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Japan Inc’s appetite for overseas acquisitions shows no signs of abating. Deals such as SoftBank’s surprising $3.3 billion purchase of Fortress Investment and Takeda’s $5.2 billion acquisition of cancer drug maker Ariad earlier this year boosted the total value of Japanese outbound M&A in January and February to 69 percent higher than last year, according to data from Reuters. These figures show a continuing trend that has been visible for at least five years.
There are a number of reasons behind this buying spree. Japan has a huge amount of cash, very cheap debt, and has been politically stable for a long time. But the main reason is demographics, says Nick Wall, a partner at Allen & Overy’s Tokyo office. “Japan is a shrinking market – there’s currently 125 million people, but over the next 40 to 50 years, it could shrink to below 90 million,” he explains. “And that means companies looking to expand have to go outbound.”
But, of course, not all deals work out. In February, Toshiba booked a $6.3 billion hit for its American nuclear unit Westinghouse, which it bought from the UK government a decade ago. Kirin also had to atone for a bad deal recently – the Japanese brewer has sold the Brazilian business it purchased for nearly $3.9 billion in 2011 for about $1 billion with debt to Heineken.
According to Yutaka Kimura, a partner at Baker McKenzie’s Tokyo office, these are not isolated incidents. “Even the top-tier Japanese companies that are viewed as having ample experience in pursuing outbound M&A transactions have recently been hit hard by unsuccessful outcomes of their landmark outbound M&A investments,” he observes.
ENTER THE LAWYERS
Helping mitigate the risks are lawyers who find their roles have expanded beyond what was traditionally expected of them.
“As outbound M&A advisers, our job now goes beyond solid due diligence and contract mechanics at the deal stage. It extends to advising post-merger on the successful integration of assets, ensuring operations are not interrupted by contractual issues and to protect the buyer as best we can from unforeseen turmoil in its new markets,” says Graeme Preston, the Tokyo-based head of North Asia M&A at Herbert Smith Freehills.
Wall at A&O says that risk can be reduced by putting a greater focus on due diligence. “We work a lot with specialists in this field, doing joint exercises and analysing these risks. That certainly wasn’t the case five years ago, when people wouldn’t have really looked at compliance and due diligence, for example,” he shares. “Now, at every transaction, people are discussing it.”
He adds that post-merger integration, or PMI, which is a hot topic in Japan, is crucial for companies to make acquisitions work. “Helping companies when they are acquired and bringing them into the group, working with them on reporting lines, on global compliance policies... that's a very important part,” notes Wall. “Historically, every corporate has struggled a little bit with it.”
Kimura of Bakers believes that a local touch is useful as well. “From a legal perspective, it is not easy even for legal advisors to fully understand the local law and practice in order to fully inform Japanese clients of the same,” he says.