Dentsu: An Advertising Mega-Agency Is Born

Advertising agency Dentsu’s bold $4.9 billion buyout of British media-buying firm Aegis Group is yet another reminder of the acquisitive mood among Japanese companies these days. A superstrong yen and stagnant domestic economy have prompted cash-rich companies to do $125 billion worth of cross-border deals since the start of 2011, according to data compiled by Bloomberg. The merger boomlet is certainly keeping investment bankers busy, though whether this dealmaking is doing much good for corporate bottom lines or shareholders is far from clear.

In recent years, Nomura Holdings’ purchase of some Lehman Brothers brokerage and investment banking assets in Asia and Europe and drugmaker Daiichi Sankyo’s takeover of India’s Ranbaxy Laboratories have resulted in financial setbacks for both companies. Dentsu’s stock fell about 7 percent on July 13, the day after the firm announced its deal, and hit a 56-week low four days later because of worries that the firm was paying too much for Aegis and might face difficulties profitably integrating two operations with different cultures. “Japanese companies need to become more careful about generating profit and creating synergies out of buyouts,” says Masamitsu Ohki, a fund manager at Tokyo-based Stats Investment Management. Companies in Japan “tend to go for a transaction just because they are looking for a growth driver or expansion overseas. There has to be a realistic plan of earnings that will follow a deal,” he says.