Japanese corporations are in the midst of a wave of M&A activity; the surge in deals in 2010–2011 — and extending into 2012 — is bigger than previous booms in the late 1980s and early 2000s. Now, as then, a strong yen and high corporate cash holdings support the acquisitions drive.
But much has changed. A recent Economist Intelligence Unit (EIU) analysis says this time, targets have been strategic rather than the sort of “trophy” deals seen in previous M&A bursts. Acquisitions today tend to be smaller and targets tend to be closer to core competencies. Growth in deal numbers is strongest in Asia, where companies are seeking to extend their market reach. The EIU further concluded that Japanese buyers are also more likely today to seek full control over their acquisitions, suggesting a move away from the minoritystake investments that restricted buyers’ influence to a limited sphere of operations such as sales.¹
As recent deals at an active acquirer such as the Japan telecom conglomerate NTT Group show, growth strategies can be achieved by acquiring access to markets outside of Japan. NTT Communications Corporation, a long-distance and international communication and information and communications technology (ICT) solutions provider within the Group, is taking a controlling stake in data centre operator Netmagic Solutions to accelerate the expansion of its infrastructure and cloud services in the Indian market. “Speed is key,” said Akira Arima, President and CEO of NTT Communications Corporation. “Everybody is talking about cloud-based services. You need to enter the markets as soon as possible to obtain a leadership position.”
Sister company NTT Data Corporation, an IT service provider, has been focused on large IT markets, still mainly in the US and Europe, with the aim to become one of the five biggest IT vendors in the world. “When we think about our growth in terms of the next 10 or 20 years, it seems really obvious that there is no future for companies that rely on the domestic market,” said Takashi Enomoto, a corporate advisor and former Senior Executive Vice President and Executive Board Member. “The hurdles [for NTT Data’s acquisition targets] get higher and higher. The companies that we are approaching after having whittled down our long list are entirely different from the companies seven years ago and even three years ago.”
NTT Data has changed how it approaches acquisitions, incorporating lessons from previous experience in the early 1990s. “In hindsight, it is clear that in those early days we were somewhat naïve in our projections,” said Enomoto. “However, those early experiences now enable us to do what we are doing today.” Top management is involved in face-to-face meetings with the management team of target companies, often in English. “It is very important to understand not only the financial figures, but also who they are.”
Even with the most disciplined approaches to acquisitions, the risks of failure are high. As Kathy Matsui, Chief Japan Strategist for Goldman Sachs Japan Company, Limited, noted, “It is one thing just to acquire an asset, a company abroad, and say, ‘I’m 20% global now,’ but it is quite another thing to run the business… How are you integrating that business? How are you going to make that business 1 + 1 = 3 as opposed to 1 + 1 = 2?”
Doubts remain whether Japanese acquirers, particularly large companies, in general are moving fast enough today to fully integrate target companies once an acquisition closes. The EIU report terms this the “one area in which Japanese companies seem to be still off-course.” The larger the acquirer is, the more difficult it can be to move quickly through the various stages of an acquisition, starting with the investment decision. Tamotsu Adachi, Managing Director and Co-Representative in Japan for The Carlyle Group, said the private equity investment group finds a lot of opportunities to work with midcap companies, but added that “as far as the large corporations are concerned, they are still very slow at making decisions.”
How quickly an acquisition is integrated, with a process that makes the strategy transparent to all stakeholders, is important. A PwC survey of dealmakers found a clear and direct link between the speed at which integration activities are pursued, the rate at which integration goals are achieved and deal success. In fact, those reporting higher levels of deal success — especially financial and operational success — also reported a tendency to align leadership styles and speak with one voice in three months or less.
Talent, in particular, must be addressed directly in postmerger integration. Buyers who are accustomed to keeping a foreign acquisition (and its managers) at arm’s length from headquarters — to allow the business to continue doing what it’s good at — are finding this approach will no longer suffice. Just as IT systems are now integrated quickly at the close of the deal — precisely because the advantages of a fully linked global network are so clear — so too must global management teams integrate. The strong rise in M&A activity in the past two years is a welcome sign, but these deals will need to follow through with strategies that tackle important integration hurdles and retain pivotal talent. As Carlyle’s Adachi noted, “In order for Japanese companies to really manage their acquired companies well, they really have to bring the global management team into the Japanese management team. That is the key.”
PwC Chairman Bob Moritz talk to Reuters' Fred Katayama about how how to improve Japan's global competitiveness.