Dealmakers in Japan are gearing up for a potential game changer in the country’s private equity space after witnessing Bain Capital up the ante in what is shaping up to be a battle with KKR [NYSE: KKR] to take over Yokohama-based systems developer Fuji Soft [TYO:9749].

Bain’s announcement has rattled Japan’s private equity space as head-to-head clashes between major global PE houses rarely occur in a country where hostile (unsolicited) takeovers are still considered somewhat “taboo,” said dealmakers.

M&A market players are watching the evolving situation to see if it heralds a new trend for Japan PE as a successful bid by Bain would set a spectacular precedent for domestic M&A.

Bain Capital announced on 3 September that it intends to submit a binding offer in October that will come in around 5% higher than KKR’s planned JPY 600bn (USD 4bn) friendly offer to privatize Fuji Soft. While Fuji Soft endorsed KKR’s offer, it is still prepared to entertain a binding counteroffer from Bain, as announced. Bain said in its statement it would submit a binding proposal only if it wins the consent of Fuji Soft’s management, and completes required decision-making processes at Bain Capital.

Randy Laxer, Tokyo-based partner and co-head of Morrison Foerster’s Asia Private Equity Practice, said he expects an increasing number of PE firms to participate in these types of deals in order to compete for the “somewhat limited attractive acquisition targets in Japan.”

“As this situation progresses, and due to the changing attitudes in Japan with respect to unsolicited bids, all signs point to a greater number of unsolicited offers by foreign PE firms in Japan in the near term,” added Laxer.

A Tokyo-based M&A advisor said the Bain-KKR takeover battle has seen some PE firms go into fight mode.

“Not only foreign firms but Japanese private equity appears to be studying the case to see if they can exercise the same tactics in the future,” he said.

This kind of scenario has been playing out among Japan’s strategics, after all, a PE executive said. “There is no reason it shouldn’t or wouldn’t happen between PEs,” he added.

The dealmakers point to the M&A guidelines set forth by the Ministry of Economy, Trade and Industry (METI) that have prompted Japanese corporates and PE buyers to act “more boldly and actively” in the face of unsolicited takeover bids.

The new guidelines, formulated in 2023, encourage boards to give “sincere consideration” to a “bona fide offer.” The guidelines expand upon METI’s MBO and buyout M&A guidelines in 2019, which stated that it is important to not “simply reject a proposal that may increase corporate value.”

Cost, discipline, reputation

There are still substantial obstacles to overcome for PE firms considering submitting counter proposals in such situations, according to some experts.

Orrick’s Tokyo Office partner Hiroki Sugita doubts if the latest move by Bain will inspire other PE houses to follow suit. He questioned whether the proposed counteroffer is a feasible approach to win deals going forward.

“Cost-wise, it may not make sense for PE buyers to aggressively “challenge” and counter propose PE winners – like KKR for Fuji Soft – that have already gone through an official sale process,” because it may be difficult to justify additional spending on far heftier costs and fees, including due diligence fees, which may ultimately result in an unsuccessful bid, said Sugita.

“PE firms are primarily cost-conscious to maximize their profits from investments, contrary to strategic suitors that sometimes turn ‘super aggressive’ to bag deals for strategic reasons,” Sugita said.

A second PE executive said that increasing offer prices is not an easy option for PE bidders. This is because such prices usually mean the “highest” they could offer on the back of LBO financing that is provided by lenders at their full capacity, especially in auction situations. “This means it totally depends on how much you are willing to increase equity or make a twist on financing structure,” he continued.

PE firms (or GPs) are typically not allowed to execute unsolicited takeovers as their contracts with LPs prohibit them from doing so, said Sugita. GPs’ decision to initiate such unsolicited takeovers are often subject to their internal advisory committee’s consent, “but the committee won’t approve it without a justifiable reason,” he noted. “Indeed, GPs can’t easily opt for these tactics contractually,” added Sugita.

The second private equity executive echoed this view while noting it is difficult for his firm to make unsolicited offers due to such contracts with LPs. There is also the need to avoid any potential reputational risk, he added.

“Conversely, if we encounter a situation where we are tendering and some other rival bidder comes up with a higher price, we may wait and see the target company’s reaction; if they are still on our side. In case the price gap is thin, there should be a chance that shareholders respect the management team’s decision,” he said.

Meanwhile an industry expert said Bain was likely able to make such a  “bold” decision – one that could involve reputational risk – because it has established a record of many successful PE investments in the country.

“I think Bain is well-aware of the reputation risks but it ventured to do that [regardless],” he said.

Meanwhile, a Tokyo-based banker said the key issue is which PE bidder can come up with a more convincing proposal, including the stock price they offer, to enhance the value of the targets. “After all, the final fate of the target should depend on shareholders’ decisions,” the banker stressed.

“What this is, is a cautionary tale for PEs active in Japan on how prepared they need to be [in the event] of all scenarios, and the importance of talking to all the stakeholders involved,” according to the first PE executive. “Build good relationships and get the proper support before any undertaking.”