The devastation caused by the earthquake and tsunami on 11 March has had a profound impact on Japan’s productive capacity and psychology, not to mention the massive loss of life and livelihoods. The ensuing development at the Fukushima Daiichi Nuclear Power Plant is casting a long shadow over recovery, restoration and redevelopment efforts.
That all of this will have a profound impact on the economy, finance and business, to say nothing of the politics, of this country is beyond doubt. The manner in which firms govern themselves may also evolve to cope with the changes brought about by the disaster. This change is likely to manifest itself in the greater use of mergers, acquisitions and disposals in the aftermath of the earthquake.
Let us look at some likely reasons for such a development:
Growing momentum for M&As The fragile but steady recovery of the Japanese economy, accumulation of cash in corporate coffers, and continued strength of the yen had all been conspiring to encourage more deals to take place since the beginning of 2011.
Significantly, the Tokyo Stock Exchange and Osaka Securities Exchange announced in March that they were entering into merger discussions to survive intensifying competition among stock exchanges regionally and globally. The TSE also indicated it would accelerate its IPO timetable. This news was a good indicator of the pressure some Japanese firms and institutions were under to increase competitiveness, the TSE having been a proud and traditional bastion of the Japanese financial services sector.
Return of foreign money to Japan
Led mainly by buy-out funds, foreign capital has returned to Japan. The Nikkei Veritas on 6 March quoted Thomson Reuters’ statistics which showed that, in the first two months of 2011, these funds had already made $4,927mn worth of investments in Japanese firms, some 44% of the total for 2010. In March, the Nikkei reported that Bain Capital of the US had entered into negotiations with Nomura Principal Capital to acquire Skylark, the restaurant chain, for just under ¥300bn.
Foreign firms have not been slow to capitalise on the greater willingness by Japanese firms to accept outside capital. If Crimson Phoenix’s experience is anything to go by, those firms with an existing Japanese base are particularly keen on expanding operations through acquisitions of local competitors.
Need for speed in global market
The earthquake has led to a loss, if only temporary, of a part of Japanese firms’ domestic production base and their market. Some firms will have been significantly weakened by the setback. Their overseas competitors will not wait for them to regain their competitive strengths before taking full advantage of any gap created. Time will be of the essence in staying in the game for many players on the global stage, and some will be compelled to make acquisitions to remain competitive.
Possible need for rescue deals
Other firms may decide to give up independence to survive by seeking to become part of a larger group. For a long time, company sales were regarded as the last resort; something that could only be contemplated when falling on one’s sword was not a practical option. More recently, ceding corporate control and ownership has become acceptable and lately, with the arrival of buy-out funds, disposing of a firm has become a less alien concept. The damage in the Tohoku region may drive shareholders and managers of many firms that are struggling to take that final step. If such a move safeguards the maximum number of jobs, it makes sense socially as well as financially. A couple of banks based in the north-east have asked for public funding and this may get the ball rolling.
The Fair Trade Commission is reported to be taking a more pragmatic stance than before when it comes to assessing potential M&A deals from a competition point of view. In the post-earthquake environment, it may be prepared to exercise further discretion to encourage more transactions to take place in the interest of the greater good.
Availability of acquisition finance
Monetary easing by the Bank of Japan has led to an abundance of bank finance looking for a home. Financial institutions are keen to provide debt for M&As on aggressive terms. It would be important for lending institutions to focus their attention on financing smaller-cap deals, to support consolidation among companies weakened by the earthquake.
The earthquake and its aftermath are many things to many firms and people. There is a widely held view that, while the loss of lives and destruction are profoundly regrettable, those of us lucky enough to have survived the disaster should make the most of this opportunity to improve on what was there before. Any recovery plan should do more than just rebuild. Local and national politics, economic management, corporate governance and finance could be reviewed to mould a better model for running the country. An active M&A market could play a vital role in creating a business community that is more responsive than before to changes in the environment and better serves all the stakeholders.