Japan’s M&A under the microscope

Bruce Pomer is Managing Partner of WESTGATE ADVISORY and an investment banker working in Tokyo. With his vision into Japanese companies, Bruce shared with me his views on Japan’s M&A activity.

As background, Bruce grew up listening to the Beatles. The idea that “It’s a small world (after all)” was catching on, a thought made popular by the Sherman Brothers’ boat ride song. Desirous of exploring that “small world”, Bruce left his native Toronto for Japan in 1980. He studied Japanese intensively, became a translator, and wrote annual reports for a living. Later he became an investment banker, work that brought him into routine and close contact with senior Japanese business leaders. Thirty-two years after his first arriving in Japan, Bruce convincingly argues that he understands what makes Japanese companies tick. Now he sources M&A deals from around the world. Recently he represented Kintetsu World Express (KWE), Japan’s largest airfreight forwarding company. KWE made a $ 50 million joint venture investment into Gati Limited, an Indian logistics company. The deal took a year to negotiate and is awaiting the formalities of final government approval.

About that deal Bruce said –

The Japanese are going to India because manufacturers and suppliers are increasingly moving there. The fundamental problem in Japan is the lack of economic growth. The population is shrinking and aging. When you get outside Tokyo to the smaller towns like Wakayama, a beautiful coastal town in Kansai, they’re losing half their population due to the hollowing out of Japan. Osaka is trying to stay alive. Kobe, the San Francisco of Japan that has oceans, mountains, a port and great food, is struggling. It’s a shame because these cities like Sendai, Fukuoka, Kobe, and Kagoshima are great cities.

There is a deep well of economic trouble. Companies who have the capacity and resources have no choice other than to go outside Japan because there is no growth here. For someone like me, there is much opportunity. Most everyone is stuck, especially small to medium-size companies. These companies do not have the resources to develop outside of Japan. Eventually, some of them are going to become targets. Even mid-sized pharmaceutical companies will eventually be acquired or merged. When they can afford to do so, big companies achieve growth by buying foreign companies. For instance, Takeda spent almost $14 billion to buy Nycomed in Switzerland. So there’s a lot to do.

M&A is interesting because you need to understand all aspects from the macro global dynamics of an industry, to a company’s balance sheet, including management, marketing, manufacturing, competitors, deal structure and negotiations. When you take all that and throw in cross border deals with India, Israel, and Vietnam, it’s fascinating.

In my view, M&A in Japan started in earnest in 2000. Before that you could not visit a Japanese company and ask them to sell their business. It was considered improper and rude because selling your own company is miuri (selling yourself). It’s a negative event.

Japanese don’t look to Exit their companies to make money (although a few companies like Takeda Pharmaceutical were enlightened and sold their non-core businesses). Generally speaking, they Exit when they have to. I believe more often than not the senior management is concerned with their own position. They don’t want to rock the boat by causing trouble. If they buy or sell a company and the result doesn’t work out well, it may come back to haunt them. It’s not as altruistic as you might think. At the end of the day, humans are humans. Hobbes, Locke, and Machiavelli got it right when they said we are self-interested creatures securing our own self-motivations and interests. I don’t think the Japanese are any different. Perhaps they shroud it to make it look good.

Those that are most likely to sell businesses are either foreign companies or older Japanese that have successor issues or troubled companies. Good companies that enjoy growth and profits are generally not for sale. When I was at Bank of America, I represented people like Mike Alfant when he sold Fusion Systems. At Shinsei Bank, I represented Oak Lawn Marketing in the sale of 51% to NTT Docomo. These were entrepreneurially owned foreign companies. Foreign entrepreneurs build businesses. Then they sell them, and go and do something else. When young Japanese build a business, they tend to keep it for life. The reason they don’t sell may be that they associate their own self-esteem and self-worth with the company. If they were to sell it, they would lose their social status as president of the company. These entrepreneurs may also not have the confidence that, once sold, they could do it again. I’ve been out with one young president whose company had a market value of $3 billion with much smaller sales. I suggested to him that he should sell it, because the business was over valued. He replied, “Why?” The company has since fallen from this lofty valuation and is worth only a fraction of what it once was.

There are other reasons Japanese don’t sell their businesses. Japan suffers from a lack of entrepreneurial drive. I’ve had senior Japanese managers from large companies that couldn’t understand why you would sell a good business. They do not understand the concept of monetizing a business to go on to do other things. It’s unfortunate because the new, young, and vigorous entrepreneurs that can ‘shake and bake’ and ‘rock ‘n roll’, just aren’t there. The economy, with its aging and declining population, doesn’t have much vigor.

In addition, the banks and the venture capitalists are reluctant to provide financing to new ventures. There is no real VC industry here. VC investors generally want to invest in companies with established track records. That’s not venture capital. In the United States, venture capital investors more often look for entrepreneurs and managers that have failed before. The attitude is, “Great. You have got experience. Now you know how to do it right the next time”. So failure is good.

In Japan there are salary men companies and owner companies. Owner companies are the ones that are active. Owners like Nidec’s Nagamori-san and before him Kyocera’s Inamori-san, Sony’s Morita-san, Toyota’s Toyota-san and Takeda’s Takeda-san were all motivated. People like this know what it takes to build a company. They know the hardships. They understand the risks, motivations and the incentives. As to the majority of the salary men companies, they’re only incentive is to retire with security. Even if they have a major success, they don’t make a lot more money. But if they screw up, they can lose their position. They could jeopardize their future retirement. So why do it? What is the upside? Salary men companies are not incentivized to take risks.

This country could be vigorous and dynamic but it’s lacking leadership in the corporate world and in the political world. Japan, as far as I’m concerned, has the best labor force in the world. It’s educated, well read, and they care. They have the right attitude. Tokyo is also one of the best cities in the world. The quality of life doesn’t get better. It’s safe. It’s clean. The Restaurants and service are great. That creates a sense of complacency. People are intelligent, bright and creative. But it is not there now. That’s mottainai (it’s a pity). Until it returns the country will not be dynamic as it should be.

Sill for me, what I’m doing is fascinating. It’s very personal. I have kids here. I care about this place. Sometimes it’s frustrating, but I love it.

Westgate Advisory Co., Ltd. www.westgateadvisory.com

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