Japanese executives continue to target M&A opportunities amid global uncertainty

Japanese M&A outlook is positive as the imperative to transform outweighs the risk of uncertainty.

The search for technology and talent is driving deals, according to the EY Global Capital Confidence Barometer: 52% of Japanese respondents plan to allocate more than 25% of their total investment capital to technology, mostly solutions that drive top-line growth. Almost half of Japanese executives will invest in technology through acquisition, joint ventures or external venture funds. At the same time, almost two-thirds of respondents (65%) are experiencing difficulties securing the right skills and talent.

In terms of investing in technology, the answer to the buy-versus-build question for most companies is tilting toward buy. At the same time, the shortage of talent is a constraint on growth and acquiring the skills needed to underpin future growth is increasingly part of the current M&A story.

No economic downturn in sight for many Japanese executives

The likelihood of a recession in the near-to mid-term is not considered a significant threat: most Japanese respondents (74%) are not expecting an economic downturn.

Companies are managing through trade and tariff issues that could be perceived as undermining economic confidence. 41% of Japanese businesses are actively planning to mitigate the impact of trade and tariff issues in ways such as reconfiguring supply chains and relocating production facilities. A further 30% are actively considering their options to respond to this fast-changing situation.

Variety in competitive and hostile deal making expected

In the context of this bullish economic outlook, the deal market going into 2020 looks set to be highly competitive. About eight in ten (78%) Japanese respondents expect to see an increase in hostile and competitive bidding in the next year and 80% of Japanese respondents expect private equity to be a major acquirer.

Japanese respondents expect increased megadeal activity (US$10b+), with half foreseeing an increase in deals topping the US$10b+ mark. Almost three-quarters (76%) do not anticipate any slowdown in M&A activity overall and a similar number (73%) of Japanese corporate executives forecast an increase in cross-border deal making.

US regains top spot; UK remains attractive to investors; Japan active with large-scale corporate carve outs

The latest Capital Confidence Barometer finds that more than half of Japanese respondents expect the M&A pipeline to increase in the next 12 months.

The Japan market in the last few years has experienced several large scale corporate carve outs from large conglomerate groups, and is expecting more de-conglomeratization and carve outs in the years ahead. As more global and regional private equity houses focus on what is seen as a once in a life time opportunity in Japan, the competitive landscape (and associated valuations) is becoming more fierce. In order to remain competitive, bidders are looking at value creation and operational and EBIDA optimization and improvement as the key differentiators and success factors for large scale corporate carve out deals.

The latest Capital Confidence Barometer also finds the US is the preferred place for M&A investment globally. While Brexit uncertainty continues, the survey finds UK attractiveness strong as investors rank it the second preferred investment destination globally. For Japanese investors Japan and the US outpace the UK (in third), China (fourth) and France (fifth).

The ongoing trade issues in a number of the major economies have not caused dealmakers to shelve plans. The imperative to transform outweighs the risk of uncertainty. As long as this continues, the drumbeat for M&A will go on. Deals continue to be powerful means to reshape portfolios and accelerate the transformation imperative facing CEOs.

Articulating purpose and long-term value creation

Purpose and social impact are rising on the boardroom agendas and are fundamentally reshaping the way companies measure success. Some 85% (global 84%) of Japanese companies already have, or plan to have, social value reporting metrics in place for the next year.

Business leaders are increasingly paying closer attention to investors’ demands to see evidence of broader responsibilities. They are recognizing and responding to the need to be good corporate citizens, knowing that any business on the wrong side of this debate will likely find themselves on the wrong side of history.