Do Japanese know true M&A yet?

Japanese are allergic to M&A

As for Western companies, M&A is commonly used as a method to realize business strategy. However, in Japan, it is not utilized as actively as in Western countries. This is because Japanese are allergic to M&A.

There are some reasons for this. One of them is that in the early 2000s, a novel about investment funds was adapted to a drama and became a hit.

In both the novel and drama, investment funds conducted M&A with the purpose of receiving short-term profits while showing versatile performance by driving a company into bankruptcy or taking over a company. These led to thoroughly establishing the image of M&A = “vulture.”

In fact, although many M&As were also carried out in Japan before WWII, these M&As were executed by the intentions of main banks rather than management.

Prior to WWII, the main-bank system was adopted in Japan. It did not allow a company’s management to oppose its main bank. Therefore, management could not disobey bank-led restructuring. This history might have been the underlying reason for the image of M&A being coercive and bullying the weak.

In the past few years, the media have increasingly covered M&A. Most of the M&As covered by the media are hostile M&As.

In the case of acquiring a listed company, the acquirer publicly announces an interest in acquisition and offers a takeover bid (TOB). The company’s management, to which a TOB was offered, needs to publicly announce agreement or disagreement. If the company’s management announces opposition to the offer, it is called a hostile TOB. This is the so-called hostile M&A.

Amid a hostile M&A, management is opposed to the TOB, various attacks and defenses are conducted, and an uproar often results. When it occurs, the media covers the news in a dramatic way, attracting the public’s attention and causing theatrical uproar.

Despite hostile M&As being covered in a dramatic way, they occur only a couple times per year, accounting for less than 1% of all M&As in Japan.

In fact, 99% of the M&As conducted in Japan are friendly M&As which are not sensationally covered by the media but move forward with the process in a quiet manner.

M&A is one of the important options in business strategy

M&As used to have a bad image but have gradually begun to be recognized as an important option for company management in Japan as well. I will elaborate on this using a specific case.

I will give an explanation using a case of a soba noodle shop. A soba noodle shop provides soba noodles to customers in exchange for payment. By providing delicious soba noodles, the shop provides value of a rich diet to the society. However, when the owner of the shop ages and becomes unable to continue his/her work, what will happen to the soba noodle shop?

If the owner of the shop wishes to keep it running, he/she has to have someone take over the business. What if the owner does not have a child or acquaintance who is willing to take over the business?

In fact, in order to resolve such a succession problem, M&A is utilized. M&A intermediaries are businesses that bring a buyer who wishes to buy a company and seller who wishes to sell a company together. Intermediaries are businesses that are going to find a buyer who wishes to buy the soba shop.

The selling price and conditions concerning the purchase of the soba shop business are to be determined based upon negotiation between the buyer and seller. If this negotiation is not finalized, the M&A does not come into effect, and the seller will have to find another buyer through the intermediaries. Therefore, a hostile takeover is unlikely to occur for M&A of unlisted companies.

Lately, since there have been an extraordinarily large number of small and medium-sized companies without successors, the cases in which companies are forced to discontinue business regardless of being profitable, have become a social problem.

Some owners think that there is nothing wrong with deciding to close a company that he/she established. However, when closing a company, it has multiple negative impacts on various parties including business partners, and the company will not be able to continue its social contribution as in the past.

M&A is an important option for resolving such a succession problem. Although the aforementioned M&A allergy strongly remains in the countryside, it is highly significant to positively recognize M&A as an important tool for resolving succession problems.

As for listed large corporations, M&A is a highly important option in order to realize their business strategy.

In recent years, the changes surrounding the business environment are drastic and their speed is increasing. There are numerous cases in which businesses that flourished 20 years ago are now on the decline. M&A is also utilized as a response to these changes.

Over the past few decades, large corporations have moved forward with business diversification. For such companies with diversification of business lines, multiple business lines exist in one company. However, since a business line will eventually come to end, developing another new business line is essential prior to a certain business line coming to end. By doing this, a company can be sustained.

In the past, companies foresaw changes in the future environment and developed a new business line in a company, whereas in recent years, large corporations are unlikely to create internal innovation that leads the next generation.

Therefore, it has become an important option to utilize the method of M&A to incorporate a promising venture company into the group. By being affiliated with large corporations, there will be fewer concerns for venture companies over raising a substantial amount of funding for research and development.

Today, with the world being further globalized, not only through M&A within Japan, but also M&A of overseas companies, expanding business into a country or region will become possible in a quicker and more efficient manner.

Thus, by positively utilizing M&A, companies will be able to advance the realization of business strategy.

It is necessary to develop the system of M&A as a social function

Of course, things do not always go perfectly with M&A. There are some challenges to overcome in order for M&A to succeed.

For instance, in the case of being affiliated with venture companies, a considerable amount of effort needs to be expended so as to make this move forward smoothly.

Young staff of venture companies conduct business with free and advanced thinking. However, when large corporations that conduct a takeover do not demonstrate an understanding towards such ways of work and spirit, forcing their business ethics and ways of work upon others, there are quite a few cases where staff of venture companies resigned due to disliking it. When it occurs, despite a huge outlay for being affiliated with venture companies, buyers will not be able to gain desired outcome due to the loss of staff.

Therefore, in an attempt to avoid such a situation, some corporations set forth a key person clause in contracts which requires key personnel including the founder of the venture company to continue operation for a certain period of time. However, in circumstances where key personnel are losing motivation, such a clause will not help the situation.

In order to enhance corporate value through integration, achieving a synergy effect between the acquiring company and the acquired company is essential. Therefore, through close communication, it is crucial for both parties to continue expending effort.

This applies to M&A of overseas companies, as well. Identifying a good balance between things that conform to the ways of Japan and things that conform to the ways of other countries and following through can result in a truly successful M&A.

In addition, a challenge concerning M&A for business succession lies in the positioning of intermediaries.

A buyer wishes to acquire a company for the lowest price, whereas a seller wishes to sell the company for the highest price. When this happens, intermediaries are in a position of having a conflict of interest. If a conflict of interest exists, it is pointed out that they will not be able to serve as reliable intermediaries.

Indeed, in Western countries, a buyer and seller each hire advisors who negotiate terms for the purpose of protecting the profits of each employer.

Some believe that Japan should adopt this Western way, and some large corporations have brought in such advisors, while the M&A of small and medium-sized companies still falls short of adopting this advisor system.

In Japan, intermediaries work for real estate and career change. The reason for that is because intermediaries with good knowledge of both parties do a better job in matching, and it is beneficial.

With Japan being accustomed to this style, it might be a possible option as a solution to have intermediaries match companies while entrusting pricing to a company specialized in corporate valuation.

Once a reliable system is developed, M&A for business succession will become accessible and active.

From this point forward, in order for M&A to be actively utilized, management first needs to dispel the negative image of M&A, recognize M&A as one of the important options for a company’s growth, and reform their thinking to be open to the utilization of M&A. Additionally, the system development and environment improvement for M&A are also crucial.

Japanese companies need to promptly make up for the lost 30 years. In order to achieve that, I hope that companies will boldly conduct M&A that allows companies to buy time.

* The information contained herein is current as of January 2022.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

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