JAPAN: An Introduction to Japan

Japan Overview – M&A 

by southgate

Global M&A activity generally remains flat or is falling slightly, but Japan is bucking this trend with a remarkable period of deal-making. Domestic and outbound M&A continues to surge, while inbound M&A lags behind, as overseas investors have their sights on China, Vietnam and other part of Asia with higher growth rates. Domestic and outbound deal volumes are each about 10 to 15 times higher than inbound deal volumes.

Domestic deals are keeping Japanese firms extremely busy, as Japanese corporates continue to shed and pick up assets at a steady clip in a slow but determined effort to consolidate and regroup in a shrinking home market. Notable deals in 2019 included Yahoo Japan’s tie-up with messaging app operator Line to create a USD30 billion tech giant, as well as Yahoo Japan’s USD3.7 billion bid for a majority stake in Zozo Inc., Japan’s largest online fashion retailer.

The main driver for M&A activity in Japan is outbound acquisitions, made inevitable by the nation’s falling demographics, in concert with the ever-growing war chests of Japanese corporates and their mandates to redeploy their capital into higher-growth markets. Small- and mid-cap deals are leading this outward push, as local players that have come to realise that they must expand overseas to survive are taking their first timid steps outside of Japan, while established MNCs continue to snap up targets to strengthen their global presence, facilitated by access to cheap financing from Japanese mega-banks. And, as in years past, 2019 saw its share of outbound mega-deals: Japanese pharmaceutical company Takeda paid USD65 billion for Shire plc in the largest ever acquisition by a Japanese company, Asahi Group Holdings acquired AB InBev’s Australian operations Carlton United for USD11 billion, Tokyo Century agreed to acquire US-based Aviation Capital Group, and Softbank acquired a majority stake of WeWork. Asia attracts the highest volume of Japanese outbound deals while the US and Europe attract the biggest ones.

Developments  

The trends described above are not new, but the Japanese M&A market did witness some noteworthy developments. First, activist shareholders are beginning to make discreet forays into corporate Japan for the first time in nearly a decade. As in the past, activist shareholders count many overseas investors among their ranks, but this time around they are being joined by domestic corporate activists in greater numbers than before. Notably, Japanese corporates have been asserting their rights as shareholders with increased vigour.

2019 also saw a very rare event in Japan occur twice: hostile takeovers. Trading house Itochu completed what is viewed as the first ever successful hostile takeover in Japan through the acquisition of a blocking stake and the implementation of management changes in sportswear maker Descent. And the end of the year saw Kokuyo initiate a hostile takeover bid for its stationery rival Pentel.

In an effort to spur outbound acquisitions, Japan passed the Act on Facilitating Industrial Competitiveness in 2013, which relaxed the procedures for stock swaps with foreign firms. In 2019, TSE-listed Datasection became the first company ever to make use of this law when it acquired the Jach group based in Chile.

Japan is quite open to foreign investment, but like the US and many other jurisdictions around the globe, it is heightening its scrutiny of foreign acquisitions in sensitive industries. Amendments to the Foreign Exchange and Foreign Trade Act that came into effect on August 31, 2019 expanded the scope of prior notification and governmental approval requirements to include foreign acquisitions of 10% or more of the shares of data processing and information and communications technology-related businesses. Given the high number of Japanese data and ICT companies, these amendments capture many inbound transactions. The waiting period for regulatory review is 30 days and can be extended up to five months, though in many cases approval is granted within two weeks.

Finally, Japanese corporates are increasingly active in corporate venture capital (CVC). The Japanese VC market is too small for most Japanese CVCs, who direct their attention first and foremost to Silicon Valley, followed by other tech centres in the US, Asia, Europe and Israel. Most CVCs invest to get a “first peek” at new technologies and trends, but many invest with the objective of eventually acquiring their portfolio companies, which should lead to increased M&A activity in those regions.

The Japanese Legal M&A Market

The so-called “Big 4” or “Big 5” domestic law firms have long dominated the domestic M&A market and, to a lesser extent, the inbound market, but they are now committing considerable resources to outbound practices, which were previously the province of international firms in Tokyo. Japanese firms have been especially aggressive in their expansion in Asia, by sending attorneys on secondment at local firms throughout the region, opening offices in the major business hubs in Southeast Asia, and acquiring local firms (Mori Hamada acquired the 50-lawyer Bangkok-based Chandler in 2016 and Nishimura acquired the 60-lawyer Thai firm SCL Law Group in 2019). The major Japanese firms have been less active in the Americas and Europe, where the international firms with a presence in Tokyo remain very strong.

If an international investor is able to identify a Japanese firm, that firm will very likely belong to the Big 4/Big 5, but Tokyo is full of small but outstanding firms that are capable of handling very sophisticated and complex domestic and cross-border deals. Some of these firms have been around for decades and others just for a few years. Most of these newer firms are offshoots of the Big 4 and some of international firms. A few of these firms feature in this year’s Chambers guide and it is likely that their number will increase in future editions.

As in other parts of the world, the accounting firms have been building out their legal arms in Tokyo. Their presence here remains modest compared to Europe, but they have been adding to their ranks by recruiting from strong domestic and international firms.

As companies in Japan, both domestic and foreign, are accelerating their recruitment of qualified attorneys for their growing in-house legal departments (in part to support the increase in M&A activity), and law firms expand their ranks to keep pace with M&A activity, the war for legal talent in Japan continues to intensify.

The presence of the Big 4 in Japan for 60-70 years and the fact that many of the international firms are celebrating the 35th anniversaries of their Tokyo offices suggest a stable legal market, but law firms in Japan – foreign and domestic, large and small – are evolving to respond to the changing needs and demands of their clients.