Morgan Stanley
  • Investment Banking
  • Apr 4, 2019

What’s Behind Japan’s Record-Breaking M&A Boom

Long-term demographic and economic shifts are propelling deals in Japan, a trend likely to continue.

  • M&A in Japan is experiencing rapid growth.
  • Japanese companies are optimistic about continued globalization and cross-border growth.
  • The Japanese government has set policies that seem supportive of M&A activity.  

Even in a standout year for global mergers and acquisitions, the number of transactions announced in Japan last year was notable. And there are good reasons to think that mergers and acquisitions activity in Japan will remain robust for the foreseeable future.

To put it in perspective, Japanese M&A activity in 2018 totaled $358.2 billion, up 129% from 2017, according to Refinitiv (formerly Thomson Reuters).1 This marked the highest full-year volume for Japanese M&A since Refinitiv began keeping track in 1980.

Mitsubishi UFJ Morgan Stanley Securities (one of the two Japanese joint venture companies between Morgan Stanley and Mitsubishi UFJ Financial Group), together with Morgan Stanley, advised on $223.6 billion of announced transactions in Japan last year, making us the No. 1 advisor in the Japan-related M&A market for 2018.

Demographic and Economic Trends

Long-term demographic and economic shifts are spurring Japanese companies to look for new opportunities for growth beyond their borders. Not only are they making acquisitions, they are also clarifying their portfolio mixes, aiming for a sharper focus on growth areas. And Japan’s growing aging population and declining birth rates have pushed its largest companies to expand into younger and faster-growing regions.

Surging research and development costs are also playing a role. R&D expenses for new technologies have been increasing dramatically, and most of the suppliers, customers and competitors are based overseas.  As their business environment has evolved, Japanese companies have embraced globalization, developing sophisticated strategies for operating and competing worldwide.

And companies in Japan have some capital-market advantages when pursuing cross-border transactions. Many rounds of restructuring after the 2008 global financial crisis left many Japanese companies in solid financial shape, often characterized by high levels of cash on their balance sheets.

Another advantage: Even as some central banks have begun to raise key interest rates, the Bank of Japan continues to maintain near-zero interest rates, giving Japanese corporations access to inexpensive capital with which to finance deals. 

Encouraging Government Policies

Beyond these strategic and economic factors, Japanese government policies may also be encouraging M&A activity. Its efforts to highlight the importance of capital efficiency have pushed Japanese companies to take a more disciplined approach to capital allocation, resulting in divestitures of noncore businesses and greater interest in cross-border acquisitions. 

Over the past few years, “Abenomics”—as the policies of Japanese Prime Minister Shinzō Abe are popularly known—has led to enhancements in Japan’s Corporate Governance and Stewardship Codes. The result is further engagement between Japanese corporations and investors, both locally and abroad, with a focus on capital efficiency, enhanced profitability, and maximizing shareholder value. 

Investors Lend a Hand

While many Japanese companies focus on overseas mergers and acquisitions, others are increasingly receptive to external investors entering the Japanese market. These investors can take many forms, from shareholders looking for value stocks to opportunistic buyers of the noncore assets that local companies want to sell, or acquiring entire businesses through leveraged buyouts.

Activist funds are drawn to Japan by the perception that many of the country’s largest companies and conglomerates trade at a discount to their intrinsic value. Their recent foothold in Japan represents a meaningful shift from historical attitudes. During an earlier wave of activism in 2007, activist funds targeted Japanese companies for takeovers— and, while they could not get public support for their efforts, their campaigns did prompt some companies to strengthen their defenses.

Activists have learned from the past and become better attuned to the Japanese market. More recently, they have taken a friendlier approach by presenting themselves as advocates for all shareholders, rather than just minority interests. This has led to more favorable coverage in the Japanese media, and some notable successes.

Japanese companies are also more receptive toward private equity investment, with several global private equity firms recently acquiring Japanese businesses.  Among the most active over the past two years, Bain Capital led a consortium in the acquisition of Toshiba Memory for $18 billion and acquired ADK, Japan’s third largest advertising agency, for $1.2Bn.  Meanwhile, KKR & Co. purchased car-parts maker Calsonic Kansei from Nissan for $4.2Bn.

Closer to home, Japan’s Softbank, which manages a $100 billion investment fund, is expected to maintain its prominent presence on the global M&A scene. 

Industry Focus

 Certain sectors may be more focused on opportunities through M&A. Local pharmaceutical companies, especially those with drugs that are going “off patent,” are hunting for cross-border business mergers to grow revenue streams. Case in point: Takeda Pharmaceutical’s announced $77 billion deal for Shire PLC in 2018 was the largest cross-border Japanese acquisition to date.

Transactions involving industrial, technology and software companies are also rife. In 2018 alone, Hitachi said it would buy ABB’s power grids business for $11 billion; Renesas Electronics Corp. announced the purchase of Integrated Device Technology for $6.5 billion; and NEC Corp. announced its $1.2 billion acquisition of KMD, Denmark’s largest IT company that focuses on public sector. M&A activity will also likely remain strong in Japan’s consumer, financial and retail sectors, as businesses seek growth abroad.

Morgan Stanley’s nine-year-old Japanese joint venture with MUFG, the country’s biggest financial group, has allowed us to maintain our leading role in the country’s M&A market. Beyond our combined financial resources, our top ranking in Japanese M&A is a reflection of the tremendous trust that Japanese corporations have in our consistency and commitment, as well as our global reach and client network.