IT’S taken decades but finally, Japan’s doors are swinging open for private equity.
The country’s corporate giants have long been a coveted target for buyout firms seeking to put large pools of capital to work.
Money, though, hasn’t been enough to overcome the traditional Japanese hostility to takeovers.
Until recently, that is. Prime Minister Shinzo Abe’s exhortations for improved corporate governance and cheaper funding costs flowing from negative interest rates have combined to create a more welcoming environment.
That’s now been joined by a third positive factor: acquiescent boards.
Bain Capital LP’s victory in an US$18bil battle for Toshiba Corp’s chip business has helped drive private equity deals to a record this year.
The increasing likelihood that the Boston-based firm will succeed in buying out a Japanese advertising agency also shows how the nation’s companies are starting to embrace overseas acquirers.
Private equity deals have surpassed US$31bil for this year, including the pending Toshiba takeover, more than triple the figure for all of 2016. On Friday, KKR & Co raised its bid for Hitachi Kokusai Electric Inc for a second time.
Two days earlier, WPP Plc agreed to sell its stake in Asatsu-DK Inc, Japan’s third-largest ad firm, to Bain Capital.
The decision represented a victory for ADK’s Japanese management, who had invited Bain’s offer after clashing with London-based WPP, the company’s largest shareholder and its partner of 20 years.
WPP didn’t disclose why it dropped its opposition, but Bain said that it would consider allowing WPP to take a non-controlling minority investment in the entity that would own a privatised ADK.
It probably realised working against the local management team wouldn’t be easy. ADK has been keen to strengthen its strategy in a changing, increasingly digital advertising landscape, and also wanted to free itself from having to use WPP in overseas work.
With a 5% market share, the agency has gross margins and returns on equity that are lower than leaders Dentsu Inc. and Hakuhodo DY Holdings Inc.
While the US$1.3bil tender has until Dec 6 to close, Bain is in a strong position to secure the majority of shares it needs, with WPP having agreed to sell its 25% stake at the original Oct 2 offer price of 3,660 yen (US$32.54).
That would mark two wins in quick succession for the US private equity firm.
The purchase of Toshiba’s chip operations – assuming Western Digital Corp stands down from its arbitration proceedings and antitrust authorities don’t object – could be Japan’s biggest-ever buyout and will see a national corporate treasure fall into foreign hands.
Here again, Bain’s engagement with management demonstrates the warming attitudes to buyout firms.
The US investor included key Toshiba chip clients such as Apple Inc and Dell Inc in its buying consortium, making its deal more palatable.
The purchase was also structured so that Japanese firms, including optical equipment maker Hoya Corp, will have 50.1% of voting rights in the special-purchase vehicle set up to conduct the takeover.
That means the company and key semiconductor technology will remain in Japan, although Bain will control the board.
With Toshiba under its belt, Bain will be Japan’s top private equity investor, beating KKR & Co. and Japan’s SoftBank Group Corp and Nomura Holdings Inc, according to data compiled by Bloomberg.
Granted, there are other reasons why private equity firms are finding more success in Japan: For one, there are simply more deals up for grabs. Faded technology stars such as Toshiba, Hitachi Ltd and Panasonic Corp are selling businesses to raise cash while company founders have increasingly turned to buyout firms to take over operations their children don’t want to run.
Whatever the drivers, Japan’s resistance to overseas raiders looks to be dissolving. With the global environment for takeovers more competitive than ever, that’s welcome news for private-equity investors. — Bloomberg