The country’s quiet approach to cross-border investment is changing. Brunswick’s Matthew Brown spoke with two experts in Japan’s M&A activity: RPC Partner Nigel Collins and southgate co-founder Mangyo Kinoshita.
Japan’s social culture has colored its business activities for generations, and helped make its manufacturing sector in particular a huge success. But that culture of doing business is evolving—quickly, by Japanese standards—as a result of a combination of international influences, pressures from investors and government regulators and a shifting global economy.
In particular, the country’s international merger and acquisition activity and investments abroad, which were almost entirely halted during the 2020 as a result of the pandemic, are returning to life. Investors are expecting a surge in deals along with subtle changes in the way Japanese leadership conducts business. Pressures at home from an aging workforce and a declining population, along with pressures to create a green economy, are generating a mounting sense of urgency to demonstrate new robust growth to shareholders and investors.
To gain some insight into the current outlook and appetite for cross-border M&A in Japan, Brunswick Director Matthew Brown sat down in February with two lawyers who are experts in the space. Nigel Collins is a corporate M&A Partner specializing in Japanese business in the UK and Europe at Reynolds Porter Chamberlain (RPC), a leading full service corporate law firm based in London. Mangyo Kinoshita is licensed to practice law in Japan and California, and spent 15 years at international firms in Tokyo and New York before co-founding the Tokyo-based firm southgate in 2016 to focus on cross-border M&A and investment activity.
Collins and Kinoshita are colleagues in the field and have worked together on transactions. Between them, they’ve been involved with hundreds of international deals and investments involving Japanese companies as acquirers or targets, including some currently under way.
Japan has seen record levels of outbound M&A in recent years and a lot of it is attributed to Japanese companies going overseas for growth due to a shrinking market back home. What are the forces behind that trend and what impact has the pandemic had?
NIGEL COLLINS: The two big trends are midsize corporates following the larger Japanese corporates overseas and a big drive into the green economy. If you go back 10 years, a lot of that M&A was in the manufacturing sector. What I’ve seen over the last 10 years is many of the big Japanese corporates—the global corporates like the big Japanese banks and the insurance companies, the big manufacturing organizations like Hitachi and the trading houses, businesses such as Itochu, Mitsui, Sumitomo—they’ve gone out and done a lot of M&A all over the world. And then in typical Japanese fashion, a lot of midsize companies have followed the larger Japanese corporates. These midsized companies are still very big companies in the context of UK and European markets.
Now, we’re also seeing a big drive into the green economy. This is accelerating the diversification away from the traditional manufacturing-type M&A transactions. You can look at the announcements from companies like Mitsubishi Heavy Industries and Toshiba, who have announced mid-term management plans based on decarbonisation of industry for the years ahead.
There’s also been a wave of restructuring. There was a number of investments by some of the trading houses into tech businesses about five years ago, but over the last couple of years, a lot of those investments have stopped. They are realizing that unless they set up a specific kind of venture capital business, they’re not necessarily the best business to be making those investments and holding them in the longer term. So, there’s been some restructuring of those investments over the pandemic period.
Domestic deals remained very active last year. As a result of the pandemic, with outbound M&A, the number of deals decreased 32.6 percent. As a whole, deal value went down by almost 60 percent last year.