Japan Regains Regional M&A Lead

Japan regained its spot as the Asian-Pacific region's most active country in mergers and acquisitions in the first quarter, edging out China, which had upstaged Japan for most of last year.

A steady stream of domestic consolidation is buoying deal activity in Japan as companies feel the effects of the country's worst postwar recession.

From January to March, albeit in a period when the overall number of M&A deals was down 19% year-to-year, Japanese M&A accounted for 30.6% of the value of Asian-Pacific deals, worth $30 billion, while Chinese activity made up 19.5%, worth $19.6 billion, according to data provider Dealogic. The figures are based on the nationality of the target company.

Japanese conglomerates, from electronics giant Hitachi Ltd. to trading house Itochu Corp., are either buying back or spinning off their own listed subsidiaries as part of a streamlining and restructuring process driven by cost cutting.

"Japanese companies are more aggressive than they have been at any time in the last two decades in examining their domestic operations, and looking at ways to refocus their core businesses," said Ken Siegel, M&A lawyer and managing partner at legal firm Morrison & Forester in Tokyo.

Mr. Siegel said Japanese companies are doing that "either through acquiring bigger stakes in subsidiaries so that they can take more control, divesting noncore assets, or merging operations that are sub-scale."

From the second to the fourth quarter of 2008, Chinese deals had made up more than one-third of M&A activity regionally. Before that, Japan dominated, except for the third quarter of 2007, when Australia took the lead with acquisitions like Anglo-Australian miner Rio Tinto Ltd.'s acquisition of Canada's Alcan Inc. for $38 billion.

Domestic M&A deals in Japan from January to March this year comprised a record-high 78.8% of total volume of M&A deals in Japan, above the 76% level last year, according to M&A consultancy Recofdata Corp.

"This rise in domestic deals is due to a consolidation trend, in particular takeover bids from group restructuring and management buyouts," said Recofdata Chief Executive Yutaka Takahashi.

The consultancy found there were 31 domestic takeover bids in Japan in the first quarter, up 41% from the same quarter last year.

Management buyouts in Japan in the first quarter nearly doubled to 38 from 20 during the same period last year, Recofdata says. That is because, in efforts to ride out the recession, companies are paying more attention to group management; parent companies prefer to control 100% of major subsidiaries for prompt and aligned decision making, said Megumi Kiyozuka, managing director of CLSA Capital Partners Japan.

For instance, Toshiba Corp. bought out its LCD joint venture with Panasonic Corp. to turn it into a wholly owned unit.

"With sales and cash flow sharply shrinking, strategy has changed and companies need to restructure and regain control over their strategic investments," said Martin Schulz, senior economist at the Fujitsu Economic Research Center. "When global markets have stabilized, these subsidiaries will become the focal point of corporate growth strategies."

The spurt in subsidiary buybacks was also spurred by low stock prices reducing the cost of management buyouts, Recofdata's Mr. Takahashi says. The Nikkei Stock Average was down 35% at the end of March this year from a year earlier.

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