No. 4 — February 2, 1996


Weekly Review

--- by Jon Choy

Even as the prolonged Japanese economic slowdown appears to be easing its grip, some Japanese observers predict that the recession's impact could leave permanent impressions on the Japanese economy. Merciless market forces — given wider play by continued efforts to deregulate and reform Japan's economic structure — have propelled many executives to reconsider their traditional antipathy toward mergers and acquisitions as an acceptable business strategy. Small- and medium-sized firms, which constituted the bulk of the record number of recession-induced bankruptcies, increasingly have been open to merger and acquisition proposals from foreign as well as domestic suitors. A recent decision by Japan's Fair Trade Commission to permit for the first time in nearly 50 years the formation of certain types of holding companies should add further impetus to M&A as a business strategy capable of meeting the challenges of tougher global competition. As for overseas mergers and acquisitions by Japanese companies, 1995 saw more judicious activity than the previous year. Having suffered from reckless investing during the late 1980s, Japanese firms now evaluate much more carefully the worth of potential foreign takeovers.

According to several private and government surveys, Japanese companies participated in more mergers and acquisitions in 1995 than the year before. Based on its independent survey, Yamaichi Securities Co., Ltd. reported 544 mergers or acquisitions involving major Japanese firms, a 7.9 percent rise over 1994's total of 504. Japanese-Japanese transactions numbered 294, up from 286. Japanese purchases of foreign firms reached 200 in 1995, up 25 from the year before. And foreign purchases of Japanese firms hit 50 versus 43 in 1994. Nomura Research Institute reported 42 deals in 1995 between a foreign buyer and a Japanese target, up by five from the year before. KPMG Peat Marwick also reported 42 instances of Japanese firms being bought by foreign companies last year, but this was down from 44 in 1994. KPMG Peat Marwick also noted that the value of deals in 1994 was inflated by GE Capital Corp.'s ¥120 billion ($1.2 billion at ¥100=$1.00) purchase of Minebea Co., Ltd.'s consumer credit arm. Analysts at the big accounting firm pointed out that last year's numbers were well above 1993's, which strengthens their rationale for remaining bullish on the Japanese M&A market.

According to Yamaichi Securities, only 215 companies disclosed the value of the merger or the acquisition in which they were involved in 1995, but the total for these reporting firms was over ¥1.3 trillion ($13 billion), up more than 248 percent from 1994. The Yamaichi Securities report also said that several large offshore transactions, such as the sale by Matsushita Electric Industrial Co., Ltd. of most of its MCA Inc. stake and Softbank Corp.'s purchase of Ziff-Davis Publishing Co., pushed up the average value of what it classified as M&A transactions to ¥6.2 billion ($62 million) each. By KPMG Peat Marwick's count, however, the value of deals involving purchases of Japanese firms by foreign business dropped sharply in 1995 to ¥72 billion ($720 million) from ¥183 billion ($1.8 billion) the year before, again highlighting the influence of the GE Capital/Minebea deal.

Yamaichi Securities analysts reported that buying a minority stake remained the favored investment vehicle in 1995 for Japanese and foreign companies alike, with 216 such transactions being reported or 24 more than in 1994. Acquiring a majority interest followed, with 209 (a big gain of 36 over 1994). Transfer or acquisitions of ownership interests came in at the same level in 1995 — 63 — as the year before, while mergers fell to 56 cases from 76 the year before. KPMG Peat Marwick noted a drop last year in the number of buyouts of local joint-venture partners by foreign firms, which decreased from 15 to 11.

The economic hard times endured since 1991 have encouraged weaker firms to look for stronger partners, either domestic or foreign. Japanese managers have been searching for ways to bolster their global marketing skills and engineering know-how; merging with another firm is one way of achieving these objectives. Firms interested in diversifying into new fields (and pulling out of poorly performing ones) have turned to M&A as a quick fix. Smaller Japanese firms ready to push into the rapidly developing economies of Southeast and South Asia also are looking at a merger or an acquisition as a quick way in. Mergers among foreign rivals also are encouraging Japanese firms to respond in kind to remain competitive. This is particularly clear in the pharmaceuticals field where five megamergers among American and European drug companies have restructured the industry in the past two years. Japanese pharmaceutical firms are under heavy pressure to combine their financial and research resources to counter these strengthened foreign competitors.

With interest in penetrating the Japanese market restoked by surging imports, foreign firms have been shopping more actively for a Japanese partner. According to Nomura Research Institute analysts, Japanese companies with strong distribution systems or a solid market reputation are favored targets for foreign bids. Japanese software houses and some specialized financial services providers also are frequent topics of inquiry from potential foreign investors, according to NRI.

JFTC's decision to remove many restrictions on holding companies from Article 9 of the Antimonopoly Law has thrown yet another ingredient into this fast-changing mixture. A holding company format would allow firms to tie much more closely together their research, marketing and production activities but would not force merged staffs and corporate cultures, the two biggest sticking points to a successful merger or acquisition in Japan. The pending Antimonopoly Law revision is controversial, especially abroad, because it might lead to greater economic concentration and more rigid corporate ties. Careful monitoring by JFTC will be critical to the success of reforms, both proponents and critics agree. Changes to the law are being drawn up and may be submitted this year to the Diet, but Japan's unsettled domestic political situation may derail JFTC's plans.

As for Japanese acquisitions of foreign firms, market watchers see an emerging trend. Japanese companies are dabbling in venture capital businesses overseas to reap both financial and technological returns. Computer and electronics makers, in particular, are at the forefront of this new trend. Such companies as Toshiba Corp. have streamlined their investment decisionmaking procedures, mimicking a venture investment business. Investment decisions now can be finalized in as little as two weeks, a Toshiba executive was reported as saying in the December 11, 1995 edition of The Nikkei Weekly. Japanese firms also are setting up offices in areas with extensive venture enterprise activity, such as central and southern California, to seek out investment opportunities instead of waiting for proposals to come over their transom.

Japanese financial firms are basking in the growing demand for M&A advice. Long-Term Credit Bank of Japan, Ltd. had twice as many clients interested in M&A in 1995 as in 1990 and is considering bolstering its M&A efforts. Yamaichi Securities has announced plans to create an Internet site for M&A information beginning February 5. The brokerage hopes to have about 350 entries, including company prospectuses and notices from potential investors. The proposed World Wide Web site will have information gathered from other securities brokerages as well as banks and investment advisers, according to Yamaichi Securities staff. Easy access to M&A information in Japan may give the relatively slow-paced market just the boost it needs as Japanese firms strive for ways to remain globally competitive and foreign firms seek footholds in Japan.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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