Japanese giants hungry for acquisitions

WHEN Japanese mobile operator Softbank smashed records on Monday with a $20.1bn (£12.5bn) deal for 70 per cent of Sprint, it was the largest-ever foreign acquisition by a Japanese company. The acquisition has created a company of 92m mobile users and propels Softbank Group into third place – behind China Mobile and Verizon Wireless – in terms of mobile revenue. It is hoped that the bolstering of Sprint’s finances will put it in a strong position to break what Softbank chief executive, Masayoshi Son referred to as a duopolistic market in the US telecoms sector, with AT&T and Verizon dominating the market.

This headline-grabbing acquisition comes as part of a resurgence in Japanese foreign M&A activity – in stark contrast with the barren landscape in European markets.

Despite threats by Tokyo officials to intervene in the yen, it is this strong currency that has underpinned the surge in Japanese corporate acquisitions of foreign companies. At the International Monetary Fund’s annual meeting in Tokyo last week, Japanese officials warned that the strength of the yen was a serious problem for the economy. This speculation has lead to a short-term fall in the yen against the dollar, but the six-month bearish trend in dollar-yen is still intact. A mixture of funds unwinding carry trade positions and yen repatriation has strengthened this trend and put Japanese corporations on a strong footing – driving their merger and acquisition activity in North America to near-record levels. The number of US and Canadian acquisitions are up to 119, a year-on-year increase of over 60 per cent. This is part of 364 mergers and acquisitions of foreign companies in the first nine months of 2012.

Of course, we’ve seen this kind of activity before. In the 1980s and early 1990s trophy acquisitions – such as Mitsubishi Estate’s investment in the Rockefeller centre, Sony’s $3.4bn acquisition of Columbia Pictures and Matsushita’s takeover of Matsushita’s takeover of Universal Pictures’ parent company, MCA – led many to opine that Japan wanted to buy American assets and they didn’t care what they paid for it. But rather than buying for buying’s sake, this new wave of expansion is coming out of necessity. Japan’s domestic market is shrinking – its population is expected to fall by some 800,000 a year, depressing demand across the board. At the same time, the fall-out from last year’s tsunami and nuclear disaster highlighted Japan’s reliance on Asian markets, meaning a downturn for Japan usually went hand-in-hand with a downturn in demand from end partners.

As well as their strong currency position, cash-rich Japanese corporations are also seeing the benefit of European uncertainty. As economic instability pushes investment funds to divest out of their US and European holdings in order to strengthen their cash reserves, Japanese firms are waiting in the wings.

There is the risk that a decline in yen strength – though a boon for the domestic Japanese economy – would weaken Japan’s outbound M&A renaissance. But previous yen repatriation attempts by its central bank have seen only short lived success, and in the long term, US financial worries should keep dollar-yen below the ¥ 80 mark.

Instead, competition in the European and US M&A sphere could come from cash-heavy emerging market corporations –Brazilian tech company Cielo’s $670m acquisition of Merchant eSolutions, and Thai Indorama Ventures’ $760m purchase of Advance America Cash Advance Centers could be a sign of things to come.