Report Summary

Japanese companies are on another cross-border buying spree. Will they be successful in creating value from their investments? To find out, the Economist Intelligence Unit interviewed a variety of senior managers at Japanese companies about their outbound M&A strategies and processes. Why and where are they pursuing foreign assets? What are the internal processes that they follow in doing so? What lessons have they learned from their previous successful (and not-so-successful) cross-border transactions? What pitfalls shouldbe avoided in various stages of the deal and post-merger process? Can Japanese buyers overcome these challenges to ensure that buying foreign assets actually creates value for shareholders?

Japanese companies are on another cross-border buying spree. After binges in the late 1980s and late 1990s—fuelled first by soaring asset prices at home and then a global technology boom—Japanese companies are again acquiring foreign assets in record numbers. In 2011, according to Thomson Reuters, they did a total of 642 deals, the highest in history and a 21% increase on the previous year. The aggregate value of all outbound deals last year was US$69.5bn, up 81% from 2010 and another all-time record.

The first two buying sprees were arguably as notable for their hubris as much as their success. Is this time any different? Certainly the conditions are more favourable. With economies in Europe and the US struggling and the yen soaring, foreign assets are cheap. The macroeconomic driver —shrinking domestic demand, higher production costs at home and increasing competition for resources with highgrowth neighbours—are similarly compelling. Notably, rather than buying “trophy assets”, Japanese buyers now seem more likely to take full control of businesses overseas in areas of core strength, for a variety of sound strategic reasons. Do these trends mean they will be more successful in creating value from their investments?

To find out, the Economist Intelligence Unit interviewed a variety of senior managers at Japanese companies about their outbound M&A strategies and processes. Why and where are they pursuing foreign assets? What are the internal processes that they follow in doing so? What lessons have they learned from their previous successful (and not-so-successful) cross-border transactions? What pitfalls should be avoided in various stages of the deal and post-merger process? Can Japanese buyers overcome these challenges to ensure that buying foreign assets actually creates value for shareholders?

Generally, many mergers and acquisitions, even of firms within the same country, fail to pass this simple test. Japanese companies are no better equipped than others to make M&A work. Indeed, research for this report suggests they face a set of additional challenges when pursuing overseas M&A, particularly those that entail the acquisition of a controlling stake and require a measure of integration to yield returns (the principal focus of this report). These challenges underpin most of the issues discussed below and can be summarised as follows.

• Japanese buyers that rely only on long-term strategy, without plans for quick action on integration, risk failure. Japanese
  companies typically sustain a longer-term outlook for their investments than many target companies are used to. This often bodes ill when pursuing M&A if a Japanese buyer’s strategy does not include plans for immediate implementation. The buyer might have certain ideas for achieving synergies, but it might not think they require immediate action as soon as the deal is complete.
   
• Failure to act quickly can result in lack of control over management at the target company. Going into a transaction with only a long-term strategy might mean acquirers fail to incentivise the target’s management to deliver short-term results at specified times, post-completion. Managers in the target firm who don’t understand this mentality will come away believing their new shareholders do not have a clear strategy. This destroys morale and increases professional uncertainty for managers in the acquired firm.
   
• Many processes recommended for successful outbound M&A go against established Japanese business culture. For instance, many Japanese managers retain an “insider-outsider” mindset, meaning they are unwilling and unprepared to impose the parent firm’s philosophy on “outsiders”, challenge the target’s management or establish full control of the acquired business. As a result, the two entities remain culturally, organisationally and philosophically distinct, and potential synergies remain unrealised.
   
• Cultural differences also make Japanese buyers slow to take action and reluctant to walk away if prospective deals become
  unattractive. Japan’s typical consensus-driven and bottom–up decisionmaking process means that opportunities that require swift action may be lost to rivals. More significantly, it means that once consensus is reached, reversing a decision often becomes impossible, even if due diligence suggests it is wise to do so. Consequently, interviewees for the report recommend the following best practices for Japanese acquirers of overseas businesses:
   
• Establish special M&A teams empowered to make top-down decisions, and conduct thorough due diligence. Experienced
  dealmakers stress that acquirers should ensure decisions are made top-down, and quickly. Establishing special taskforces empowered to take charge of the transaction is often effective. Due diligence should involve a thorough investigation, particularly of the target’s human resources. Communication should be open, direct and explicit. Depending on the sector, it may also be necessary to conduct due diligence on the potential impact of changing regulations and the political environment.
   
• Be willing to walk away if the deal becomes unattractive. Some analysts estimate that only a quarter of Japanese buyers are prepared to abandon deals during the latter stages of the acquisition process, compared to three-quarters of Western firms. Being able to walk away from a deal, even after time and effort has been invested in the approach, is crucial.
   
• Establish control from the word go. If a deal is to proceed, control should be established from the very beginning. Telling the target, “Please continue as normal,” sends the wrong message. Buyers should establish authority and set time-specific targets immediately, based on thorough (and independent) research during the due diligence phase.