Cashed up and on a roll: Japan Inc on record M&A spree

TOKYO Mon Oct 15, 2012 5:03pm EDT

TOKYO (Reuters) - Japanese companies outside the banking sector were sitting on more than $2.6 trillion in cash and deposits at the end of June - a warchest fattened by a strong yen that is driving another record year of outbound acquisitions.

Bankers say telecoms firm Softbank Corp's (9984.T) $20 billion bid for Sprint Nextel Corp (S.N) of the United States, announced on Monday, may be an outlier in Japanese finance - a deal so bold it could only be pulled off by the firm's audacious chief, Masayoshi Son.

But that deal has put an exclamation mark on the emergence of Japanese companies as aggressive overseas buyers, a trend that has gathered pace over the past two years and shows no signs of abating even as Europe's debt crisis drags on and as global growth wanes.

Central bank data shows Japan's corporate warchest has grown steadily over the past decade and topped 200 trillion yen for the first time on a calendar basis last year.

Junji Horinouchi, head of global M&A consulting at Mercer Japan, said companies in healthcare, chemicals and technology would be among the most active deal seekers given their need to build scale to compete globally.

Healthcare, where top drugmaker Takeda Pharmaceutical Co (4502.T) has been an active acquirer, accounted for almost a third of the total value of overseas deals last year, followed by materials at 20 percent. High tech made up just 5 percent of deals.

"I see big opportunities in sectors burdened with heavy research and development costs or industries where establishing a presence in key global markets would be tough through organic growth alone," Horinouchi said.

GLOBAL GRAB

Bankers said Japanese trading house and consumer-related sectors will also continue to snap up assets at a healthy pace, barring a global recession or sharp reversal of yen strength. In May, trading house Marubeni Corp (8002.T) bid $3.6 billion for U.S. grain merchant Gavilon LLC.

"Yes, there is concern about the economy, but there is also an understanding that M&A is a way to establish yourself as a global company," said Jerome Finck, managing director at Rothschild Japan. "With the strong yen now is the time to do it."

The Softbank deal, if completed, would bring Japan Inc's tally of outbound acquisitions this year to about $75 billion, topping last year's $69 billion, a record in dollar terms, Thomson Reuters data shows.

The active dealmaking reflects a common need among companies to secure growth outside a mature Japanese market and has been fuelled by the currency's one-third rise against the dollar since late 2007, making acquisitions less costly in yen terms.

Japan's spending on overseas deals ranks second in the world this year, behind the United States' $158 billion, but ahead of recent big spenders China, on $46 billion.

AGGRESSION, RISKS

Bankers said near term it was unlikely there would be any more deals on the scale of Softbank's bid for Sprint, which is set to top Japan Tobacco's (2914.T) $19 billion purchase of Gallaher in 2007 as the largest overseas by a Japanese firm.

But Rothschild Japan's Finck says the Softbank acquisition highlights a growing willingness among Japanese executives to consider large, so-called transformational deals in addition to smaller, bolt-on transactions.

Among deals announced over the past few months, advertising giant Dentsu Inc (4324.T) said it would pay $5 billion for British media buyer Aegis AEGS.L, while trading house Toyota Tsusho (8015.T) has bid for French distribution firm CFAO (CFAO.PA) in a two-step acquisition that could reach $3 billion.

Japanese firms have announced 14 outbound acquisitions worth at least $2 billion each since 2011, up from 5 over the previous two years. A total of 10 multi-billion dollar deals were signed in 2008 when Japanese firms took advantage of the financial crisis to pick up assets on the cheap.

But not all investment bankers are optimistic.

Some believe the current flurry of acquisitions could mark a dealmaking peak, especially if the global economy slows further, as was predicted in new forecasts from the International Monetary Fund last week.

"With the Japanese economy in such a poor state and given the increasingly uncertain outlook globally, there are a growing number of Japanese executives who are unsure of just how aggressive they should be with M&A," said a Tokyo-based banker at a Western investment bank. ($1 = 78.3550 Japanese yen)

(Reporting by Nathan Layne and Emi Emoto; Editing by Ian Geoghegan)