Outbound challenges

Author: | Published: 29 Mar 2017
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Asia reporter Brian Yap examines the opportunities and obstacles facing the country’s acquisitive corporates

Japanese corporates are making a comeback in the international market after a year of China-dominated M&A, but domestic rules are hampering expansion.

The country's Corporate Governance Code, introduced in June 2015, has forced Japanese listed companies to hire more independent outside directors and to be evaluated on their growth strategy by their board of directors.

Such pressure to pursue growth has pushed both Japanese-owned international conglomerates and increasingly domestically-focused corporates to seek high-quality assets overseas and away from a shrinking domestic market.

The US is a prime target, but counsel in Japan argue that the biggest impact of US President Donald Trump's trade policy has been on the automobile industry. Japanese companies have been trying to increase their investment in Mexico. But Trump's efforts to push US and foreign carmakers, including Toyota, to invest more in the world's biggest economy has posed challenges and left Japanese corporates confused about what to do next.

"They are waiting to see what the new president will be doing with the relationship between the US and Mexico, including NAFTA regulations," said Yoshinobu Fujimoto, partner at Nishimura & Asahi in Tokyo. He added that if President Trump tries to restrict trade, such as the import of Mexican goods through increased tariffs or duties, it could impact on the cost and the selling price for Japanese cars in the US market.

Some Japanese companies are more careful about their future investment in the UK than before

Data from Dealogic shows that Japan ranks 11th globally for outbound deals with a total of 99 acquisitions worth $18 billion, as of March 10 2017, with 36 acquisitions in the US and five in France. North America, Europe and Southeast Asia have emerged as the top three regions targeted by Japanese investors, with 38 deals worth $133 billion out of the total having been completed in North America, 29 in Europe and 14 in Southeast.

One of the biggest transactions emerging out of Japan's renewed outbound M&A drive was Tokyo-listed Takeda Pharmaceuticals' $5.6 billion acquisition of a majority stake in Nasdaq-listed Ariad Pharmaceuticals, which was completed on February 16. In terms of deal size, the transaction currently ranks first among other major deals done by Asian corporates.

Dealogic data also shows that Japanese corporates in the electronics and consumer products sectors have been most active, with overseas healthcare and investment management-oriented companies being their main targets.

But Japan witnessed a significant decline in the total number of outbound M&A deals last year, with only 761 deals totaling $5 trillion recorded from 1,326 transactions worth $14.3 trillion the year before and 1,278 transactions worth $37.9 trillion in 2015.

While the US continues to attract foreign direct investment (FDI) from Japanese corporates, the UK's vote to leave the EU last June and the upcoming elections in France and Italy have made Japanese corporates more cautious about investment in Europe. While Softbank's $31 billion acquisition of UK chipmaker ARM Holdings in September 2016 has been a fillip to the UK's inward FDI growth, Japanese companies have been closely monitoring the situation in the European market, concerned about the uncertainty surrounding upcoming national elections.

"In the UK market, some Japanese companies are more careful and conservative about their future investment in the UK than before, though there is still strong interest in investing in the UK," says Fujimoto.

A passage to India

In the past decade, Japanese corporates have set their sights on non-traditional emerging markets such as Myanmar and India, with 38 announced Japan-led deals in India totaling $223 billion recorded last year. But India has been a difficult country for Japanese companies to invest in, compared to European, US and even Southeast Asian markets, because of relatively complicated tax laws and federal and state regulations.

Takayuki Kihira, partner at Mori Hamada & Matsumoto in Tokyo, points out that certain filings for regulatory approvals can be sent around to different departments and take longer than the applicant might hope for.

Manabu Katsumata, partner at Anderson Mori & Tomotsune in Tokyo, on the other hand, points to labour issues facing foreign corporates operating in India and, while investment is expected to remain active, inadequate numbers of appropriate local partners continue to be a major issue.

A Japanese lawyer with knowledge of Japanese-led deals in India tells IFLR that a transaction intended to transfer just minority shares took over one year to be given clearance by different departments and the central bank. But Kihira concedes that the recent introduction of the new Bankruptcy and Insolvency Law, as well as the antitrust regulations and amendments to the Company's Act will help boost investment by Japanese companies into India.

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