A powerful mix of political, economic and demographic factors has resulted in a record level of inbound M&A activity targeting Japan’s tech sector.
While 2017’s record deal value was heavily skewed by the US$10.6 billion acquisition of a 59.8% stake in Toshiba Corp. by a consortium led by Bain Capital, H1 2018 achieved a record deal volume, with a total of 33 deals narrowly beating the previous half-year record volume of 32 deals set in H2 2017.
The growth of shareholder activism in Japan also looks set to contribute to strong tech M&A activity, although it may also sometimes complicate individual M&A deals.
In conversations with bankers and others, Japan’s aging population is offered as one driver behind the record level of inbound M&A activity in the tech sector: The country’s birth rate began to decline rapidly in the mid 1970s, and has fallen below the replacement rate of 2.1 since 1974, according to the World Bank. As a result, the presidents of some family-owned small and medium-sized enterprises lack willing and able successors more often than has been the case in previous generations, leading to opportunities for a competitor or outside buyer to provide an exit.
The average age of Japanese company presidents has risen from 54 in 1990 to 59 in 2016, according to Nomura Securities. As the generation of business owners born during the baby boom approaches traditional retirement age, business owners looking to retire face difficult choices on how and when to do so.
Vibrant tech innovation
Another factor driving tech M&A’s growth in Japan is the vibrant state of Japanese tech innovation, which has created some attractive M&A opportunities.
The relative ease with which a startup can go public and maintain listed status with relatively low compliance costs in Japan has limited the frequency of M&A exits for newer companies here. However, for testimony to Japan’s new generation of tech company founders, one need look no further than the flurry of listings of tech companies, including the February flotation of JTec, which makes optical equipment, cell culture systems and robotics devices; the March listing of Fibergate, which provides Wi-Fi services; and the June listing of Mercari at a market capitalization of more than US$1 billion.
Japan’s startup scene has been given further encouragement recently by the government’s efforts in the space, within the framework of policy efforts to boost long-term economic growth. To engineer this, various branches of the government have been encouraging investment in artificial intelligence, fintech and other fields.
The strong tech sector opportunities have attracted considerable interest in acquisitions, particularly in the semiconductor and e-commerce spaces. Recent high-value deals have included those made by overseas bidders, at times from elsewhere in Asia. For example, Taiwan’s United Microelectronics in June completed the purchase of the remaining 84.1% it did not already own in Mie Fujitsu Semiconductor for up to JPY 57.63 billion (approximately US$500 million).
While many of the deals have involved businesses with a large export presence, there have been a number of deals focused on tapping into Japan’s domestic market. The third-largest tech acquisition targeting a Japanese firm so far in 2018 was eBay’s announced approximately US$700 million purchase of the Japan business of Giosis, the online marketplace company headquartered in Singapore.
Shareholder activism as a price increase lever
The growth of shareholder activism in Japan, and increasing boldness of overseas and domestic shareholder activist firms here, is also playing an important role in tech M&A.
Shareholder activism can throw a wrench in the gears of a deal. Elliott Management’s investment in Hitachi Kokusai Electric was reported at times to threaten to scupper KKR’s buyout of Hitachi Kokusai, a chip-making equipment subsidiary of Japanese conglomerate Hitachi Ltd. The acquisition was reportedly structured to require a successful tender offer for shares held by non-Hitachi outside shareholders. The deal finally went ahead in December 2017 only after KKR raised its offer price for tendered shares in Hitachi Kokusai twice following its first approach in April, generally thought to be in response to Elliott’s pressure. (Elliott is known as one of the most prolific and aggressive activist funds globally, and was separately involved with Hitachi in a long-running campaign in Italy at the same time as the Hitachi Kokusai matter.)
Also notable is Oasis Management’s campaign to increase the sale price of Alpine Electronics, Inc. in the takeover bid by Alpine’s parent company, ALPS Electric Co., Ltd.
Activism as a catalyst for deal activity
Shareholder activism also can serve as a catalyst to initiate deal activity, including tech M&A within Japan.
While each fund has a different philosophy and profile, a number of activist shareholders approach companies with proposals to divest subsidiaries and non-core business units. Such shareholders believe they can unlock value by eliminating the valuation penalty applied to such companies, known as the “conglomerate discount.” When management can be convinced to pursue this path, deals follow.
Japan’s recently revised corporate governance code and stewardship code, among other reform efforts, have shown the government’s interest in encouraging Japan’s listed companies to focus on shareholder returns, including the financial metric of return on equity. The government efforts are part of a push to boost economic growth from various sources, and the Abe administration has shown friendliness to foreign activist shareholders, with Prime Minister Abe himself even meeting with CEOs of foreign funds.
The sale of Hitachi Kokusai Electric is said to be part of a long-running program by Hitachi to sell non-core assets. And Toshiba agreed in September 2017 to sell Toshiba Memory to the US private equity firm Bain Capital and a number of US technology companies.
Will Japan-focused tech M&A remain strong, as policy-makers and industry promote innovation and Japan’s senior management moves seriously toward corporate reorganization, in part galvanized by shareholder and government activism? Time will tell, but we are cautiously optimistic based on recent trends and the course of events elsewhere following similar boosts to shareholder activism and the increased focus on shareholder value.