Analysis: Quake spurring Japan M&A to decade high

TOKYO Fri Jun 10, 2011 12:28am EDT

Related Topics

TOKYO (Reuters) - Japanese companies from eye shadow makers to insurers are stepping up the pace of their overseas expansion as the devastating March 11 earthquake provides another spur to escape their moribund domestic economy.

It could, investment bankers predict, help drive Japan-related merger and acquisition activity to its strongest year since 1999, with as much as 15 trillion yen ($187 billion) worth of deals estimated in 2011.

That post-quake boom is already underway. In May the value of mergers and acquisitions (M&A) by Japanese firms rebounded to 2.5 trillion yen, up from only 616 billion yen in April, according to data compiled by Thomson Reuters. That pushed the accumulated value of deals this year to 5.8 trillion, yen double the same time last year.

"It's proof that M&A has become an important strategy for Japanese companies," Kentaro Okuda, joint head of global M&A at leading brokerage Nomura Holdings (8604.T), told Reuters. "Without M&A there's no next step, more companies are convinced that without it they won't achieve growth."

After two decades of recession as Chinese, Taiwanese and South Korean rivals overtake them the incentive to break out from deflation, population decline and anemic existed before the quake. The new post-quake spur to go overseas is geographical risk.

Customers around the world are uneasy about doing business with companies that could be reduced to rubble at any time. To keep them buying the Japanese have to show the next temblor won't halt production.

It is a change that Yuichi Jimbo, head of investment banking at Citigroup (C.N), says he has noticed since the quake.

"The push to add overseas production sites and expand foreign sales is spreading, and cross-border M&A is set to rise," Jimbo said.

Accompanying that, Jimbo says, may be a jump in demand in equity financing as companies without enough cash look for money to fund their M&A ambition beyond Japan's quake-prone shores.

Acquisition deals since the quake point to the broad nature of corporate Japan's M&A activity.

In April online brokerage Monex Group (8698.T) said it would fork out $411 million for U.S. peer TradeStation Group in a bid for new pastures.

Smaller deals have included cardboard packing maker Rengo's (3941.T) $183 million purchase in April of 29 percent of Chinese company Hung Hing Printing, and cosmetics maker Pola Orbis (4927.T) $91 million paid for a U.S.-based maker of skin lotion, H20 Plus.

There have been mega deals too including the biggest so far this year; Takeda Pharmaceutical's (4502.T) announcement in May that it will pay 9.6 billion euros ($14 billion) for privately held Nycomed, a Swiss maker of over-the-counter remedies and lung cancer drug Daxas [ID:nL4E7GJ0XB]

Nomura's Okuda expects more from Japan's drug makers in the coming months as they look to gain scale and grab the best drugs around the world.

Energy-related deals too may also burgeon in the wake of Japan's nuclear crisis, Okuda predicts, amid reawakened interest in renewable energy sources and as companies look to secure oil and gas rights needed to make up for lost nuclear generating.

"It wouldn't be surprising to see more activity by drug companies or energy-related firms," said Okuda.

Another spur for M&A, say bankers, is alluring targets, on sale from private equity firms they bought five or six years ago and which they now want to exit. A strong post-quake yen is helping too making the yen of cash-rich Japanese bidders stretch further.

Hoping to get some punch out of the heavyweight yen is industrial conglomerate Toshiba Corp (6502.T). It is vying with U.S. and European firms including General Electric Co (GE.N) and ABB (ABBN.VX) to buy Switzerland-based smart metering company Landis+Gyr from several investors including Bayard Capital of Australia in a deal that could fetch as much as $2 billion.

Junichi Kondo, a partner at law firm Anderson Mori & Tomotsune, also expects an upswing in foreign deals.

"After the March 11 disaster I hear there has been mounting interest in having new suppliers outside Japan," said Kondo. That activity, he said, is spreading beyond corporate Japan's favoured market, China, to other destinations including Vietnam, Indonesia and Malaysia.

But it, he added, it may not just be foreign fields that will lure Japanese executives in the hunt for targets. Quake-triggered M&A, Kondo said, may also mean deals mount at home too as disaster-weakened firms huddle to ensure their survival.

"The March 11 disaster was a big, unexpected event. I would not be surprised to see some notable domestic consolidations happening among Japanese companies later this year or next," Kondo said.

Domestic or foreign, it will still be a fee bonanza for the bankers and lawyers that win the business. ($1 = 80.075 Japanese Yen; $1 = 0.685 Euros)

(Writing by Tim Kelly; Editing by Lincoln Feast)

FILED UNDER: