Japanese companies, largely overlooked in China’s five-year, $182 billion overseas acquisition spree, are set to become targets as falling valuations increase the allure of brands and technology.
China’s stock market capitalization swelled about seven times since 2005 to $3.8 trillion, almost closing the gap with Japan, and its economy is set to overtake Japan’s as the world’s second largest this year. While Chinese companies have been buoyed by rising valuations and cash piles, Japan’s benchmark Nikkei 225 Average fell by a third in the past five years as confidence in its economic policies waned.
“There is increasing interest from Chinese corporations in buying technology in Japan, and I expect that interest to develop,” said Marcus Stein, Deutsche Bank AG’s co-head of mergers and acquisitions for Japan.
Companies based in China and Hong Kong announced 44 acquisitions in Japan worth a combined $437.7 million since Jan. 1, the highest deal count in a decade, according to data compiled by Bloomberg.
Sumitomo Mitsui Financial Group Inc., Japan’s second-largest bank by market value, is starting a merger advisory unit in Shanghai, betting transactions between the two countries will continue to increase.
Kenji Orimo, chief pattern designer at Japanese clothing maker Toray Diplomode Inc., said he expects more companies -- including his own -- to become targets for Chinese buyers.
“The day may come in the near future when we will have to start our morning meeting with ‘Ni hao,’” Orimo, 44, said in an interview, referring to a commonly used Chinese greeting.
In July, 108-year-old Japanese apparel maker Renown Inc. sold a 42 percent stake to Chinese rival Shandong Ruyi Science & Technology Group Co. for 4 billion yen ($50 million). Renown shares had lost about 60 percent in the two years to May 21, the last trading day before the deal was first reported.
Higashiyama Film Co., a film manufacturer, and consumer electronics chain Laox Co. are among other Japanese assets targeted by companies in China and Hong Kong this year. Hong Kong is a special administrative region of China that retained its own legal and financial system after returning from British rule in 1997.
Suning Appliance Co., based in Nanjing, eastern China, said Aug. 16 it planned to spend 159 million yuan ($24 million) to boost its stake in Tokyo-based Laox. CITIC Capital Holdings Ltd. and other investors bought a majority stake in Higashiyama Film for 1.5 billion yen in June.
“Acquisitions by Chinese firms in Japan will increase in terms of numbers and values in 2011,” said Masaya Oowada, head of merger advisory operation at Nikko Cordial Securities Inc., which advised Renown. “Japanese apparel makers and the food industry will be targets.”
Chinese acquisitions in Japan defied territorial disputes in the East China Sea that have strained diplomatic ties. Chinese tourism in Japan has been hurt by tensions that flared in September when a Chinese fishing boat collided with a Japanese coast guard vessel near the disputed Senkaku islands, according to Japan National Tourism Organization.
Japan remains far from a top priority among Chinese and Hong Kong companies and investors, which announced overseas acquisitions valued at a combined $82.3 billion in 2010, a 37 percent increase from last year, according to Bloomberg data.
“While I expect more activity to come, there is still a relatively long way to go before we see that activity significantly increasing,” said Deutsche Bank’s Stein.
Still, the “sense of resistance” among Japanese executives to selling out to Chinese buyers is weakening as China’s emergence as an economic superpower persuades them of the merits of deals, said Nikko Cordial’s Oowada.
Since China began gradually introducing a capitalist system in 1978 after the death of Mao Zedong, the economy has grown more than 90 times. The government has encouraged state-owned companies to pursue acquisitions abroad to secure raw materials, technology and brands.
Corporate deposits, a proxy for the amount of cash Chinese companies wield, reached a record $3.5 trillion in September, Bloomberg data show.
Japan, meanwhile, has stagnated since its bubble economy deflated in the late 1980s. The Nikkei 225 has lost about 75 percent from its 1989 peak, and annual gross domestic product is hovering around 1992 levels in nominal terms.
The Nikkei 225 rose less than 1 percent to 10,311.29 today. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 0.5 percent to 2898.138.
“It’s our mission to navigate Japanese companies to the entrance of China’s market through M&A,” said Toyoaki Kishihara, president of SMBC Nikko Investment Consulting (Shanghai) Ltd., which is scheduled to start operations on Jan. 4.
Toray Diplomode’s Orimo, who’s been trying to hone his skills by listening to Chinese-language radio broadcasts in Tokyo since a trip to Shanghai last year, said he plans to start taking private lessons.
“I don’t want to be just a soldier when a Chinese firm acquires my company,” Orimo said. “I would want to get involved in the new management by brushing up on my communication skills.”