Ahead of our Mergermarket Japan Forum on 25 June 2024, we analyze deal trends based on interviews with senior bankers and private equity executives.

Japan had a rather slow start this year with 1,553 deals amounting to a total deal value of USD 32.2bn, enduring a 36% decrease in Japan-targeted M&A volume, compared with the same period last year.

But the data is not telling the entire story. Dealmakers polled by this news service continue to see a strong deal momentum in their day-to-day operations.

“We are seeing new deal opportunities coming up one after another,” said Yusuke Ishimaru, Senior Deputy Head of Mergers and Acquisitions Advisory and General Manager, Mergers and Acquisitions Advisory at SMBC Nikko Securities, adding the number of cases that his firm is handling has not decreased compared to last year.

The drop in deal-making data is largely due to the absence of large deals so far this year, dealmakers noted. Excluding Toshiba’s USD 16.1bn privatization deal from last year, the deal volume then presents a much milder decline of 8.6%.

As shareholder pressure mounts, Japanese companies have been allocating more funds to their core business than before, creating more opportunities for divesting non-core assets, Ishimaru noted.

Atsushi Tatsuguchi, Managing Director, Head of M&A Advisory Group, at Mitsubishi UFJ Morgan Stanley Securities (MUMSS), pointed out that an enormous number of talks are going on behind the scenes, and these deals could push up M&A volume later this year.

A growing awareness of corporate governance and capital efficiency among Japanese companies keeps pushing them to seek various types of deals, such as divesting non-core businesses to streamline portfolios, industry consolidation, and management buyouts, the dealmakers said.

The growing need for founders’ succession solutions is also constantly leading to more opportunities across industries, they noted.

Meanwhile, the weaker yen and the central bank’s policy shift earlier this spring, which involved ending its negative interest rates, had little impact on deal momentum, dealmakers pointed out.

PE confidence remains

PE buyout deals in Japan reached a total of USD 3.9bn, marking a 14% increase in deal count YoY but an 83% decrease in deal volume. A total of 25 PE exit deals were recorded with a total value of USD 894.9m, representing a 4% decline in deal count and 76.5% drop in deal volume, respectively.

“Now investment money from all over the world is heading for Japan,” said Tadashi Maruoka, Partner and Japan Chairman at EQT Private Capital Asia.

Japan’s fundamentals for PE deals, such as corporate governance reforms and public authorities’ pressure for corporations to be more accountable to shareholders, have remained unchanged. As a result, PE firms’ appetite for the Japanese market has remained strong, he said.

Meanwhile, competition among GPs is likely to intensify due to pressure from LPs and larger fund sizes raised by domestic GPs, he added.

Megumi Kiyozuka, CEO, Sunrise Capital (formerly CLSA Capital Partners), said that he is enjoying “the busiest moment” in his 24 years of professional career in the private equity space. The firm acquired four companies in the last six months, which is the fastest deployment pace ever, Kiyozuka noted.

Even after the BOJ ended its negative rate policy in March, financial costs are still far cheaper and more accessible than in the US and Europe, according to Kiyozuka.

“We are still able to secure a leveraged buyout loan at the policy rate plus 300 basis points, which means all-in at an interest rate of 4% at worst. Japan should be the only country being able to do that.” Kiyozuka noted. There has been no sign of a change in the loan spread at this moment, he noted.

Meanwhile, debt providers are also holding a positive outlook for the domestic leveraged financing market.

Jin Nishikawa, Managing Director and Head of M&A Finance at MUFG Bank said he expects the LBO financing space to keep momentum on the back of a slew of LBO deal flows in the pipeline.

Japan’s LBO financing business appears to be attracting some new debt providers, such as foreign lenders, who are potentially hoping to enter the market, Nishikawa added. That said, there are still “some hurdles” for them to clear before actually tapping into the market, he noted.

Rise in unsolicited offers

Meanwhile, dealmakers anticipate an increase in deals involving unsolicited offers going forward as it has become a considerable tool for Japanese companies following Nidec’s [TYO:6594] acquisition of Takisawa Machine Tool in 2023 and Dai-ichi Life Holdings’ [TYO:8750] acquisition of Benefit One, completed earlier this year.

Shoya Ohkuma, CEO, QuestHub, added that more unsolicited counter offers are likely to be seen in response to tender offers aiming for management buyouts (MBO) due to the increased potential for conflicts of interest within MBO scenarios.

“Management teams have incentives to achieve privatization at a lower price, creating opportunities to offer higher prices to shareholders as alternatives,” he said.

Revived outbound interest

Japan has recorded 186 outbound deals worth USD 32.9bn, and 33 inbound deals worth USD 857.7m in 2024 YTD. Outbound deal volume, led by Tokyo-based semiconductor giant Renesas Electronics’ [TYO:6723] acquisition of California-based electronics design systems company Altium [ASX:ALU] for USD 5.88bn, has already surpassed full year 2023.

MUMSS’s Tatsuguchi said that he is seeing signs of recovery for outbound deal volume. “Japanese companies are thinking of larger targets. The number of such Japanese companies is also increasing,” he noted.

SMBC Nikko’s Ishimaru also said that Japanese companies’ appetite for overseas assets is recovering compared to the time under the COVID-19 pandemic.

The US, while a recurring theme for Japanese outbound deals, could be pushing 2024 to outshine other years.

According to Takeshi Nakao, managing partner at Freshfields Bruckhaus Deringer’s Tokyo office, outbound deals by Japanese companies last year were not as strong as the market hoped, noting, however, the substantial deal flow towards the US that included some large acquisitions.

Freshfields has beefed up its Tokyo team, as announced last November, bringing Noah Carr and Gordon Palmquist on board as partners. Both new joiners have solid experience in cross-border deals, including those involving the US, where the firm continues “to see increased client demand.”

For 2024 YTD, US-targeted deals by Japan Inc clocked USD 23.6bn on 61 transactions, including the Renesas-Altium deal, making it by far the top target geography, with a whopping 71.7% of all 2024 YTD outbound deals.

“While deal flow could perform better this year, geopolitical uncertainties and (to a lesser extent) the weak yen could remain a concern,” Nakao added.