As Japanese offshore M&A was starting to recover from COVID-19, geopolitical risks have moved firmly to the fore. What are the implications for the Japanese acquirers and who might benefit?
- The mountain of corporate cash in Japan has in the past decade or so been squarely aimed at offshore M&A.
- The COVID-19 situation globally, and more recently, war in Ukraine, has suddenly changed the game for Japanese firms in search of value around the globe.
- What does this mean for the Japanese market? And will we see a rise in the M&A advisory business as a result, or changing priorities and a very different risk landscape?
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In the lead up to the COVID-19 pandemic in 2020, the scale of Japanese corporate investment outside of the domestic market had reached all-time highs.
Japanese firms were going far and wide across the globe to snap up famous brands to add to their domestic collection.
Suntory bought Jim Beam and a number of other famous beverage makers, the Nikkei bought the FT, one of the world’s great news newspapers, and Japan Post Group bought Toll Group in Australia.
Offshore M&A had become a common strategy among Japanese conglomerates.
This was driven by an extremely crowded and competitive domestic market that left little room for growth and was crimping margins, coupled with an almost universally strong cash position common to large Japanese firms.
The bottom fell out of this bonanza with the arrival of COVID-19.
Unable to travel to test acquisition targets, distracted at home by trying to work flexibly and keep the business going, and amid constantly changing domestic rules and states of emergency, M&A plummeted, to levels not seen for decades.
The impact of geopolitics on offshore M&A
As the world now seems to be approaching the end of the COVID 19 challenge, Japanese groups are once again looking to drive large offshore M&A programmes.
However, the playing field has proven to be suddenly very different.
The war in Ukraine has caused massive disruption to the usual global trade flows and put pressure on a number of markets, geographies and business plans.
The Japanese Government has responded strongly to the situation, bringing in its own sanctions in close coordination with the rest of the western world – a posture not commonly seen in previous global crisis such as this.
According to numerous media, including the Nikkei and Reuters, Japanese aircraft cannot fly over Russia, and doing business not just within Russia, but with Russian entities, Russian-linked businesses and many Russian individuals is now just as difficult for Japanese entities as it is in the U.S. or UK for example.
Suddenly, the risk equations are very different.
In what has also been well documented by media, formerly adventurous organisations, like the venerable trading house of Mitsui, now have question marks over their stake in the enormous Russian Sakhalin II oil and gas project.
Sumitomo Mitsui Financial Group’s Aviation Leasing business has potentially hundreds of millions of dollars of risk tied up in aircraft leased to Russian airlines and which is now effectively stuck in Russia.
Meanwhile, Japanese carmakers like Toyota and Mitsubishi have had their entire distribution and financing activities curtailed in Russia.
The list goes on, and not only within the borders of Russia itself but anywhere there is a link with any Russian entities or individuals.
What does this mean for the revived offshore M&A activity in Japan?
Previously potential acquirers worried more about product quality, marketing strategies, growth curves, profit and loss and the ability to combine corporate cultures with the newly acquired. However, today’s acquirers are now looking first at geopolitical risk, potential sanction issues and the possibility of reputation damage from investing in what might be viewed as the ‘wrong’ place, or with the ‘wrong’ people.
Raised levels of risk in domestic Japan
Being able to navigate these complexities of ownership, market location and local business practice will be crucial in the post-Ukraine/post-COVID-19 world of international mergers and acquisitions.
The new world order potentially brings a new level of domestic risk to Japan.
While the old “economic miracle” of the 1950s and 60s was anchored in the ability to build high-quality products that the world would buy, that is now being turned on its head by the need for Japanese groups to act as truly multinational; and what happens in some previously far-off market can bring challenges directly to the doorstep in Tokyo or Osaka.
This will also bring corporate culture challenges. Groups are having to absorb more and more non-Japanese headcount and are forced to suddenly take on the same diversity and inclusion challenges faced by all truer multinational corporations.
Some pioneers such as Sony and Olympus have seen challenges in breaking out of the traditional Japanese cultures that have often proven incompatible with global expansion.
Advisory bonanza in Japan
This could well also be viewed as an advisory bonanza in Japan.
The very domestically focused Japanese Investment banks will be unable to deliver the depth and nuance of more international competitors when it comes to identifying the potential dangers and risks and being able to ultimately value the assets in question.
As soon as travel restrictions permit, it is very possible the Haneda and Narita Airports could see long lines of investment bankers from London, New York and elsewhere beating a path to Japanese corporations trying to revive inorganic growth models in far-flung countries while protecting the newly vulnerable domestic market.