Law firms interviewed: Morrison Foerster, Miura & Partners
Japan's relaxed monetary policy and corporate restructuring efforts are driving an increase in M&A deals as international buyout firms seek bargains and activist investors push for higher returns.
- Japan's corporate governance reforms boosting investor confidence and M&A activity
- Shareholder activism rising as cross-shareholdings decline
- Foreign investors, especially PE firms, increasingly targeting Japanese companies
After decades of deflation and economic stagnation, Japan is staring at a fundamental shake-up to its corporate governance framework. This change has been rejuvenating investor confidence and making waves in the country’s once dormant dealmaking landscape.
According to a JP Morgan report in August, Japan-related M&A has grown steadily since 2010 and is on track for another strong performance in 2024, set to outpace last year’s volumes.
The volume of M&A linked to the country was up around 20 percent in the first half of the year compared to 2023 following the strong pace seen at the end of last year, the report showed.
The surge in deal activities is seen to be closely linked to the favourable fundraising conditions in Japan. The Bank of Japan has been trying to revitalise the shrinking economy with ultra-loose monetary policies, in stark contrast to the tightening monetary cycles by central banks in the United States and Europe.
Consequently, the low interest rate and rapid depreciation of the yen have captured the attention of foreign investors, who are battered by heftier funding costs overseas and hunting for cheaper deals. Even with a recent rate hike, the BoJ is keeping an accommodative stance on future rate decisions, with Japan’s new cabinet favouring a cautious approach when it comes to raising rates.
In addition to the economic situation, the evolving corporate landscape has contributed positively to the investment potential of Japanese companies. In a move that’s been years in the making, the Japanese government revised the Corporate Governance Code in 2021, heralding an era of corporate reforms aiming to achieve sustainable corporate growth and increase corporate value.
The Code, compiled in 2015 and first updated in 2018, has been revised to enhance board independence including increasing the number of independent directors for prime market listed companies. Other improvements include promoting diversity in senior management and placing more emphasis on ESG obligations.
Nozomi Oda, partner at Morrison Foerster Law Offices in Tokyo, underscores the active role increasingly played by independent directors in executive decision-making in high-profile M&A transactions, including Toshiba’s privatisation, for the past few years.
“The updated Corporate Governance Code requires Japanese public companies to enhance the function of independent directors (in terms of both quality and quantity). As a result, Japanese boards have become more international and open to investors, which has contributed to lowering the hurdles for foreign investors to invest in Japanese public companies,” says Oda.
HOSTILE TAKEOVERS
The Code’s latest revision was followed by new initiatives implemented by the Tokyo Stock Exchange (TSE) and the Ministry of Economy, Trade and Industry (METI), introducing more incentives for market liberalisation and competition. Nevertheless, these shifts have also brought complications to Japanese companies accustomed to the status quo.
In particular, the METI last year has laid out guidelines aimed at promoting fairness and transparency in processes, urging boards to boost corporate value and prioritise shareholders' interests by evaluating credible takeover offers.
“Since the time of the recent release of METI’s Guidelines for Conduct in Corporate Takeovers, there has been an increase in acquisitions without consent, not only by engagement funds but also by strategic buyers, such as operating companies,” points out Kohei Okusa, partner at Japanese law firm Miura & Partners.
However, even after the METI initiative was released, “in reality, we are still seeing cases where Japanese boards block unsolicited bidders at a very early stage,” says Oda. She emphasises that Japanese companies should be cautious and avoid simply rejecting unsolicited M&A proposals without providing clear and specific reasons.
In one of the latest notable examples, the board of Seven & i Holdings – owner of the 7-Eleven convenience store chain - has turned down a substantial cash takeover bid of nearly $39 billion from Canada’s Alimentation Couche-Tard.
The board contended that the offer significantly underestimates the value of the Japanese company and fails to account for the regulatory challenges that any potential agreement would face.
The Canadian company is anticipated to return with a second offer, while both international and local private equity firms are keenly looking to stake their claim in the retail giant. Meanwhile, the Japanese group is reportedly considering the sale of non-essential assets to buyout firms or other potential investors.
“Recently, we are seeing unsolicited offers being made after friendly deals are announced. The ‘fiduciary out’ scenario from a friendly deal is no longer hypothetical. Japanese boards need to be prepared to make a difficult determination on competing bids,” says Oda.
SHAREHOLDER ACTIVISM
Moreover, the growing dealmaking appetite is closely associated with a significant development: the rise of shareholder activism. Traditionally, in the Japanese market, financial services firms and corporations maintained substantial stakes in one another as a defensive strategy against potential takeovers, limiting shareholder activism.
Now, the new development may indicate the diminishing influence of "cross-shareholdings," especially in light of new government regulations requiring the disclosure of shareholdings.
Also, the Tokyo Stock Exchange (TSE) is urging Japanese public companies to enhance their shareholder value and operational efficiency, say lawyers.
A common benchmark that activist investors rely on is the price-to-book Ratio (PBR), particularly when it exceeds 1.0x, serving as a critical indicator for evaluating these companies. As a result, Japanese firms are anticipated to explore strategies aimed at boosting their business efficiency.
“Previously, a typical request from activist shareholders was to increase the return to shareholders through dividends or stock repurchase,” says Oda. “Recently, their requests are more diverse and often involve M&A strategies, such as divestiture of non-core assets. From the perspective of law firms, being capable of handling the dynamics of complex corporate transactions is key for counselling on shareholder activism.”
“Historically, the key players for PE transactions in Japan were domestic Japanese PE sponsors, together with a handful of big-name U.S. sponsors that have large teams in Tokyo. Recently, however, many additional major international PE sponsors are entering the Japanese market.”
- Nozomi Oda, Morrison Foerster
Looking ahead, lawyers expect to see more inbound Japanese M&A transactions where foreign investors look to acquire Japanese assets under conducive market environment and favourable reforms.
“In particular, we expect international PE firms will be key players in the next wave of M&A,” says Oda. “Historically, the key players for PE transactions in Japan were domestic Japanese PE sponsors, together with a handful of big-name U.S. sponsors that have large teams in Tokyo. Recently, however, many additional major international PE sponsors are entering the Japanese market,” she adds.
Acknowledging that the cultural and language barrier is one of the most common challenges for inbound investors, Oda suggests that investors should have people on the ground in Japan, and who are fluent in Japanese.
“We are also seeing more consortium deals where an international PE firm teams up with a domestic PE firm to acquire a Japanese target company,” she says. “It is not easy for new foreign investors who do not have experience in acquiring Japanese companies to do a buyout of a Japanese corporation alone.”
