Japan outbound M&A: Looking for growth

Takeda Pharmaceutical’s acquisition of Shire, which values the Ireland-headquartered multinational drugmaker at $79.7 billion, casts a long shadow over recent Japanese outbound M&A activity. From a private equity perspective, though, a more significant transaction involved an asset bought from Takeda a year earlier.

The Japanese giant sold its chemistry, manufacturing and controls business to Bushu Pharmaceuticals, establishing a strategic partnership that will see the buyer help bring new drug candidates to market. For Takeda, it is a shortcut to a more agile R&D model. For Baring Private Equity Asia – Bushu’s owner – the deal added a development capability to what was a contract manufacturing organization (CMO). More acquisitions in Japan and the US are set to follow.

“Global private equity firms can use their capabilities to help Japanese portfolio companies acquire and integrate overseas assets,” says Paul Ford, a transaction services partner for KPMG in Japan. “This is more difficult to do without private equity ownership and expertise.”

Outbound investment by Japanese firms is likely to reach an all-time high in 2018, having surpassed $102 billion in the first six months of the year, according to Mergermarket. But the Takeda-Shire transaction has a distorting effect on the headline number, much like SoftBank’s purchase of Sprint Corporation in 2012, when investment reached $115.6 billion, the current record annual total.

Beneath these mega acquisitions lurks a long tail of smaller investments. The deal count has risen steadily in recent years – 353 transactions were announced in 2017 compared to 151 in 2010 – in a way that reflects the severity of two long-term secular shifts: an aging and declining population; and a lack of domestic innovation. Japanese companies are looking overseas for growth and for technologies and business that can maintain their global competitiveness.

Private equity firms can help in these endeavors because their core strengths match up with historical weaknesses among Japanese corporates. For example, when Advantage Partners raised its debut Asia ex-Japan fund, Mitsui & Co. and Marubeni Corporation came in as anchor investors. The GP gets access to the trading companies’ networks, but in return they are seconding people to the fund to gather insights into deal execution.

“Their people are being trained and they will eventually go back and perform different roles in their respective companies,” says Emmett Thomas, head of Asia for Advantage. “They will also learn more about investing in Asia, specifically buyouts. While Mitsui and Marubeni are both active principal investors, it tends to be venture and growth capital.”

Strategic support

While other large corporates differ in their strategic agenda, PE has still made inroads. KKR bought Panasonic Healthcare for in 2013 on the promise of driving expansion domestically and overseas. Since then the business has doubled in size, in part due to the purchase of Bayer’s diabetes care business. That success opene the door to other carve-outs, and the GP is now working with auto parts maker Calsonic Kansei Corp – acquired in 2016 for $4.5 billion – on M&A opportunities.

The Carlyle Group had a similar experience with Tsubaki Nakashima, a ball bearing manufacturer it bought in 2011 and listed in Tokyo four years later. Prior to completing its exit last October, the GP supported the JPY42.5 billion ($388 million) purchase of US-based NN’s precision bearing components business, which was almost the same size as Tsubaki.

“In our discussions with Tsubaki Nakashima, we showed how we could add value and global expansion was a key issue,” says Kazuhiro Yamada, managing director and head of Japan buyouts at Carlyle. “We laid out certain options and identified acquisitions that would make sense for them. They had already been thinking of acquiring NN. They then approached the company with our support in the deal execution.”

Yamada adds that some companies have acquisition wish lists, but the targets aren’t always feasible, while many – even those with over $1 billion in annual revenue – may not have the capability to acquire businesses overseas. Transaction advisors can help identify and close deals, but post-acquisition integration remains a challenge that companies might not want to tackle on their own.

These sentiments are echoed by Hiro Hirano, Japan CEO at KKR, who believes private equity investors can play an especially important role in personnel management once a deal has closed. This is because Japanese companies often struggle to instill a diversified management culture with a global mindset, creating an obstacle to integration. 

“Culture is a significant part of why companies thrive or struggle, so getting this right and starting new M&A partnerships on the right foot is important to the long-term success of a business,” he says. KKR emphasized the international perspective at Calsonic by hiring a non-Japanese CEO from a leading global auto parts manufacturer. 

Calsonic is an example of a Japanese company with a track record of serving a worldwide customer base, but the previous controlling shareholder – Nissan – accounted for 80% of sales when KKR moved for the asset. Diversifying the clientele was an obvious priority. For industrial groups, there is often a strategic hole that needs to be filled, typically involving customers or distribution channels in new markets or transformative technologies and manufacturing capabilities. 

Some of these issues are also relevant in the consumer sphere, but they are often subsumed by a marketing and branding drive. “With a B2B business it essentially comes down to product quality, price, reliability of delivery, and the reliability and cost of after-sales services. There’s a branding halo around it, but those are the key issues,” says Mark Chiba, group chairman at The Longreach Group. “With a B2C business, clearly there are broader brand attraction, marketing impact, and qualitative customer experience factors overlaying product quality and price.”

When Longreach bought bridal jewelry specialist Primo Japan in 2015, the company had a leading domestic presence plus 10 stores in Taiwan and one in Hong Kong. The GP spent six months drawing up and market testing an expansion plan for mainland China. It concluded that Primo should focus initially on the Shanghai and Hangzhou area, where consumer sophistication is high and the allure of a distinctly Japanese brand is strong. From here a confirmed and replicable template for a broader China roll out was established.

Working with Oyatsu, the manufacturer of Baby-Star ramen snacks, Carlyle also had to take the initiative on cross-border expansion because the founding family didn’t know how to proceed. While China and Southeast Asia were identified as suitable targets, similar products were sold in these markets at a 25% discount to the Japan price. The solution was to build a manufacturing plant in Taiwan as a beachhead for Asian exports, but taking this step required faith in the strategy and execution ability.

Sector by sector

The consumer, leisure and media space has been the second most active in terms of outbound M&A activity in the last two years. Investors expect to see more deal flow, and not only because this sector is directly, and substantially, impacted by demographic change. From cuisine to couture, the appeal of Japanese brands in Asia is seen as an opportunity that has yet to be properly tapped.

While KKR is sector-agnostic in its approach, the firm has generally been attracted to manufacturers, relying on the country’s industrial base. Industrials and chemicals remain by some distance the most prolific sector for outbound M&A, accounting for more than one out of every four deals announced since the start of 2016. However, there could be a blurring of the lines between industrials and technology – a fast-riser in the sector rankings – as corporate Japan considers its future. 

KKR’s Hirano believes high-end manufacturers have differentiated themselves sufficiently in terms of innovation, on top of their other qualities, to stay ahead of disrupters in the global market. On the other hand, Ford of KPMG points to areas in which companies have been slow in positioning themselves for digitization. Whereas once incorporating a technology-enabled business model meant building internally, the onus could switch to M&A if there is a talent deficit. Deep learning, artificial intelligence, and big data analytics are all on Japan’s shopping list.

Private equity investors can capitalize on this trend as well, provided they remain relevant. “The specifics will differ based on the size and complexity of the business. What sellers are looking for is not only global capabilities but track record, experience, and relationships in their sector,” says Ford. “Do you have portfolio companies in this sector and the potential to create synergies? Or is it a purely greenfield expansion, in which case, can you bring the value-add you claim to have?”   

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• Topics
• North Asia
• Buyouts
• Industrials
• Technology
• Consumer
• Japan
• Advantage Partners
• The Carlyle Group
• KKR
• The Longreach Group Limited
• M&A