Japanese overseas M&A boom continues, despite goodwill writedowns

Japan’s overseas M&A reached a record high of nearly ¥11trn ($100bn) in 2016, an increase of 6% on the year before, covering 627 acquisitions.

However the recent revelations of Japan Post’s ¥400bn writedown on their 2015 $4.9bn  acquisition of Australian logistics company Toll Holdings has triggered another wave of commentary in the Japanese media questioning whether Japanese companies really know what they’re doing when they venture overseas.

Nidec the honourable exception to not meeting expectations

As blogged by us, Nidec is the honourable exception to this – largely thanks to its strategy of buying smaller, more easily absorbed companies.  It seems to be the big name, big ticket acquisitions where Japanese blue chips, in search of growth and markets, come unstuck.  Diamond magazine cites NTT DoCoMo’s spending spree in the 2000s in the Netherlands, UK and India as well as its acquisition of AT&T Wireless in the USA.  Nomura and Lehman Brothers’ merger and Daiichi Sankyo acquiring the Indian generic pharmaceuticals company Ranbaxy also “did not meet expectations”.

Nikkei Business points to Toshiba’s acquisition of Westinghouse in 2006 and Kirin’s acquisition of a Brazilian drinks company in 2011, which ended in its sale earlier this year to Heineken.  “If Japan Post had not written down the acquisition now, then writing off the goodwill would have continued from year to year, depressing profits, so in a way, writing it off with one stroke was the rational management decision.  However, it remains to be seen how Japan Post and Toll are going to find synergies quickly and paint a picture of growth in international logistics”.

The personal (and political) connection between Toshiba and Japan Post

There is a connection between Toshiba and Japan Post – Taizo Nishimuro was President of Toshiba 1996-2000 and was President of Japan Post from 2012, including when it was privatised in 2015.  Apparently he briefed group directors in 2013 that they should try to find, as quickly as possible, a major acquisition.  Nikkei Business says this was Nishimuro trying to help Abenomics in its intention to raise share prices, by making Japan Post an attractive stock through a growth strategy based on M&A.

Japan Post has 200,000 employees, but of course almost all had only domestic careers.  Nishimuro did not bring anyone with him from Toshiba, so ended up relying on a management team composed mainly of ex-civil servants.  Nishimuro therefore had to say that the management team at Toll would be unchanged after acquisition.  Apparently the acquisition plans were barely discussed by the Japan Post board, angering the big names that had been appointed as external directors from the Japanese “industrial triangle” such as Akio Mimura, honorary chairman of Nippon Steel.  Toll was acquired without any loans from banks, from Japan Post’s own funds – in other words, the post office savings of its customers.

The new President of Japan Post since 2016, Kunio Yokoyama, joined Japan Post in 2006 from Sumitomo Mitsui Banking Corporation.  It was Yokoyama who decided to proceed with the writedown.

Lack of experience in post acquisition corporate governance

The three factors behind Japan’s M&A boom are firstly and most obviously, the lack of growth in the domestic Japanese market, secondly that Japanese companies are cash rich and are under pressure from foreign investors to use that cash rather than sit on it and the third reason is that overseas markets have been inviting Japanese companies’ bids as they were less damaged by the Lehman Shock than Western suitors.  However cash rich Chinese companies are also getting involved, pushing prices up.

As one consultant puts it “acquiring overseas business means integrating different HR systems, and this takes time.  Japanese companies are still inexperienced in this.”  Just leaving it up to the local management will inevitably lead to losses if Japan HQ turns a blind eye to problems, as Toshiba did for 10 years with Westinghouse.

The Japanese companies who have the most amount of goodwill (over Y1 trillion) on their books as a result of M&A are Softbank (ARM), JTI, NTT and Suntory.  And now Seven & I have announced they will buy the US convenience store and petrol station chain Sunoco for $3.3bn.  Seven & I claim that the acqusition was discussed vigorously at the board level, including external directors, but as the Nikkei Business says, that alone will not guarantee success.  Continuous, rigorous corporate governance is needed after acquisition too.

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