Japan Goes Shopping—and Not Just for Sprint
Masayoshi Son’s $20.1 billion bid for SoftBank to buy control of Sprint is the biggest outbound Japanese takeover in at least a dozen years. It’s also the latest and largest example of a new movement by Japanese companies to look abroad for growth. With Japan’s population shrinking and the economy stalled, Son and many other Japanese executives realize they need to head overseas.
That’s leading to a flood of deals. So far this year, Japanese companies have announced $96 billion in foreign takeovers, exceeding last year’s $87 billion. In March, Asahi Kasei announced the acquisition of Zoll Medical, in Chelmsford, Mass., for $2.06 billion in cash. Other big deals include Marubeni’s takeover of Omaha agricultural operations company Gavilon Group for $3.6 billion in cash and $2 billion in debt, announced May 29; Dentsu’s $4.54 billion purchase of British advertising company Aegis Group, announced July 12, and Daikin Industries’ purchase of Goodman Global Group, a Houston-based producer of heating and air-conditioning systems, for $3.7 billion cash, announced Aug. 29. On Sept. 17, Itochu Corp. purchased Dole Food’s worldwide packaged food business and its Asian fresh produce business for $1.685 billion in cash. Then, on Monday, SoftBank’s boss went on stage with Dan Hesse, the chief executive of Sprint, to announce plans to purchase 70 percent of the U.S. telecom operator.
For these Japanese companies, securing funding is surprisingly easy. Having finally gotten over their post-bubble trauma, Japanese banks are in good shape compared with many of their Western rivals, says Frederic Neumann, managing director and co-head of Asian Economic Research at HSBC in Hong Kong. Moreover, the Bank of Japan’s zero-interest rate policy and the government’s eagerness to prevent further strengthening of the yen provide further incentives for banks to lend to companies doing deals outside the country.
“These banks are looking to expand. They want to grow, but they don’t really have the opportunity to do that domestically,” Neumann says. With the strong yen, affordable valuations, and languishing economy, “there is an overwhelming incentive for Japanese companies go abroad.”
During the bubble years, Japanese investors splurged on prestige names, buying such trophy real estate as Rockefeller Center, Pebble Beach, and several Hollywood studios. Many of those investments soured after the collapse of the Japanese property and stock market bubbles, and for years after, Japanese tried to overcome their reputation for dumb deals. But as Bloomberg News reported in a story on Wednesday, Japanese dealmakers don’t quite have the Midas touch. Japanese companies involved in the 10 biggest overseas purchases from 2000 to 2011 suffered a combined $330 billion loss in market value. Of the 10 companies, only two gained in value. “The track record is terrible,” Stephen Givens, an M&A lawyer in Tokyo, told Bloomberg News.
Even so, there’s little incentive to stick with a domestic economy going nowhere. Boosted by the strong yen and supportive banks, where are Japanese likely to go? Despite the earlier problems, the U.S. remains the top choice. Yes, the unemployment rate remains high, and there’s the fiscal cliff looming after next month’s election, but compared with alternative destinations, such as Europe, Neumann believes the U.S. is looking good. “There are clear signs the economy is over the worst and starting to recover,” he says. For the rest of this year and into 2013, “the U.S. will be a prime target” for Japanese dealmakers.
The U.S. also stands to benefit as Japanese investors stay clear of China. With the two countries caught up in a nasty dispute over islands in the East China Sea, Sino-Japanese relations are at their lowest point in years. The visit on Thursday by two Japanese cabinet members to the Yasukini Shrine in Tokyo, coming just a day after opposition leader Shinzo Abe went to the shrine, may just make a bad situation worse. The Yasukini Shrine commemorates Japan’s war dead and includes leaders from the Second World War convicted of war crimes. Even at the best of times, visits by Japanese politicians to the shrine inflame tensions in the region.
Japanese businesses in China are suffering. Toyota, Nissan, and Honda’s sales in China plunged last month as Chinese consumers boycotted Japanese products.
But even if Chinese demonstrators weren’t overturning Japanese cars in the streets of China’s cities, the Chinese market wouldn’t be a main target for Japanese investors, according to Ben Collett, head of Japanese equities at Louis Capital Markets in Hong Kong. China is at the end of its fast-growth years, he says, and because of an aging population caused by the one-child policy, it faces some of the same problems as its neighbor to the east. Already, workers are harder to come by for factories in Guangdong and other centers of labor-intensive manufacturing, and that problem is likely to get worse as the number of young people entering the workforce shrinks. “The demographics in China are not really that far behind Japan,” says Collett. “China’s young-population story has passed.”
One country that doesn’t have a demographic problem is the U.S., which is far more open to immigration than the two big Asian economies. “The real demographic growth in terms of volume is going to come out of the U.S.,” he says. For investors looking for growth in big economies, “everything points to the U.S.”