The pitfalls that Japanese companies have avoided in overseas mergers and acquisitions

Overseas mergers and acquisitions are becoming a hot topic in Japan. In 2016, Japanese companies spent a total of 11 trillion yen, or about 100 billion U.S. dollars, on overseas mergers and acquisitions, exceeding previous records.

The main reason for Japanese companies' overseas mergers and acquisitions is that the country has released a large amount of money in the hope of raising prices, bringing the inflation rate to 2%, and getting out of the state of deflation. However, the stagnation of technological innovation and the shrinking domestic market caused by the aging of the population have left a large amount of funds idle in Japan. The only way to absorb the large amount of released funds is to go overseas for mergers and acquisitions.

Fortunately, Japanese companies mainly use their own funds to invest overseas. Not many of them actually borrow money from banks or raise capital from the stock market to invest overseas. However, they do not cherish their own money. Judging from media reports, there are more failed overseas M&A cases by Japanese companies than successful ones.

After entering the bubble economy in the 1980s, Japanese companies have carried out large-scale overseas mergers and acquisitions, including Mitsubishi's acquisition of Rockefeller Center in the United States in 1989, Sony's acquisition of Columbia Broadcasting Corporation's film and music departments in the same year, and Panasonic's acquisition of Universal Music in 1995, all of which cost more than one billion US dollars. None of these can compare to Toshiba's acquisition of the US nuclear power company Westinghouse in 2005, with a transaction amount of US$5.4 billion, setting a record in the history of Japanese mergers and acquisitions. Toshiba's overseas mergers and acquisitions, which set a record, can be said to be one of Japan's most failed merger and acquisition cases.

Most of the overseas mergers and acquisitions that individuals engage in to add glory to themselves end in failure, while the mergers and acquisitions of some foreign companies in the fields that the company is most familiar with are very effective. Looking at the official statistics of Japan, the profits earned by Japan's overseas investment are far greater than the benefits obtained from product exports, which should be considered as relatively effective overall (in 2016, Japan's trade balance profit was 4 trillion yen; the profits obtained by Japan's direct investment were 7.4 trillion yen).

Why did Toshiba finally decide to spend US$5.4 billion in 2005 to acquire non-performing assets originally valued at less than US$1 billion, and why did it regard assets like Westinghouse as a hot commodity, thinking that it would have a business that could continue for decades to come? This is inseparable from Japan's national nuclear power plan.

"Now, Toshiba is guaranteed to have business for the next 30 to 50 years," said President Atsutoshi Nishida, who made the final decision on the merger.

When an expert in business management heard that Toshiba had decided to acquire Westinghouse, he described the acquisition as follows: "A company with only 200 billion yen bought assets worth 600 billion yen. It's a typical case of the small fish eating the big fish." So, the outcome is: even if it eats it, it can't digest it.

Toshiba soon had to falsify its accounts to maintain its stock price. After the scandal of gilding corporate leaders was exposed, people at Toshiba reflected on President Nishida's decision: "He made that decision so that he could become the chairman of Keidanren."

In fact, Nishida was famous for his ability to sell laptops at Toshiba, and he was not an expert in nuclear power business. Some people in Toshiba believed that the merger was just a way for President Nishida to show his management ability and entrepreneurial spirit. With the government's encouragement and his own ambition, the merger was decided. However, this merger left Toshiba with endless troubles.

In March 2011, natural disasters (the Great East Japan Earthquake) and man-made disasters (the huge technical deficiencies of nuclear power plants and related national policies) made nuclear power plants in Japan lose their meaning of existence. Of course, Japan will not abandon nuclear power plants in the future for strategic reasons, but the specific related companies will bear huge economic burdens due to the nuclear power business, nuclear waste treatment, population decline and power conservation leading to a continuous decrease in electricity demand.

In 2016, another merger and acquisition case involving Toshiba people came to light.

Taizo Nishimuro, the predecessor of Toshiba President Nishida, became the president of Japan Post after retiring from the position of president. During the Nishimuro era, Japan Post spent 620 billion yen (about 6 billion US dollars) in 2015 to acquire an Australian logistics company "Toll Holdings Limited". By 2016, this Australian subsidiary had caused Japan Post a loss of 400 billion yen (about 3.6 billion US dollars). Japan Post was originally a state-owned enterprise, and now it has just been privatized, and the former president of Toshiba has been appointed as the top leader. It should not have been losing money, but in fact it has lost a lot.

Is it because Toshiba's entrepreneurs are not good at management and have too big ambitions? Perhaps it is more likely that Japan's national nuclear power plan and privatization process were too hasty.

Japanese companies' overseas mergers and acquisitions in the service and real estate industries have not been successful, but a major feature in the past two years is that they have been very active in the pharmaceutical field. The mergers and acquisitions of many Japanese chemical and pharmaceutical companies have shown good business and profit points.

In 2016, Japanese pharmaceutical companies completed 95 major overseas mergers and acquisitions. In October 2016, Dainippon Sumitomo Pharma acquired a Canadian pharmaceutical venture for 65.9 billion yen (about 600 million U.S. dollars), acquiring the development technology for the treatment of Parkinson's disease. In October last year, Japan's Astellas Pharmaceuticals also acquired the German biopharmaceutical company Ganymed, bringing its new drug development technology for the treatment of gastric cancer and esophageal cancer under its control.

In addition, in the field of industrial manufacturing, there are many Japanese companies that have become stronger and bigger through mergers and acquisitions, and they are highly relevant to their main business.

For example, Nippon Electric Glass Company spent 60 billion yen (about 540 million U.S. dollars) on the acquisition of PPG Industries, a major American coatings company, because it was optimistic about the glass fiber technology of American companies. This technology can be used in automotive parts, electronic parts and new liquid crystal panels. There is a lot of room for development in this field in the future. Nippon Electric Glass Company began researching glass fiber as early as 1998 and has considerable technical accumulation. Through the acquisition of American companies, it is expected to become one of the world's top three companies in this industry, along with another American company "Owens Corning" and China's "Jushi Group".

For example, in April 2017, Hitachi acquired the European elevator company Temple for 2 billion yen (about 18 million U.S. dollars). Hitachi is the world's largest elevator company, and the acquisition of a small European elevator company was mainly to quickly capture the existing elevator replacement market in Europe.

Quickly obtaining new profit points and acquiring new markets should be an important feature and purpose of Japanese companies' overseas mergers and acquisitions in recent years. The total amount of funds held by Japanese companies at the end of 2016 was 377 trillion yen (about 3.4 trillion US dollars), and there will be a lot of funds available for investment and mergers and acquisitions in the future. Since entering 2017, Japanese companies have also been active in mergers and acquisitions. However, with the lessons learned from Toshiba, Japanese companies have become more cautious. There are not many large-scale overseas mergers and acquisitions, but many small ones. However, relying on this method to digest the liquidity of funds in Japan is quite difficult, and the solutions are very limited.

Source: China Business News

Exclusively compiled by Xinshiye

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