Six months after the tragic earthquake and tsunami that rocked Japan, life is slowly returning to normal for businesses and the legal services market. This is not to say that the country has fully recovered from the devastating effects of the crisis; society remains indelibly affected by both the human and economic cost of the tragedy. In terms of the latter, while the earthquake has restricted the production capacity of Japanese companies and fractured traditional business relationships, it has also opened up opportunities for both new foreign suppliers to enter the market and proved yet another catalyst for the outbound expansion of Japanese companies. ALB looks in detail at how the market has changed since the historic earthquake and how the country’s legal services market has responded.
M&A levels hit record highs
Japanese companies from eye shadow makers to insurers are stepping up the pace of their overseas expansion as the devastating March 11 earthquake provides another spur to escape their moribund domestic economy.
It could, investment bankers predict, help drive Japan-related merger and acquisition activity to its strongest year since 1999, with as much as 15 trillion yen ($187 billion) worth of deals estimated in 2011.
That post-quake boom is already underway. In May the value of mergers and acquisitions (M&A) by Japanese firms rebounded to 2.5 trillion yen, up from only 616 billion yen in April, according to data compiled by Thomson Reuters. That pushed the accumulated value of deals this year to 5.8 trillion yen—double the value registered in the same period last year.
“It’s proof that M&A has become an important strategy for Japanese companies,” said Kentaro Okuda, joint head of global M&A at Nomura Holdings. “Without M&A there’s no next step, more companies are convinced that without it they won’t achieve growth.”
After two decades of recession as Chinese, Taiwanese and South Korean rivals overtake them, the incentive to break out from deflation, population decline and anaemic growth existed before the quake. The new post-quake spur to go overseas is geographical risk.
Ken Siegel, the Tokyo managing partner of U.S. law firm Morrison & Foerster, expressed some surprise that cross-border deal flows have remained strong in the aftermath of the crisis.
“We expected that there would be much less interest going out until the situation was more stable and predictable in Japan,” he said. “Historically, any kind of uncertainty stops M&A. In this case, it’s accelerated M&A in some respect, because it’s now clear that the domestic market is going to contract a little more.”
Siegel believes that the earthquake has exacerbated the “pre-existing theme” of Japan not being big enough for the companies that are here, citing Toshiba’s $2.3 billion acquisition of Landis+Gyr – a deal that was closed only a week after the earthquake as an example. Morrison & Foerster was retained by long-time client, Toshiba, on the transaction while Switzerland-based Landis+Gyr turned to Skadden.
But Siegel is quick to point out that in the aftermath of the crisis not all Japanese companies were quick to ramp up their outbound activities.
“Blue Chip companies may be unaffected. But I had a couple of situations where merger talks were suspended,” he said. “The reason was the lack of management resources that were able to pay attention to strategic transactions… I had some middlemarket clients who were in discussions, and a few weeks later, the CEO said ‘we have to pay attention to the domestic situation’. We have to shift our attention to restructuring. It’s not the availability of money that’s affected this. It’s the availability of human resources that they have available.”
In addition to increased cross-border M&A levels and more Japanese companies establishing overseas production facilities, industry experts predict a jump in demand for equity financing. Here companies without enough cash may look for money to fund their international ambitions. Acquisition deals since the quake point to the broad nature of corporate Japan’s M&A activity.
Earlier this year, Monex Group (represented by Simpson Thacher & Bartlett), an online brokerage service, paid $411 million for U.S. peer TradeStation Group. Smaller deals include cardboard packing maker Rengo’s $183 million purchase of a stake in Chinese company Hung Hing Printing (Ashurst and Oh Ebashi were retained by Rengo, while Clifford Chance represented Hung Hing), and cosmetics maker Pola Orbis’ $91 million acquisition of U.S.-based maker of skin lotion, H2O Plus. Simpson Thacher and Nagashima Ohno & Tsunematsu acted for Pola Orbis while Paul, Weiss was retained by H2O Plus.
There have been mega deals too including the biggest so far this year; Takeda Pharmaceutical’s announcement in May that it will pay 9.6 billion euros ($14 billion) for privately held Nycomed, a Swiss maker of over-the-counter remedies and lung cancer drug Daxas. Healthcare is one area in particular, which is earmarked for much more crossborder activity in the year ahead.
Energy
Energy-related deals are also expected to increase in the wake of the nuclear crisis amid rekindled interest in renewable energy sources and ask companies look to secure oil and gas rights needed to make up for lost nuclear power generation.
“It wouldn’t be surprising to see more activity by drug companies or energyrelated firms,” said Nomura’s Kentaro Okuda. And the last few months have seen increased activity on the energy front. Earlier this year, DLA Piper, Milbank and Arnold & Porter all won roles on a landmark Japanese-Latin America outbound deal.
The deal saw a consortium of Japanese financial institutions invest $1.5 billion in Venezuela’s national oil company, Petroleos de Venezuela (PDVSA). DLA Piper acted for the consortium which included The Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (NEXI) —Japan’s government-owned financial insurance institution—as well as commercial bank lenders.
“These transactions are an important part of Japan’s strategy for diversification of energy resources and are particularly important this time when Japan faces new challenges for electric power generation from conventional fuels in the wake of the recent tragic events,” said the firm’s lead partner on the deal, David Robbins.
But Masaru Shibata, a partner with Crosspoint advisors, believes that the opportunities in the domestic energy market could prove just as lucrative. “In sectors like energy, there could be some fabulous stimulus that could come from this to get them into clean tech,” he said, noting that the sector could really take off with government support.
Asian Investment & local deals
While most commentators have been quick to focus on the abundant outbound opportunities for Japanese companies, Junichi Kondo, a partner with Anderson Mori & Tomotsune, believes there could be just as many M&A opportunities occurring domestically in the months ahead.
“After the March 11 disaster I hear there has been mounting interest in having new suppliers outside Japan,” said Kondo. That activity, he said, is spreading beyond corporate Japan’s favoured market, China, to other destinations including Vietnam, Indonesia and Malaysia.
But it, he added, it may not just be foreign fields that will lure Japanese executives in the hunt for targets. Quake-triggered M&A, Kondo said, may also mean deals mount at home too as disaster-weakened firms huddle to ensure their survival. “The March 11 disaster was a big, unexpected event. I would not be surprised to see some notable domestic consolidations happening among Japanese companies later this year or next,” Kondo said. On this front, however, a number of recent and impending regulatory changes will present new challenges to dealmakers and their legal advisors. For example, number of profound changes are in pipeline in the antitrust area of merger control. On March 4, 2011, the Japan Fair Trade Commission (JFTC) announced plans to amend its directives on merger control procedures and to eliminate the consultation process that had been previously used. The JFTC was thereby responding to criticism that the procedure was too protracted. The changes are expected to come into force during the second half of the year.
In addition, the lower house of the Japanese Diet passed various legislative amendments which facilitate M&A transactions in Japan and should bring Japanese regulations in line with international standards. The upper house approved these proposed amendments on May 18, 2011 and it is expected that these legislative amendments will take effect in the second half of the year.
While these changes will add to the factors that need to be considered by practitioners, it is also expected that they will benefit foreign and domestic acquirers setting the scene for increased local M&A levels in the months and years ahead.
Market changes
While the spike in outbound work has done little to affect the complexion of the domestic section of the Japanese legal services market, it has changed the makeup of the international legal services market. Most of the major international players in the market have moved to reinforce their transactional capabilities over the last 12 months through a mix of lateral hires, partner relocations and organic growth. U.S. firm K&L Gates pulled off one of the largest en masse lawyer moves in recent memory earlier this year when it hired three partners, four counsels and three associates from Clifford Chance’s Tokyo office. A number of other international law firms are also in the process of bolstering their Japan teams with an emphasis on M&A, cross-border work, infrastructure and project finance.
Although domestic law firms did not see the same level of movement between them (despite Atsumi & Sakai did take a large bite out of TMI Associates practice when it poached eight lawyers including new named partner, Yutaka Sakai), the last 12 months have seen an aggressive expansion of the ‘big fours’ international capabilities.
“Although we anticipate that the Japanese domestic market will continue to show weakness over the next year, we believe that foreign investors will find opportunities during this period for investment in Japan, as they position themselves to capitalize on a wave of economic re-growth that will follow,” said Anderson Mori & Tomotsune senior partner, Tsutomu Miyano. “We also expect that Japanese clients, pushed by various factors, including Japan’s current power supply shortfall and its declining population, will take advantage of the strong yen to be active overseas, especially in Asia. We will aggressively develop our business to support our clients in China, India and Southeast Asian countries, taking advantage of informal alliances with prominent law firms in those jurisdictions,” he said.
The same expansion is on the mind of his counterparts at other Japanese law firms. Although Nishimura & Asahi, the country’s largest law firm by headcount, has launched three international offices over the last 12 months, the firm’s managing partner, Masaki Hosaka, has not ruled out further expansion. “In order to further support our Japanese clients’ overseas operations and provide advice at a competitive international standard, last year, we opened a representative office in Beijing, China, and an office in HCMC, Vietnam, and we plan to open an office in Hanoi in Autumn 2011.”
And the firm could soon have company in South East Asia in the form of Mori Hamada & Matsumoto. Widely regarded as having one of the strongest M&A practices in the country, one of the firm’s managing partners, Masanori Sato, said that one of the firm’s major growth objectives for the next 12 months is to strengthen its cross-border legal practices, especially in the area of the outbound investments in other Asian countries. With two offices in mainland China, a stronger presence in Southeast Asia is a distinct possibility.
Internationalisation and regionalization is also on the mind of the managing partners of smaller Japanese law firms. Oh-Ebashi managing partner, Shiro Kuniya, has been working to expand his firms international networks, particularly associate exchange programs with law firms in the U.S., China and Vietnam. He told ALB that the firm hopes to further expand these programs over the coming year to also include exchanges with Indian firms. Steady expansion of the firm’s three offices (Tokyo, Osaka & Shanghai) is also expected. The situation is similar for Kitahama & Partners. The firm’s managing partner, Hiroshi Morimoto, has said the “globalization of the firm” is his number one priority over the next 12 months.
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