Analysis by Mergermarket, an Acuris company owned by ION Group

Japan dealmakers have a positive outlook on deal activity pipeline through 2022 due to a continuation of corporate divestitures, digital transformation (DX), and ESG trends among others, according to industry experts speaking at a webinar hosted by Datasite and Mergermarket on 27 January.

Japan-targeted M&A activity recorded US$110bn in total value across 3,210 deals in 2021, according to data from Dealogic. This compares with US$138.1bn over 2,891 deals in the previous year. Real estate/property was the largest sector in terms of deal value with US$21.5bn in 2021, while the technology sector was the most active in terms of deal count with 1,154 deals (worth US$16.8bn). Outbound M&A recorded US$84.4bn on 401 deals in 2021, compared with US$64.9bn across 468 deals in the previous year.

DX

DX has become the top priority theme among Japanese companies, regardless of sectors, in the last couple of years and they are very keen to acquire such skills and technologies, according to Chiaki Tani, partner at KPMG FAS.  

Rei Kyogoku, head of corporate finance, SMBC Nikko Securities, said that Japanese companies may become more selective under the current economic circumstance and uncertainty in the financial market, but the number of deals in the DX space and other growing segments is expected to increase. Large enterprises with a sound financial base could also continue to explore large cross-border deals this year, as valuation has in general lowered because of the drop in share prices and changes in the business environment, he noted.

Tech companies are pursuing acquisitions and capital alliances to offer value-added IT solutions to customers in conjunction with existing businesses, in order to increase revenue, Kyogoku added.

Ken Matsumoto, director on international acquisitions at Fujitsu [TYO:6702], said the company has increased the number of staff who handles cross-border deals in its overseas locations, so as not to be affected by travel bans. Handling deals remotely has already become the norm for Fujitsu under the pandemic, he noted.

Fujitsu is seeking IT service-related buys and it is crucial for the company to determine how much a potential target can contribute to Fujitsu in the context of DX. Retention of talents and repeatability with regards to recruitment are the key factor on DX-related buys, he added.

According to Yoichiro Shimizu, head of Japan, Datasite, the pandemic has helped the digitalization of the M&A process. There are further needs for technologies that can help deal makers carry out due diligence remotely. More deal makers use virtual data room (VDR) as a communication tool recently, instead of email and spreadsheets which could contain of a potential risk of information leakage, he pointed out, adding that they are now using VDR not only on cross-border deals but even on domestic deals.

Masahiko Ishida, partner and head of Corporate-Japan at DLA Piper Tokyo Partnership, said that regulators are now paying greater attention to DX-related deals. As seen in many deals, many large M&A deals are happening around industries related to personal information and technologies, he continued.

Recently announced deals in the space include Oracle's [NYSE:ORCL] US$28.3bn acquisition of Missouri-based electric medical data provider Cerner [NASDAQ: CERN], according to Mergermarket data.

The Committee on Foreign Investment in the US (CFIUS) is strictly reviewing deals involving critical technology and personal information, and regulators in Germany and Australia seem to be going in the same direction, he noted. 

From an antitrust angle, regulators in many jurisdictions including Germany, South Korea and Japan are increasingly scrutinizing the details of the target technology being acquired as they consider the potential market impact of the transfer of such technology, and are no longer making their decisions on deals based just on market share, Ishida added.

ESG

Meanwhile, ESG is rapidly becoming a key driver to accelerate M&A, the experts pointed out. Akihiro Kido, head of global advisory, Mizuho Securities, said that Japanese commodity makers could consider further divestitures, as they are struggling with the increasing cost caused by the hike in natural resource prices, as well as additional costs to achieve carbon neutrality. It is difficult for them to add these costs on to their selling price, he added.

Owners of natural resource assets could also opt for different strategies. Some may choose to divest those assets to get rid of the downward pressure on their share prices, and others may want to hold on to the assets for now as those businesses still generate profit backed by the soaring resource prices, Kido noted.

Fujitsu’s Matsumoto said that the company exchanges views on ESG with target companies at the beginning of negotiations. This helps management teams become more intimate and sometimes helps Fujitsu to be considered as a preferred bidder by the sellers, he continued. Having such discussions is also useful in identifying targets that do not fit Fujitsu’s vison at an early stage.

This webinar coverage article was originally published by Mergermarket on February 4, 2022; it has been republished with permission.