The Japanese invasion

(RTTNews) - When the entire world is trying to weather a financial storm, with nations taking emergency measures, the World Bank announcing additional assistance and companies cutting costs, firms from an Asian country view the crisis as an opportunity. An opportunity to expand themselves. Or so it seems, going by the number of deals involving Japanese companies that have hit the headlines in the recent past.

In 2008 thus far, Japanese companies have signed many hefty deals overseas, with most of them being strategic than opportunistic. And interestingly, pharmaceutical companies have been in the forefront of this shopping spree abroad.

In April, Takeda Pharmaceutical Co., Japan's largest drug maker, agreed to acquire blood cancer drug maker Millennium Pharmaceutical for $8.8 billion. In June, Daiichi Sankyo Co. (DSKYF.PK) agreed to buy a controlling stake in Indian drugs firm Ranbaxy Laboratories (RBXLF.PK, RBXZF.PK) for about $4.6 billion. In December 2007, Eisai, Japan's fourth largest drug maker, said it was buying US biotech firm MGI Pharma for $3.9 billion in an all-cash deal. For pharma companies, acquisitions help extend product line and expand business in wider markets.

In July, Tokio Marine Holdings Inc., Japan's largest insurer, agreed to buy Philadelphia Consolidated Holding Corp. for $4.7 billion. In the same month, TDK Corp., the world's largest maker of magnetic heads used in disk drives, agreed to buy Epcos AG of Germany for about 200 yen. While Tokio Marine's revenues are expected to improve dramatically through the acquisition, the deal will help TDK expand production of machinery parts and add customers in Europe.

Cashing in on the distress of the target company, Mitsubishi UFJ Financial Group Inc. last month bought 21% of troubled investment bank Morgan Stanley (MS | Quote | Chart | News | PowerRating) for $9 billion. In another opportunistic deal, Nomura Holdings Inc., Japan's biggest securities firm, recently bought bankrupt Lehman Brothers' Asian-Pacific unit for a mere $225 million.

In the latest transaction involving a Japanese company, Japan's biggest mobile-phone operator NTT DoCoMo Inc. (DCM | Quote | Chart | News | PowerRating) said on November 12 that it would acquire 26% of India's Tata Teleservices Limited for about $2.7 billion. India is the second-largest mobile market in the world after China and the deal is sure to boost NTT DoCoMo's revenues.

Several factors are prompting Japanese companies to carry their shopping bags outside the country. One of them is the aging population, which has brought many businesses to a near-saturation point. With potential clients becoming less in the domestic market, resulting in biting competition among peers, firms are forced to search elsewhere. Also, acquisitions are not viewed well in the Japanese society due to a historical disinclination towards the idea.

And most importantly, due to prudent, often called conservative, management, Japanese companies are flush with funds, when their counterparts elsewhere in the world are languishing. Meanwhile, leveraged buyout of companies has become tough as investors have become more cautious, effectively putting rival suitors from other countries out of picture. Due to the financial crisis, the target companies have reduced in market value, which makes deals cheaper now than ever before. Thus, purchases considered unimaginable until a few months ago are within reach for the Japanese companies now.

Market advisor Updata Advisors said recently that in the current quarter, cross-border deals tracked by the company made up a healthy proportion of deals overall at 41%, compared to 39% last quarter. However, unlike in the previous quarter, 37% of deals tracked were inbound to the U.S. and 37% were outbound from the U.S. Last quarter, only 17% of the cross-border deals tracked involved a U.S. target company.

Meanwhile, the economy is slowing in Japan too. The country's Cabinet Office said in a preliminary report on Monday that the economy contracted 0.1% in the third quarter of 2008, compared to the previous quarter. This is the second consecutive quarter of decline. On an annualized basis, GDP was down 0.4% after a revised 3.7% contraction in the second quarter. Speaking to reporters, Japanese Economy Minister Kaoru Yosano said the data shows that the economy is in a recessionary phase.

This is not the first time that Japanese firms are trying to find additional value for their money abroad. At least on two occasions in the past, they made forays outside Japan. In the late 1980's firms based in the second largest economy in the world tried to procure real estate assets abroad, while in late 1990's, many of them tried to acquire technology companies based elsewhere. However, these two movements did not prove beneficial for the buyers.

The present movement has to be seen differently from those in the past, as the target companies are more linked to the buyers' core businesses. In many deals announced this year, the Japan-based buyer benefits by an additional product or an extended market. Apart from all these, these transactions look long-term if not life-long, unlike private equity firms, which sell off the acquired assets at the nearest opportunity.

It looks as though the Japanese invasion will continue unabated, at least until global economy shows definite signs of recovery.

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