Japan Mergers Fall to Nine-Year Low as Yen Volatility Surges

Japanese companies made the fewest acquisitions in a decade during the first half as the yen’s volatility climbed to a four-year high, cooling buying interest.

The number of deals announced in the first half of 2013 was 997, with a total value of $45.7 billion, according to data compiled by Bloomberg. That’s the lowest number of deals and value since the first six months of 2004. Total deal value is 47 percent lower from the first half of 2012.

Since Prime Minister Shinzo Abe swept into power in December on promises to resurrect the economy by expanding stimulus measures and weakening the yen, the Japanese currency has whipsawed between 82.36 yen and 103.21 yen to the dollar. The yen’s 100-day volatility rose to 14.81 points in July, the highest since August 2009, and more than double the 6.97 figure at the start of the year.

“Companies had set their budgets for the year as of April-May under certain assumptions, but they’re not sure they will hold,” said Nobuhisa Ishizuka, a Tokyo-based partner specializing in mergers at Skadden, Arps, Slate, Meagher & Flom LLP. “This makes it difficult for a lot of them to pull the trigger.”

Currency options show volatility in the yen is set to continue, which could force companies to cut the size of deals or delay them. JPMorgan Chase & Co.’s Group of Seven Volatility Index, based on currency-option premiums, climbed to 11.96 percent on June 24, the highest since January 2012.

Smaller Size

Marubeni Corp., Japan’s sixth-most acquisitive company in the last five years, last month cut the size of its purchase to buy U.S. grain trader Gavilon Group LLC by $1 billion from the $3.6 billion announced in May 2012 by excluding the energy unit from the final agreement. The trader said July 6 that it paid $2.7 billion for Gavilon in the end because of a “purchase price adjustment,” without providing details.

Masami Iijima, chief executive officer of Mitsui & Co., Japan’s most acquisitive company in the last five years, said in May the trading house doesn’t plan any major acquisitions that are “significant in size.” The Tokyo-based trader will focus on expanding existing assets as slowing Chinese economic growth cooled demand for commodities, Iijima said.

The yen, which traded at 101.00 to the dollar at 3:11 p.m. in Tokyo, has a 49 percent chance of strengthening to 95 and a 48 percent chance of weakening to 105 within the next three months, according to Bloomberg data based on options pricing.

The yen was the worst performer among the 10 most-traded currencies in Bloomberg Correlated-Weighted Indexes this year, tumbling 9 percent.

Stoked by the yen’s stability and strength in recent years, companies across Japan’s industries had stepped up acquisitions overseas. SoftBank Corp. last October announced its takeover of Sprint Nextel Corp. of the U.S., now valued at $21.6 billion, the biggest overseas deal by a Japanese company since 2000.

Second-Half Bounce

The total number of domestic and overseas acquisitions announced by Japanese companies in the first six months of last year was 1,167, the data show. The total deal value was $85.5 billion, according to the data.

Overseas mergers and acquisitions by Japanese firms fell to $10.6 billion this year from a record $112 billion for all of 2012, the data showed.

Mitsubishi Corp., the nation’s biggest trading house, announced the most deals in the first six months with 12, data show. The biggest transaction proposed was the $3.25 billion merger of the thermal power units of Hitachi Ltd. and Mitsubishi Heavy Industries Ltd.

Deal Pipeline

Japanese acquisitions abroad will recover in the second half as companies make adjustments to cope with the weaker yen, said Yuichi Jimbo, head of investment banking at Citigroup Global Markets Japan Inc. in Tokyo. The bank has some deals that may be announced before year-end, he said in June.

Mitsubishi UFJ Financial Group Inc. said July 3 that it plans to buy Thailand’s Bank of Ayudhya Pcl for as much as 560 billion yen ($5.6 billion) in the largest banking takeover in the Southeast Asian nation. The tender offer for as much as 75 percent of the Bangkok-based lender’s stock is Japan’s biggest deal of the year so far.

Consumer companies may need to pursue overseas deals to offset the country’s long-term population decline and anemic domestic demand. Newly listed soft drinks company Suntory Beverage & Food Ltd. said last week it plans to use some of the proceeds from its $4 billion initial public offering for acquisitions in growth markets outside Japan.

Some companies have been slow to react to the yen’s volatility, and may not trust the currency to stay at current levels, the weakest in about five years, said Dale Caldwell, a Tokyo-based partner at Morrison & Foerster LLP, which advised SoftBank on Sprint.

“It may be that they see the weakening as a temporary adjustment and it’s just going to go the other way again,” Caldwell said. “Until they see things slow down, it may not be wise to make a move.”

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