- Industry recognizes there are too many small/mid-sized players, encouraging further industry consolidation.
- The Japanese government published new guidelines for corporate takeovers in 2023, including the treatment of unsolicited “bona fide offers.”
Key takeaways
- New guidelines from (METI) Ministry of Economy, Trade and Industry on corporate takeovers and (TSE) Tokyo Stock Exchange reforms have helped pave the way for a new era of Japanese corporate governance and dealmaking in the region.
- The Japan M&A market has had a strong first half, with deal volume up around 20% compared to same period in 2023.
- Shareholder activism in Japan continues to gain momentum, increasing the number of takeover proposals.
Reforms driving change for the M&A outlook in Japan
After three decades of deflation and stagnant growth, recent government and market reforms designed to improve corporate governance and capital management have encouraged corporates to embrace a more transparent, pro-growth agenda leading to a wave of dealmaking in Japan.
“We’re seeing a fundamental shift in corporate governance in Japan, with greater accountability at the board level to drive shareholder value. That’s leading to a lot of corporate introspection with boards looking at what is core to their business and doubling down on those areas through acquisitions and with spin-offs of non-core assets to drive growth,” said Yamada Masataka, Head of Investment Banking in Japan at J.P. Morgan.
The investment banking addressable wallet for Japan is up around 35% compared to last year according to Dealogic and the dealmaking boom has been significant. The volume of mergers and acquisitions (M&A) linked to the country was up around 20% in the first half of the year compared to 2023 following the strong pace seen at the end of last year. Japan-related deals accounted for over 20% of Asia’s entire transaction volumes for 2023, the highest in four years, MARR data showed.
Japan-related M&A (deal count)
Japan related M&A has grown steadily since 2010 and is on track for another strong year in 2024 and set to outpace last year’s volumes.
Market structure reforms in Japan have been years in the making, with the revised Corporate Governance Code introduced by the government in 2022, but changes have gained momentum following new initiatives implemented by the TSE and METI last year.
The TSE announced its “Action to Implement Management that is Conscious of Cost of Capital and Stock Price,” initiative, which includes guidance for companies to encourage better valuations, asking for stock prices to go beyond a price to book ratio (PBR) of one, a measure that had been widely embraced by Japanese companies. METI also outlined guidelines to ensure fairness and transparency of procedures, encouraging boards to enhance corporate value and shareholders’ interests by seriously considering credible takeover proposals.
“Previously, proposals from outside parties could be overlooked because companies were not obligated to weigh them. The rules in place now mean that boards must thoroughly judge whether a proposal is serious. If the company is listed, they might also do a market touch to assess other potential buyers or bidders for the company — this is changing the Japanese M&A market,” Masataka said.
Japan-related M&A compound annual growth rate 2010–2023
Shareholder activism is on the rise
A unique historic feature of the Japanese market has been the existence of “cross-shareholdings” – where firms have historically held large stakes in each other, thereby protecting themselves from takeovers and shareholder activism.
Many large Japanese financial services firms and corporates have legacy stakes in traditional, well-known Japanese names that are starting to come back on the market for the first time in years following new government guidelines to disclose holdings.
“It has been a gradual unwinding, but we have gotten to a point now where many of those holdings are finally coming to the market,” Masataka said.
In many instances, this unwinding of cross-shareholdings has allowed activists to come back into play after decades of trying to enter the market.
Initially, shareholder activism largely took the form of balance sheet efficiency proposals, capital management, dividend increases or stock repurchases, but emboldened by the latest reforms, pressure to refocus company strategy has started to become increasingly popular.
“On top of capital efficiency measures, activists are actually increasing the number of proposals, looking at the sale of a company itself, divesting non-core assets, sales of divisions, spin-offs or acquisitions, so activist pressure on Japanese corporates is growing,” Masataka said.
Key themes in Japan’s M&A market
Market pressure, changes in government policy and increasingly active financial sponsors are leading to large-scale corporate actions.
- Japan is the second largest market being targeted by U.S. activist investors— U.S. holders have increased their holdings by around 7% of total outstanding shares from 2013 to 2023.
- Increasing presence of activist investors puts pressure on Japanese corporates.
- Despite recent increases in interest rates in the global financial sector, Japan has kept interest rates low, providing private equity firms attractive financing opportunities.
- Sponsor-related deals have increased from around a 5% share in 2015 to around 15% in 2023.
- Japanese players are undervalued compared with global peers.
- TSE has encouraged companies with a PBR below one to disclose policies designed to improve their PBRs.
- Japanese corporates are becoming more open to inorganic actions.
- Japan’s shrinking economy further accelerates outbound attempts.
- Access to local sales channels and customer networks are often a primary purpose of acquisitions.
Case study: Dai-ichi Life and Benefit One
J.P. Morgan recently acted as exclusive financial advisor to life insurance firm Dai-ichi Life Holdings on its take-private transaction of employee benefits service provider Benefit One. The $2 billion transaction enables Dai-ichi Life, one of the largest life insurers in Japan, to expand beyond the domestic life insurance market and move into insurance-related services and employee benefits.
The complex transaction involved four parties, with Dai-ichi Life placing an unsolicited counter-offer, a rare approach for a major traditional financial institution of its size in Japan. After much negotiation among all parties during a short time frame, Dai-ichi Life successfully reached an agreement to acquire Benefit One.
“There was no precedent here, but we successfully guided our client through a complex transaction, negotiating with multiple parties to conclude with a positive outcome. We took into consideration all the guidelines issued by the Japanese government, working hard to acquire agreement from all respective parties, hitting all the right points to secure the best possible offer.”
Hideo Fujimoto
Japan M&A Banking Team, J.P. Morgan
“There was no precedent here, but we successfully guided our client through a complex transaction, negotiating with multiple parties to conclude with a positive outcome. We took into consideration all the guidelines issued by the Japanese government, working hard to acquire agreement from all respective parties, hitting all the points to secure the best possible offer,” said Hideo Fujimoto, who is part of the Japan M&A Banking Team at J.P. Morgan.
“We are observing a shift in mindset in the Japanese M&A market right now. Our clients have been interested to learn about this deal, as it shows how we can help them achieve their strategic goals in a creative way,” Fujimoto said.
Japan and cross-border M&A
Domestic M&A volumes have picked up largely in the areas of domestic consolidation and divesture of non-core businesses, but cross-border transactions are also gaining momentum.
Cross-border M&A deal volume is on track to outpace last year’s deal count and growth is expected to continue into 2025, as corporates look for value creation.
Japanese companies are looking overseas at U.S. and European companies, while international firms, in particular private equity firms, are eyeing opportunities in Japan.
“Even as Japanese company share prices and currency markets have fluctuated, global players see Japanese companies as undervalued, with significant strategic value. The momentum for outbound transactions is getting stronger, and there is a sense of urgency - our clients are feeling confident compared to a few years ago,” said Fujimoto.
“Our clients are thinking strategically — not just buying, but also selling non-core assets and using the proceeds to buy core assets. We see an increasing number of opportunities linked to the structural changes in the market,” Fujimoto added.
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