Shrinking market sends Japan Inc buying abroad

TOKYO (Reuters) - Japanese companies are turning increasingly to overseas acquisitions to drive growth, buy technology and build market share, spurred by a stagnant domestic economy, shrinking population and largely unburdened by subprime credit damage.

The retreat of private equity firms from the global buyout stage and lower valuations thanks to slumping stock markets are helping smooth the way for outbound acquisitions from a country with a chequered deal-making history.

"We have global operations and we'd like to further expand that," Shuzo Sumi, chief executive of Tokio Marine Holdings Inc (8766.T), told the Reuters Japan Investment Summit this week.

Tokio Marine, Japan's largest non-life insurer, completed the purchase this year of Lloyd's of London insurer Kiln Ltd for 442 million pounds ($881 million), marking the largest overseas acquisition by a Japanese insurer.

Tokio Marine generates 15 percent of its business overseas and hopes to expand that to 20-25 percent by 2015.

"We have been focusing on emerging markets but to be a real global player, we need to build significant positions in the U.S. and Europe, where the markets are big," Sumi said.

Already this year, outbound acquisitions from Japan total $24 billion, according to Thomson Reuters data, nearly matching the haul for all of 2007. The increase partly mitigates the 69 percent drop in inbound deals this year, to just $5.8 billion.

"We are seeing a very, very clear trend which is that of outward M&A growth and activity," Steven Thomas, managing director and head of M&A at UBS (UBSN.VX) in Japan, told the Reuters Summit.

For a graphic on Japanese M&A, click here

While private equity firms drove the surge in global M&A activity and valuations in recent years, banks have all-but stopped financing such deals, removing competition for industrial, or "strategic" buyers, said Hiromi Yamaji, executive vice president in global investment banking at Nomura Securities.

The firm was the top advisor on Japanese M&A deals.

"Strategic buyers have the competitive edge now because banks are shy about lending to financial buyers. This must be one of the best periods of time for strategic buyers to buy abroad," Yamaji said.

However, Japanese buyers face unique challenges overseas: they must overcome language and cultural barriers, and sellers typically demand cash instead of shares. In the 1980s, Japan had a reputation for overpaying. More recently, Japanese companies are viewed as overly cautious.

DRUGS, FOOD, BANKS

Drug companies have been the biggest outbound acquirers, thanks to Takeda Pharmaceutical Co Ltd's (4502.T) $8.1 billion deal for U.S. biotech firm Millennium Pharmaceuticals and Daiichi Sankyo Co Ltd's (4568.T) $4.6 billion purchase of a controlling stake in India's Ranbaxy Laboratories (RANB.BO).

Financial services firms, including huge Japanese banks that have been relatively unscathed by the subprime crisis in the West, are also expected to invest overseas, although huge buyouts are less likely, industry players said.

"The current turmoil is not over yet," said Teisuke Kitayama, president of No. 3 Japanese bank Sumitomo Mitsui Financial Group (8316.T).

"There will be opportunities for us to make investments in some of the operations to be disposed by those western financial institutions, together with some opportunities for capital investment," he said.

After a decade of faltering under bad debts, Japanese banks have strengthened their balance sheets and rebuilt their businesses.

Food makers are also looking overseas.

Brewer Kirin Holdings Co (2503.T) has picked up stakes in recent years in Australia's Lion Nathan LNN.AX and San Miguel (SMC.PS) of the Philippines, and is in the hunt for Australia's Dairy Farmers in a deal that could be worth roughly $960 million.

"For many Japanese companies in the food sector, their M&As mean entering markets with higher growth, unlike Japan, where the population is getting smaller," Nomura's Yamaji said.

The recent wave of outbound deals stands in contrast to the buying binge of two decades ago, when Japanese buyers paid ruinously high prices for trophy assets such as Rockefeller Centre.

"It is underpinned by some very, very careful thinking, some very careful planning, and a very clear understanding by many Japanese corporate executives that growth will come through being a leader, hopefully at the global level, and certainly at the Japanese level," said Thomas of UBS. (Editing by Anshuman Daga)