The old hand bested the fresh face.
When a Sumitomo Mitsui Financial Group Inc.-led partnership in January bid $7.3 billion for RBS Aviation Capital, it prevailed despite offering less than rival finalist China Development Bank Corp. The seller, Royal Bank of Scotland Group plc, felt confident that Sumitomo Mitsui Financial, as a longtime dealmaker, would be best able to close the transaction. e_SPar Sumitomo Mitsui Financial's triumph in the auction set a record in aviation leasing. It also highlighted the strength and visibility of Japanese acquirers on the global M&A scene as Japan makes a spirited return to dealmaking after more than a decade of relative calm.
Spurred by cash-rich corporate coffers, low domestic growth and a strong yen, Japanese companies emerged as the No. 3 source of outbound M&A in 2011, up from No. 13 in 2010, spending $66.6 billion as the number of transactions rose 158% year-on-year, according to Allen & Overy LLP.
Perhaps because they recall the asset bubble of the 1980s, when many Japanese bidders paid excessive prices for trophy properties such as New York's Rockefeller Center or Hollywood's Columbia Pictures movie studio, today's Japanese acquirers are determined to be strategic and prudent -- with extensive due diligence. Only then will they proceed.
Sumitomo Mitsui Financial, whose partner on the RBS deal was Sumitomo Corp., is Japan's No. 2 lender and a long-familiar name in the dealmaking arena. But the range of the current crop of acquirers, including drugmaker Takeda Pharmaceutical Co. Ltd., motor manufacturer Nidec Corp., building materials supplier JS Group Corp. and e-commerce leader Rakuten Inc., is new. And the list is expanding.
"The Japanese now see M&A as a strategic imperative to survive in a global market," says Tosh Kojima, Japan and Asia focus group head at investment bank DC Advisory Partners Ltd. "Whether in industrials, power, aerospace, high-speed trains or automotive, Japan's global participation and influence needs to be enhanced and maintained."
"Particularly after the earthquake last year, Japanese management are more convinced that without M&A they won't be able to achieve longer-term growth," says Shinsuke Tsunoda, Nomura Securities Co. Ltd.'s head of M&A advisory in Japan. "More small and medium-sized businesses across Japan are starting to join large corporations in seeking growth abroad."
Western investment banks have forged alliances with Japanese institutions to capture advisory mandates from domestic leader Nomura Holdings Inc. In May 2010 Morgan Stanley joined with No. 1 lender Mitsubishi UFJ Financial Group Inc., building on MUFJ's rescue funding to the now 22%-owned New York bank at the height of the credit crisis. The firms were following a path trod more than two decades earlier when Nomura spent $100 million on 20% of Wasserstein Perella & Co.
In January New York-based Moelis & Co. sold a 5% stake to SMBC Nikko Securities Inc. The transaction expanded a partnership forged in May, which last year helped secure the U.S. investment bank a role advising Osaka Securities Exchange Co. Ltd. on its pending takeover by Tokyo Stock Exchange Group Inc.
Evercore Partners Inc. and Japanese partner and No. 3 lender Mizuho Financial Group Inc. last November co-advised on Itochu Corp.'s $7.2 billion consortium purchase of Tulsa, Okla., oil and gas explorer Samson Investment Co.
Observers of Japanese dealmaking report that suitors often require long, detailed discussions to create an internal consensus to move on a deal. But once they finally push the button, Japanese bidders enjoy a reputation for sticking to their word and paying well.
The differences between Japanese and non-Japanese suitors are "absolutely entirely manageable," says DC Advisory's Kojima. "But if you make Japanese companies go through a one-size-fits-all, generic process, they will take very long to get to where the Western companies are. That typically results in 1,000 questions to the seller's adviser at a late stage."
Underpinning Japanese companies' desire for detail is the fact that targets are overwhelmingly selected for strategic reasons -- and not as an exercise in financial engineering.
Products, brands and technology assume critical importance, as do potential synergies and a target's long-term business plan.
Kojima saw those forces at work firsthand when he advised EQT Partners AB on its October sale of semiconductor sensor company VTI Technologies Oy to Japan's Murata Manufacturing Co. Ltd. for €195 million ($259.1 million). "Murata cared about product, technology and manufacturing capabilities -- everything else was secondary," says Kojima. "We let them take a whole range of new products and test them. Then we ran the process backwards, starting with a management meeting."
Compared with Western acquirers, "there's a lot more review into the intellectual property aspects of the transaction," says Skadden, Arps, Slate, Meagher & Flom LLP's Mike Mies, who last year advised Miraca Holdings Inc. in its $725 million acquisition of the anatomic pathology business of Irving, Texas-based Caris Life Sciences Inc. "The professionalization of post-merger integration is a trend that is coming into Japan full force," he adds. "A lot of due diligence activity is to get knowledge about what they will do after closing."
This often entails extremely long-term planning, with potential bidders requesting targets' business plans way into the distant future.
With fast-paced auctions, this can't always be accommodated. As a result, "pre-emptive" bids have become popular for Japanese buyers. For example, Tokio Marine Holdings Inc. struck a deal in December to pay $2.66 billion for Delphi Financial Group Inc. -- building on the bidder's purchase of Philadelphia Consolidated Holdings Corp. for $4.7 billion in 2008.
Tokio Marine adviser Macquarie Group Ltd. initiated the acquisition with an approach to the target's founder, chairman and CEO Robert Rosenkranz. The eventual agreement was priced at a generous 1.5 times Delphi's prevailing book value just as Delphi and many other listed insurers languished below book value.
"A Japanese deal is less likely to take place through an auction process and more likely to be a privately negotiated exclusive-type deal. That may entail paying a premium to market," notes Macquarie U.S. financial institutions group head John Roddy.
In another pre-emptive deal, Carlyle Group struck a £650 million ($1 billion) agreement in February to sell British cash management systems and software business Talaris Ltd. to Japanese money-counting-machine maker Glory Ltd., for a multiple of well over 3 times.
Japanese companies have the cash cushion to pay what Roddy notes is often a "robust price." UBS Securities LLC estimates that Japanese companies' cash balance equated to 5.8% of gross domestic product in the third quarter of 2011, compared with 2.7% among U.S. companies and 1% in Europe.
Japanese companies also tend to have easier access to bank debt than many Western corporations, a legacy of decades-old relationships with lenders. "We are rarely on transactions that are leveraged," says Skadden's Mies. "In most cases they are being done with cash on hand. In the few cases where there are loans, it's a standard Japanese loan, and most are done within a short period. The Miraca deal was financed in Japan and through standard banking relationships. That's something you don't see outside Japan."
Cash prevails for legal reasons, too: Japanese regulations make stock-based takeovers complicated. Until last July, directors at the acquirer could be held liable if the value of the target's stock sank during the tender period, bidders had to have a court-appointed expert value the target, and companies offering a substantial premium needed clearance from their own shareholders.
A July amendment to the Act on Special Measures for Industrial Revitalization and Innovation relaxes those restrictions if the government watchdog for that industry decides a deal is strategically valuable.
Still, "it will take some compelling deals under this new law for others to follow," says Sullivan & Cromwell LLP's Keiji Hatano, who also advised Tokio Marine on the Delphi purchase. "It's still at an early stage."
The legislative reform highlights the government's desire to back Japanese companies as they strike deals to meet competition from South Korean consumer electronics companies and, in a wide range of sectors, from China. To further that goal, the Japan Bank for International Cooperation makes $130 billion in credit available for strategic overseas M&A as part of a program the government expanded in October.
In July 2009 the government established the Innovation Network Corp. of Japan, and then doubled its investment firepower last fall to ¥1.9 trillion ($25 billion). The fund, partly financed by 19 corporations including Development Bank of Japan Inc., Sumitomo Corp., Takeda Pharmaceutical and GE Japan Corp., aims to foster technology and expertise that will benefit the broader Japanese economy.
In July of last year, INCJ made a $680 million investment for 40% of the equity in Swiss "smart meter" maker Landis+Gyr AG as part of Toshiba Corp.'s $2.3 billion acquisition. Landis+Gyr "transforms Toshiba's own smart-grid business and gives it a service touch," says INCJ executive managing director Keita Nishiyama. "Japanese companies are very good at manufacturing but not always very good at providing services."
In recent months, Nishiyama says, INCJ has had numerous applications from would-be private equity sellers. On March 19 one of those PE sellers moved. New York buyout shop Riverstone Holdings Ltd. sold wind farm services company Seajacks International Ltd. for an estimated $850 million to INCJ and Marubeni Corp. as 50-50 partners.
Japanese companies' 88 deals last year, worth a combined $66.6 billion, comfortably trumped China, the No. 6 acquirer, with 56 deals worth $46.6 billion, according to Allen & Overy.
In the coming year, while Chinese institutions and state-backed corporations will likely contemplate buying distressed assets, particularly in Europe, Japanese groups will favor sound companies to boost growth and product ranges and diversify after last year's devastating earthquake and tsunami, observers say.
"Japanese companies are focused on buying companies or assets that are already well managed," says Sullivan & Cromwell attorney Hatano. Finding good local management and keeping it in place is "a somewhat unique characteristic of outbound deals coming from Japan," he adds.
This year dealmakers expect most outbound Japanese transactions to occur in Asia and South America, but with U.S. and Europe hosting the biggest deals.
Old hands at outbound M&A will likely remain active. Deals are expected in financial services, including in the U.S. by Sumitomo Mitsui Financial, which has well-flagged plans to boost overseas assets and earnings, and Mitsubishi UFJ.
Trading companies may well strike more shale energy deals, on the heels of Mitsubishi Corp.'s February agreement to buy 40% of Encana Corp.'s Canadian Cutbank Ridge natural gas project for $2.9 billion.
And takeovers in manufacturing, technology and retailing by the likes of Uniqlo owner Fast Retailing Co. Ltd. and Aeon Co. Ltd. are also expected.
Other names to watch include electronics company NEC Corp., currently nursing steep nine-month losses; car-parts maker Sumitomo Electric Industries Ltd.; and Internet content provider Gree Inc.
Adds Skadden's Mies: "We see an increase in middle-market outbound transactions by first- and second-time acquirers. There's a huge incentive to be one of the first guys to go out and do one of these things."
As always, they'll take care to move cautiously even when they move fast.