In September 2022, Mergermarket M&A Forum - Japan was held simultaneously in Tokyo and online. In attendance were more than 550 participants from over 320 companies and organizations in 24 regions. Thirty-three speakers from leading companies took the stage to exchange views on various topics related to ESG, corporate governance, domestic M&A trends, private equity in Japan, and more.

Datasite’s Head of Japan, Yoichiro Shimizu, joined the following panelists in the session “Japanese M&A Update: The current state of play”, which was moderated by Takeshi Hitomi, Partner, M&A Group Leader, NTT Data Institute of Management Consulting.

• Atushi Tatsuguchi, Managing Director, Head of M&A Advisory Group, Investment Banking Business Unit, Mitsubishi UFJ Morgan Stanley
• Yoshinobu Agu, Managing Director, Head of M&A Division, Citigroup Global Markets Japan
• Yoshikazu Hayashi, Senior Vice President, Corporate Development Office, Mitsubishi Chemical Holdings Corporation
•  Takashi Niwa, Senior Director, Strategic Growth & Investment, Fujitsu

The global rise in inflation came just as the economy was recovering from the COVID-19 pandemic. The panel discussed the latest situation of M&A in Japan and the investment themes, trends, risks, and challenges that will drive M&A in Japan in the future.

Below are selections from the experts' insights on the following topics.

Japan M&A outlook for the next 12 months

With regard to regulatory clearances, the national security perspective comes very strongly into play where the authorities have a great deal of discretion in the process review. Also, based on past deals, it is becoming very difficult to estimate the timing when deals will close. Therefore, the timeline between the announcement of a deal and its closure will become relatively longer.

Global M&A stagnated in the first half of this 2022, with data showing a 21% decline in value and a 17% decline in volume in the first half of the fiscal year of 2022 compared to the same period of the fiscal year in 2021. However, the technology, media, and telecommunications sector is growing significantly.

A weak Yen cannot cause a company to forgo an outbound deal, freeze a deal, or to otherwise go ahead with a deal. Especially, in the technology industry speed is of the essence and a target company may be taken over by someone else if there is even a slight delay.

Will carve-outs of large companies increase?

Carve-outs, or divestitures in the broad sense of the word, are sure to increase gradually rather than exploding over the next year or two. The main factor driving these decisions will be governance.

In addition to simply selling off businesses that are unprofitable, discussions are emerging about selling off even profitable businesses if they cannot be prioritized for future investment.

Cross-border M&A risks and challenges

A weak Yen cannot cause a company to forgo an outbound deal, freeze a deal, or to otherwise go ahead with a deal. Especially, in the technology industry speed is of the essence and a target company may be taken over by someone else if there is even a slight delay. While it is important to respond to changes in the business environment, I think it is more important not to lose a sense of urgency.

Also, the variation of target companies has settled down to a more manageable level compared to the past few years creating an opportunity for partnerships with such companies.

The discussion about overseas acquisitions will remain as will the idea of buying strong cash flow in foreign currencies. On the other hand, there is also the idea that it is time to sell Japan's overseas operations.

In the USA, there is a movement to regulate overseas investment. Although not yet fully implemented, in the semiconductor industry, for example, there have been cases where, instead of subsidizing investment in the USA, investment in China and other countries have been restricted, or it has become difficult to outsource manufacturing to Chinese manufacturers. These vectors are not expected to change for some time.

Overseas M&A: What should dealmakers aim for?

Considering the recent global situation, such as the tension between the U.S. and China and the Russian-Ukraine war, every industry faces supply chain problems. One angle is to take a comprehensive look at the value chain or supply chain of one's own products or services, and if there are any weak points or risks that could have a very serious impact, supplement and strengthen them through M&A or strategic alliances.

Learn more about the dealmaking trends and market forces driving deals in Japan and the rest of APAC from Datasite’s Deal Drivers reports.