Japanese Mergers and Acquisitions: Overcoming Obstacles to Improved Systemic Efficiency
Debroux, Philippe, Atlantic Economic Journal
Out-in (foreign firms buying Japanese firms) mergers and acquisitions (M&A) activities in Japan have gradually increased but remain at an extremely low level compared with the West, whether judged in terms of the number of deals or the size of the local companies involved. If not completely removed, regulatory obstacles diminished. This paper focuses on how nonregulatory factors impede M&A. Explanations range from the peculiar aspects of the business environment to the unique characteristics of the Japanese labor market, stakeholders, and corporate governance.
Japan is undertaking rapid sociocultural and socioeconomic changes and one should avoid outmoded stereotypes. Nevertheless, peculiarities persist and should be considered with great care when making M&A transactions, particularly now because of the fluidity of the current situation. There is considerable anxiety concerning jobs and employment security, especially at the white collar level. Intercompany ties are also changing, as are the patterns of bargaining and business transactions. Regulatory obstacles - to the extent they still exist - are best perceived as compounding the basic cultural difficulties.
II. General Facts and Trends
Changing Trends in M&A Activities
Japanese-European relations are dominated by large trade and investment deficits. In 1993, total direct Japanese investment in Europe amounted to $8 billion (22 percent of Japan's total investment abroad), while European foreign direct investment in Japan was $1 billion, 33.3 percent of worldwide foreign direct investment in Japan. The ratio of Japanese investment in Europe to European investment in Japan is about 15 to 1 [European Business Community, 1995]. The rectification of this imbalance could provide a partial solution to the broader trade problems. One important way to achieve this objective, given high entrance costs, is the acquisition or merger with Japanese firms [Ishizumi, 1988]. Foreign firms may be attracted to this alternative because of the difficulty of recruiting top managers and the intricacies of marketing. Getting new products and services through complex distribution systems to the consumer is still very time-consuming and expensive. Japanese competition is fierce and advertising, promotion, start-up, and operating expenses are extremely high.
Moreover, in the short term, current stock prices are relatively low and land prices are dropping. It is true that the average nominal price-earning ratio of Japanese stocks is still high, given stated book values, but it is often misleading because firms tend to understate their capital assets, especially land and investments which are carried on the balance sheet at cost. Leveraged assets may provide an additional attraction. Licenses and government approvals might already be in place or easier to obtain. Finally, relationships with various government agencies, such as the Ministry of International Trade and Industry (MITI) as well as industrial associations and bank circles, could be facilitated.
M&A activities also could be viewed positively by public authorities concerned about capital misallocation. MITI has frequently encouraged mergers as a way of achieving economies of scale in industries such as chemicals, petrochemicals, cement, and pharmaceuticals. Japanese companies themselves are redefining their strategies and refocusing their businesses. Many industrial sectors are feeling the pinch after the diversification spree of the 1980s. The relatively high market value of Japanese stocks and land has enabled some companies and investors to amass enormous holding of investible cash, tempting top management to invest in risky projects they should have avoided. Companies which diversified during the high growth period of the 1980s are now divesting inefficient subsidiaries or divisions, but the restructuring process has hardly begun for many of them. …