FW discusses M&A in Japan in 2024 with Ryuichi Shiomi, Masatsugu Nakajima, Jun Fukuda and Risa Fukumoto at Anderson Mōri & Tomotsune.
FW: Could you provide an overview of the key factors driving M&A activity in Japan? How would you characterise the impact of macroeconomic developments?
Shiomi: One of the most notable M&A trends in Japan is the increase in shareholder activism. Over the past 10 years, activist campaigns directed at Japanese companies have increased dramatically, and an increasing number of companies have started taking into consideration issues such as return on equity and price to earnings ratio in order to accommodate shareholder interests. Carve out deals are also on the increase in order to improve shareholder profits and the outlooks of portfolios held by large listed companies, and also to take into account factors such as zero-carbon goals and sustainable development goals requirements. Other factors affecting recent M&A trends include an increase in divesting businesses of relatively small companies due, for example, to management succession issues, an increase in private equity (PE) funds established and managed by large listed companies, and rising interest rates.
"Companies' sustainability strategies and social responsibility practices are now pivotal evaluation criteria in M&A assessments."
— Risa Fukumoto
FW: Which industries or sectors are experiencing higher transaction volumes? Have any recent, notable deals caught your eye?
Nakajima: We have observed significant M&A activity across several key sectors, reflecting current trends and market dynamics. The technology and IT sector remains robust, fuelled by advancements in digital transformation, cyber security priorities and the burgeoning growth of technology start-ups. With Japan's ageing population, there is a notable uptick in consolidation and strategic acquisitions within healthcare services, pharmaceuticals and biotechnology. And in financial services, encompassing banking, insurance and FinTech, M&A activities are being driven by regulatory shifts, technological advancements and the pursuit of scale efficiencies. One noteworthy transaction is Blackstone's acquisition of Infocom, a leading e-comics provider in Japan, for $1.7bn. Infocom specialises in comic platforms and healthcare services, including an employment management system for nurses. The deal was publicly disclosed on 18 June 2024.
FW: To what extent are you seeing a move toward protectionism and greater scrutiny of foreign investments into Japan? How do you see this affecting inbound dealmaking?
Fukuda: When investing in Japanese companies from abroad, it is necessary to pay attention to the changing regulatory regime set out in the Foreign Exchange and Foreign Trade Act (FEFTA) and its ancillary regulations. In particular, prior notification is required when investing in the software industry, the information processing equipment industry and the parts manufacturing industry as per FEFTA amendments that came into force in 2019, as well as when investing in the medical equipment industry as per FEFTA amendments that came into force in June 2020. Thus, investing in Japanese companies in these industries should be handled with care, as prior notifications to the relevant authorities may be needed. Also, prior notification has become necessary under recent amendments to the regulatory regime when ratifying proposals for appointing directors or auditors as shareholders of Japanese companies in these industries.
"Acquirers will need to maintain flexibility and adaptability in their M&A strategies to effectively navigate challenges such as regulatory changes, geopolitical uncertainties and market volatility."
— Jun Fukuda
FW: What trends are you seeing in the way deals are executed in Japan? Have acquirers enhanced their approach to due diligence and transactional risk management?
Fukumoto: In Japan's M&A landscape, several trends are evident regarding human rights due diligence and environmental, social and governance (ESG) considerations, where acquirers have enhanced their approach. In terms of enhanced human rights due diligence, there is a growing emphasis on evaluating the impact of corporate operations and supply chains on human rights. This includes investigating risks related to labour conditions and human rights abuses. Ethical considerations and adherence to corporate social responsibility (CSR) are increasingly recognised as critical factors for the success of M&A transactions. Regarding the integration of ESG factors, such as environmental sustainability, social responsibility and governance practices, these are increasingly incorporated into due diligence processes. Companies' sustainability strategies and social responsibility practices are now pivotal evaluation criteria in M&A assessments.
"The technology and IT sector remains robust, fuelled by advancements in digital transformation, cyber security priorities and the burgeoning growth of technology start-ups."
— Masatsugu Nakajima
FW: What are some of the key legal and regulatory considerations companies need to make when undertaking transactions in Japan?
Shiomi: When investing in Japanese companies, in addition to the requirements of Japanese competition law, regulations concerning reorganisation under the tax law and requirements under the FEFTA regulatory regime, investors should also consider tender offer bids (TOBs)-related legislation, such as that set out under the Financial Instruments and Exchange Act. In particular, when acquiring shares of a Japanese listed company, companies should confirm whether a TOB is mandatory – an obligation that will be triggered when an investor purchases a certain number of shares. In December 2023, a Ministry of Economy, Trade and Industry working group submitted a report regulating TOBs, including amendments to current requirements for mandatory TOBs, and a revision bill was enacted in May 2024.
FW: What essential advice would you offer to parties on planning, negotiating, structuring, financing and closing successful deals in Japan? What key issues need to be considered?
Nakajima: Securing financing early in the deal process is crucial, particularly for domestic and international PE firms that are actively entering the Japanese market through leveraged buyout (LBO) transactions to execute corporate restructuring and growth strategies. This heightened activity has intensified competition in the market. Understanding local financing options, such as bank loans and debt markets, and evaluating the feasibility of these options are essential steps for leveraging debt to enhance capital efficiency and propel corporate growth.
"Carve out deals are also on the increase in order to improve shareholder profits and the outlooks of portfolios held by large listed companies."
— Ryuichi Shiomi
FW: How buoyant do you expect M&A in Japan to be in the months ahead? Will acquirers need to continue to adapt their M&A strategies to navigate challenges and take advantage of opportunities?
Fukuda: The outlook for M&A activity in Japan in the upcoming months appears promising, driven by several factors including economic recovery, a weakened yen which is beneficial for inbound transactions, low interest rates facilitating LBO finance, ongoing corporate restructuring carve out efforts, and strategic realignment amid evolving global and regional landscapes. Acquirers will need to maintain flexibility and adaptability in their M&A strategies to effectively navigate challenges such as regulatory changes, geopolitical uncertainties and market volatility. Additionally, opportunities may arise in sectors experiencing transformation, such as technology, healthcare and renewable energy. By remaining agile and proactive, acquirers can position themselves to capitalise on these emerging opportunities and achieve successful M&A outcomes in Japan.
Originally published by Financier Worldwide Ltd.
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