Private Equity Heads for Japan
Chigusa, Tadaaki, The McKinsey Quarterly
The country's huge conglomerates move slowly, but they are moving to divest assets.
Regulations long impeded restructuring, and business mores condemned it. But corporate Japan, looking for an antidote to an almost decade-long recession, has nonetheless started the process. These days, even blue chips such as Asahi Chemical Industry, Mitsubishi, Nissan, and Toshiba are buying and selling assets (Exhibit 1, on the next page).
This sea change offers huge opportunities for foreign principal-investment firms willing to establish a local presence--if they master the nuances of Japanese business culture and practice. Only by doing so will they be able to complete deals and to become effective managers of the assets they acquire.
M&A becomes more attractive
Almost without exception, large Japanese companies participate in keiretsu: integrated corporate groupings characterized by cross-shareholdings, close and long-term business relationships, and strong ties among managements. As a result, these companies find themselves ensnared in businesses that are sometimes barely profitable or even losing money. The Western approach to such underperforming assets is often to divest the noncore ones, but few Japanese managers have ever been exposed to M&A practice, let alone regarded the divestiture of any business as a suitable strategy.
But Toshiba's mid-1998 announcement that it would divest all of its underperforming noncore businesses signaled a transformation in Japanese attitudes. The company eventually sold a number of units and went so far as to merge its large electric motor operation with a competitor, Mitsubishi Electric.
Because Mitsubishi Electric and Toshiba are archetypal Japanese keiretsu, these actions had a knockoff effect. Many other companies are now either selling parts of their businesses or publicizing their intention to do so (Exhibit 2). Nissan, which holds stakes in 1,394 component suppliers and other related companies, will soon have an interest in only 4. Renault's purchase of a nearly 37 percent stake in Nissan--and its installation of a non-Japanese senior vice president of Renault, Carlos Ghosn, as Nissan's chief operating officer- was favorably reported in Japan's press. This reaction suggests that the country's communications media are coming to accept both the dismemberment of the once all-powerful keiretsu system and corporate restructuring as a way of revitalizing Japan's ailing businesses.
The banking sector's troubles are providing a further impetus. Despite a $70 billion capital infusion from the state, many financial institutions have failed; others, temporarily nationalized, are likely to be put up for sale. In the first large-scale acquisition in Japan by a private equity group, US-based Ripplewood acquired the Long-Term Credit Bank. Government officials have been keen to justify the sale, suggesting publicly that the use of foreign capital to restructure domestic companies may well be beneficial.
To promote mergers and acquisitions, Japan's government is taking further steps, ranging from a reform of accounting standards to a revision of the securities laws. Between March 2000 and March 2002, Japan will move toward embracing international accounting standards, which record the current market (rather than book) value of a company's assets, such as its subsidiaries or its holdings of other firms' securities. Japanese corporations will probably realize $100 billion of value, giving their managers an incentive to sell shares and use the proceeds in other ways.
Japan's government has also said that it intends to interpret regulations governing business conduct more flexibly. The application of the Fair Trade Act, for example, will be loosened, making it easier to merge large companies and to establish limited partnerships. And rules prohibiting mergers involving tax-free exchanges of stock have been relaxed recently. …