Financial(SMFG.US$ strengthened their strategic alliance last year, with SMFG intending to increase its stake in Jefferies from almost 5% to 15%. Their plan is to work together on potential opportunities in the areas of corporate and investment banking, as well as equity sales, trading, and research. BI analysts Neil Sipes and Alison Williams indicated that
Jefferies' deeper tie-up with SMBC Group should further lift its investment bank's revenue opportunity, building on the 2021 alliance that sought to bolster cross-border M&A and leverage finance.
Source: Japan Times, Nomura, Goldman Sachs, IMF, Financial Times, Reuters, Bloomberg, iFind, Macromicro
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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