In this two-part series, we discuss the recent pandemic-related disruptions to, and then seeming rebound of, the M&A market here in Japan. Demystifying the coronavirus - impacted Japanese M&A Market *In part 1, we examined why the pandemic has not slowed domestic M&A deals in Japan. Here we discuss the record-breaking M&A figures in June and July 2020, and predict what lies ahead. Our belief is that the M&A market in Japan will continue to experience an upward trend for the remainder of the year. Part 2: The Market in the Middle of a Pandemic - 2020 and Beyond 1._The initial shock First half of 2020 saw a 60% shrinking in value of domestic and cross-border M&A deals involving Japanese firms to around 2.9 trillion yen. Cross-border deals were especially hard-hit, with overseas acquisitions declining 76% in value from the same period the previous year. In contrast, domestic deals only shrank by 30% in value. This initial halting of deals was a by-product of a working culture that believes “remote work is not real work”. In a country that values face-time, businesses were ill-prepared to conduct deals remotely – many thinking it was not possible. Coronavirus has challenged the Japanese economy, and in particular M&A market by making due diligence, face-to-face negotiations, and everyday execution of deal tasks difficult. Rigid administrative procedures, such as corporate seal requirements, strict internal procedures, difficulty in changing preset board meeting agendas and obtaining M&A approvals at these board meetings, all played a part. As a result, the first half of the year saw companies initially go into a shock cash-saving mode: more so than their usual cash-saving habits. 2._The June and July figures In June, domestic M&A cases were up by 7% compared with June last year. Further, in July, there were 70 domestic M&A cases, making it the third consecutive month that figures were higher than the equivalent month in the previous year. Some factors that may have maintained the 2019 upward trajectory are discussed below.
3._2020 and beyond In the domestic context, the trends described above will likely continue. Succession issues will continue to cripple SMEs for the foreseeable future. Companies will continue to make divestments and downsize in response to shareholder pressure. This may lead to an increase, or at least the maintenance, of current activity levels. For cross-border deals involving Japanese companies, it is unlikely we will see any complex mega-deals this year. As remote work and virtual meetings become the norm, a certain level of due diligence and negotiations can be conducted remotely. This trend will likely continue even post-corona. Yet for Japanese companies, a sensitive, high-stake decision to purchase a foreign company cannot be all achieved over Zoom. The inability to “shake hands on it” will hinder cross-border mega deals closing in the foreseeable future. As well, valuations remain challenging in corona times: with most companies’ 2020 financial statements not being a fair representation of how a company may perform in the future. Japanese businesses have experienced an IT bubble, the Lehman shock, and the 2011 Tohoku disaster. They are accustomed to conducting M&As during such downturns. Each crisis has had a lasting impact on the market, and the coronavirus’ long-term market effects are already being felt. Notably, Mitsubishi implemented an unprecedented policy in response to the pandemic. It announced that it will implement a one-in, one-out policy: breaking taboo of Japanese companies that were reluctant to make divestments in the past. If other corporations follow this powerhouse’s strategic move, it could cause a seismic shift in the way the Japanese M&A market operates. With conglomerates slimming down, we may see foreign private equity firms rushing in to make attractive bids. In any case, one thing is certain: while the road back to pre-coronavirus levels of activity internationally will be a long and rough one, the Japanese M&A market seems to be re-gaining its momentum. (Written by: Dai Iwasaki, Tomo Greer) For more information and questions regarding this newsletter, reach out to us at newsletter@tkilaw.com. *This Newsletter is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. |
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