Analysis: Japan Inc bets on M&A, boosted by yen strength

TOKYO Tue Aug 17, 2010 2:39am EDT

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TOKYO (Reuters) - The rising yen is helping reignite a push by Japanese companies to snap up overseas assets and secure growth outside their sluggish home market, after the financial crisis quieted their dealmaking last year.

Bankers report a strong appetite for deals across all industries -- from Hitachi Ltd (6501.T) hunting for an information technology services firm to brewers seeking growth in Asia and trading houses looking to invest in water and iron ore.

Japanese firms have spent $27 billion buying overseas rivals so far in 2010, already more than the $21 billion of acquisitions for all of 2009, though short of the pace in 2008 when they cut a record $68 billion in deals, Thomson Reuters data shows.

"Japanese companies need to go abroad to seek growth," said Tomonori Ito, co-head of investment banking at UBS Securities Japan. "The environment for M&A is ripe with the yen gaining strength against the dollar and the euro, and share prices of target companies having come down to a good level."

The yen surged to a 15-year high against the dollar last week and has gained 18 percent on the euro this year, lowering the price of targets in yen terms.

Japanese executives are worried about a further deterioration of economic conditions in the United States and Europe and slowing growth in China, which could temper their fervor for deals regardless of currency levels.

The firm yen is also slicing into the profits of auto and technology exporters that get most of their sales outside Japan.

But opportunity knocks for companies with plenty of cash and whose earnings are less vulnerable or even boosted by yen strength. At the same time, the slide in global stock markets has depressed valuations to more attractive levels.

The yen's surge has amplified the purchasing power of an already ample pile of cash. Non-financial firms were sitting on 144 trillion yen ($1.67 trillion) in cash and deposits as of end- March, up 8.5 percent from a year earlier and the second highest quarterly total in two decades, government data shows.

Bankers say the yen's level is never the main driver behind a transaction. Increasingly, deals are financed in part in the local currency and companies will consider the negative impact of yen strength on sales in the target's market.

But it can act as an important catalyst.

"It's 85 yen for a dollar. We love the strong yen," said Hiroshi Mikitani, CEO of Internet shopping mall Rakuten Inc 4755.Q, which recently bought U.S. and French online firms and wants to enter four more countries by the end of the year.

BIG DEALS, BIG RISKS

Japanese companies have a patchy reputation for dealmaking that stems from famously overpaying for trophy properties before the country's economic bubble burst in the early 1990's and a string of disastrous acquisitions at the height of the IT bubble.

More recently, Daiichi Sankyo Co's (4568.T) purchase of a majority stake in Indian generic drug maker Ranbaxy (RANB.BO) in 2008 and subsequent write-down a few months later was a reminder of the risks inherent in a big overseas deal.

But executives are more worried of being left further behind by hard-charging global rivals such as South Korea's Samsung Electronics (005930.KS), whose rise to the top of the semiconductor and flat TV markets is a reflection of the broad decline in the competitiveness of Japan's technology sector.

For electronics firms like Sharp Corp (6753.T) and Hitachi, which has said it is looking to buy an IT firm with about $3 billion in sales, acquisitions are one way of closing the gap.

"Japanese companies are not taking advantage of the growth of overseas markets. The bigger overseas markets become, the smaller their market shares will be," said Masaya Oowada, who heads mergers and acquisitions at Nikko Cordial Securities.

Against that backdrop, Japanese firms are under pressure to act more quickly and be more flexible in structuring deals.

Nowhere is this more apparent than in the battle for natural resources, where trading houses such as Mitsubishi Corp (8058.T) and Mitsui & Co (8031.T) are increasingly up against Chinese rivals with deep pockets and state support.

Mitsubishi was part of a public-private consortium that agreed to buy an Australian water firm in May for about $200 million.

"Japanese companies are really getting more active in M&A and maybe looking at doing deals in more innovative ways," said Jerome Finck, a director at Global Advisory Japan, the local associate of Anglo-French banking group Rothschild. ROT.UL.

"Now they have more flexibility in structuring the deals - how to go after the deal, what partners to use."

Deals within Japan are also expected to pick up as far-flung electronics conglomerates shed non-core businesses and domestic industries consolidate to cope with shrinking demand.

This month Panasonic Corp (6752.T) said it would spend about $9 billion to buyout minority shareholders of subsidiaries Sanyo Electric 6764.T and Panasonic Electric Works 6991.T, aiming to boost the efficiency of the group.

($1=86.19 Yen=1.114 Australian Dollar)

(Editing by Anshuman Daga)

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