Macroeconomic considerations are driving a comeback of Japanese cross-border M&A in 2024. The market is expanding robustly, with both incoming and outbound transactions stepping up the pace.

Japan’s outbound M&A in the year to date (10 September; YTD) has seen deal volume spike 36% to USD 44.98bn from the same period last year. By contrast, deal count has fallen to its lowest level since 2010, with only 295 transactions inked.

In September alone, a number of companies have said they are keen to grow via overseas acquisitions and investments. These include Yokohama Rubber [TYO:5101], which is considering additional favorable targets following the takeover of Ohio-based Goodyear Tire & Rubber’s [NASDAQ:GT] off-road tire business.

Added attraction

Technology is the most targeted sector for Japanese outbound deals, according to Mergermarket data, with the largest in 2024 YTD being the acquisition of California-based software company Altium by semiconductor giant Renesas Electronics [TYO:6723] for USD 8.8bn. This month, Tokyo-based Sumitomo Mitsui Banking Corporation and GMO Payment Gateway pumped USD 23m into California-based trade finance platform, Drip Capital.

A weak yen was never going to dampen Japan Inc’s spirit in terms of outbound buys, which are necessity for growth, according to one industry expert. Acquiring an overseas target, for instance in the US, with dollar-based operations, could be to the acquirers’ benefit in that context, he adds.

In line with past trends, Japanese buyers have continued to invest this year primarily in the US and Europe, per Mergermarket data, sealing 92 deals for USD 32bn and 75 transactions for USD 4.7bn, respectively. Japanese businesses are intent on searching for growth in major global markets, as their home market feels the pinch of a shrinking population.

In September, Nihon Kohden [TYO:6849] acquired a 71.4% stake in NeuroAdvanced Corp for JPY 16bn (USD 112.38m). In the same month, Tadano [TYO:6395] snapped up 85.8025% of Manitex International for USD 195.85m. In August, major trading house Mitsui & Co [TYO:8031] announced plans to invest in Polska-Mit Steel company in Skarbimierz, Poland. Mergermarket reported in the same month that Hokuto [TYO:1379], a Nagano-based mushroom producer, could consider a peer acquisition in Europe and a food processing target in Japan.

Noboru Yamamoto, CEO and a representative partner at XIB, a Tokyo-based M&A advisory firm, says that Japanese companies are split between those eager to pursue new deal opportunities and those adopting a cautious approach, as the challenges of managing overseas subsidiaries post-acquisition are widely acknowledged.

“Companies that have successful track records in overseas acquisitions tend to go out and shop large targets actively, however, there are only a handful of companies that fall under this category,” explains Yamamoto. – Nidec [TYO:6594], Japan Tobacco [TYO:2914], NTT Data Group [TYO:9613], Asahi Group Holdings [TYO:2502], Suntory Holdings, Daikin Industries [TYO:6367] and Daiwa House Industry [TYO:1925] – are among such examples, Yamamoto noted.

He adds that it is tough for Japanese firms to govern overseas companies after acquisition, particularly if they then fall into distressed situations.

Companies that endured difficult experiences with previous transactions are usually reluctant to pursue deals even though they are fully aware of the fact that they need to achieve growth in global markets, because Japan’s domestic market shrinks, says Yamamoto.

Investors welcome

Japan has seen record inbound M&A volume in 2024 YTD, per Mergermarket data. Inbound deals stand at USD 46.12bn from 54 transactions, thanks to Canadian Alimentation Couche-Tard’s [TSE:ATD] USD 38.5bn offer for Japanese retail giant Seven & i Holdings [TYO:3382], which represents the largest inbound move to date.

Japan has always been a popular destination for foreign investment. According to the industry expert, the market is seen as relatively risk-free thanks to its reliable legal system and infrastructure, while geopolitical tensions surrounding the US and China have turned investor attention towards alternative target geographies such as Japan.

Moreover, Japan also has plenty of hidden gems that are not always appreciated in local capital markets, says the industry expert. These include startups and also SMEs, both listed and privately held. With disclosure practices improving, and an abundance of investor materials available in English, the country could see even more inbound interest going forward, he adds.

Domestic IT services and healthcare industries in particular are expected to see further growth, he continues.

Global private-equity (PE) firms are as bullish as ever about the Land of the Rising Sun. Bain Capital is launching a tender offer for Trancom [TYO:9058] shares; Fuji Soft [TYO:9749] is being taken private by KKR [NYSE:KKR]; Joban Kosan [TYO:9675] has been privatised by Fortress Investment Group; Oak Hill Capital and the CPPIB-backed Berlin Packaging acquired Nissho Jitsugyo; while L Catterton acquired a 70% stake in Kapital.

With the likes of Hong Kong-based Longreach Group upscaling fundraising efforts for Japan-related investments, the market remains a hotspot for global sponsors.

As Mergermarket reports, several household names are exploring divestitures or sale processes, many of which are expected to draw PE interest. Tokyo-based brewery Kirin Holdings [TYO:2503] is exploring a potential carve-out of its amino-acid business; Mitsubishi Chemical Group [TYO:4188] is considering the sale of its Mitsubishi Tanabe Pharma unit; while KKR-backed healthcare firm PHC Holdings [TYO:6523] is weighing up strategic options, including a carve-out, for its diabetes management business.