Japan Growing Ripe for Increased Mergers, Aquisitions, Goldman Sachs Says
Japan “is ripe” for more mergers and acquisitions as companies have ample cash and the level of takeover activity is lower than it should be, according to Goldman Sachs Group Inc.
Japanese companies should consolidate in industries where there is excessive competition, and be more aggressive in making acquisitions in Asia, where the long-term growth potential is high, Kathy Matsui, chief strategist for Goldman in Japan said today. Corporate cash balances are at record highs, the yen is near its strongest level in 15 years, share valuations are low and companies are selling cross-held shares, making mergers and acquisitions more attractive, Goldman said in a report on Aug. 28.
“Increased M&A is likely to be positive for Japan as a whole since it can lead to higher growth potential and result in economies of scale to enable Japanese firms to compete more effectively in global markets,” said Matsui in e-mailed comments today. “Despite being flush with cash, the absolute level of Japanese M&A is nowhere where it should be.”
While Japanese M&A activity has been sluggish since 2005, deals this quarter have increased 28 percent to $22 billion on a quarter-on-quarter basis, Matsui and five other analysts and strategists wrote in the report. The yen is near a 15-year high against the dollar, giving Japanese companies more buying power abroad.
Conducive to M&As
Japan is “growing ripe for increased M&A,” as about 70 percent of companies on the Topix stock index’s first section trade below book value, the report said. The Topix’s price-to- book ratio is at 0.97, its lowest level since April last year, according to Bloomberg data.
Chinese companies spent $120 million in the first half of this year to acquire Japanese enterprises, according to the report. That was a six-fold increase as Chinese firms sought to gain brands, technology and distribution networks, Matsui said.
Also, a sell-off of crossholdings is increasing the percentage of free-float shares on the market, which will make acquisitions easier, Matsui wrote. The ratio of crossheld shares to free-float shares fell to 32.6 percent in March from 34.8 percent a year earlier, the report said.
Meanwhile, the amount of cash held by nonfinancial companies on the Topix’s first section reached a record high of $580 billion in March, increasing the “firepower for acquisitions,” the report said.
Asian Takeovers Increasing
“We believe the environment has become even more conducive to increased Japanese M&A activity,” Matsui wrote in the report. “In terms of cross-border Japanese M&A, Asia-linked transactions are on the rise.”
Asian transactions are increasing and account for 20 percent of M&As involving Japanese companies, compared with 4 percent in 2000, the report said.
Shinkin Asset Management Co., which manages the equivalent of $3.8 billion in Tokyo, said an increase in M&A activity will boost Japan’s stock market as benefits can be derived from owning company shares on both the acquiring side and the companies that are bought.
“Japanese companies that buy firms abroad may see their stock prices jump on expectations that their business will grow. We can hope for a premium for the companies that are being bought,” said Hiroshi Fujimoto, a fund manager at Shinkin Asset. “While it’s hard to know which companies will be involved in M&As beforehand, we are always watching stocks with low price- to-book valuations as they are easier targets for takeovers.”
Companies likely to be involved in M&A activity include those with high internal rates of return, companies that have at least $2 billion cash and subsidiaries that may be acquired by their parent, the report said.
Companies that have high internal rates of return include Elpida Memory Inc., Renesas Electronics Corp. and Kawasaki Kisen Kaisha Ltd., according to the report. Toyota Motor Corp., Honda Motor Co., and Denso Corp. have cash for acquisitions, while Oriental Yeast Co., NS Solutions Corp. and Nissin Electric Co. are subsidiaries that may be absorbed by their parents, the report said.
To contact the reporters on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net; Satoshi Kawano in Tokyo skawano1@bloomberg.net
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