Japan Inc adopts ‘wait-and-see’ stance for M&A amid COVID-19 recession fears – Analysis

16 March 2020

Japan Inc is largely adopting a “wait-and-see” stance with regards to M&A deals against the backdrop of a potential global recession sparked by the COVID-19 outbreak, according to dealmakers polled by this news service. Some advisors also noted that a few of their deals had been terminated and/or stalled due to increasing uncertainty. “For both sellers and buyers, it is not the right timing to push deals forward as conditions have changed subsequent to the outbreak,” the first banker and an advisor said.

  • Nikkei 225 has plunged 25% since start of this year
  • Acquisition opportunities for strategics and private equity remain
  • Current inflated valuation to see readjustment


Japan Inc is largely adopting a “wait-and-see” stance with regards to M&A deals against the backdrop of a potential global recession sparked by the COVID-19 outbreak, according to dealmakers polled by this news service.


Some advisors also noted that a few of their deals had been terminated and/or stalled due to increasing uncertainty. “For both sellers and buyers, it is not the right timing to push deals forward as conditions have changed subsequent to the outbreak,” the first banker and an advisor said.


Eiichi Yamazaki, head of global advisory at Mizuho Securities, said the importance of M&A as a business strategy would remain unchanged. However, it could be less of a priority now as companies respond to more urgent issues. The current situation prevents dealmakers from conducting site visits and meetings, and cross-border deals in particular are being impacted. Processes such as auctions and researching targets are being affected, he added.


There had been a healthy pipeline of deals since the start of 2020, but many of these have now been suspended as decisions at the management and board levels have been put on hold, the second banker said.


The third banker noted there would be fewer RFPs in the coming months. “The key question is how long this will last and what the real impact is,” he added.


Companies such as Tokyo-based telecommunication company KDDI noted it had no plans to cancel or postpone any investments due to the novel coronavirus as of now. Tokyo-based IT service provider Fujitsu said it could not immediately comment about COVID-19’s potential impact on M&A.


Meanwhile, Unizo Holdings announced last week that it was planning to sell properties valued at about JPY 130bn (USD 1.2bn) in April 2020 or thereafter. It noted that due to declining asset values because of increased uncertainty about the future on account of COVID-19 and other factors, it was scaling up asset sales. Separately, news reports have also pointed out that Unizo may be accelerating asset sales aimed at securing funds to conduct an employee buyout and reducing the company’s enterprise value to fend off takeover attempts from other bidders.


Dai-ichi Life Research Institute’s Executive Chief Economist Toshihiro Nagahama expects the number of deals in Japan to decline temporarily as many Japanese companies need to allocate funds, which had been set aside for M&A, to respond to the crisis. However, government stimulus packages offered to companies in the event of a recession should enable them to return to the M&A market relatively soon, he noted.


Mark Weeks, partner at Orrick, pointed out that lower stock prices and appreciation of the Japanese yen could present buying opportunities for far-sighted Japanese buyers. Recent inflated valuations are being adjusted downward due to the coronavirus outbreak. Japanese companies keen on acquiring cutting-edge technologies, including artificial intelligence and big data, may now see such targets within their grasp, he continued.


Lower share prices could bring an uptick in unsolicited takeover offers from strategics with strong balance sheets, Weeks said. Targets with weak balance sheets or a negative outlook due to a recession or downturn in their industries, such as travel and leisure, may be especially vulnerable, he noted. Private equity and activist funds also intensify their investment efforts under such circumstances, he added.


Private equity buyouts – opportune timing?


Meanwhile, the first banker noted that private equity firms are gearing up for potential buying opportunities. For private equity, a recession is not an immediate issue as funds already have dry powder to invest, he said. In fact, it should be a great time to acquire companies at reasonable valuations and there should be numerous turnaround targets coming up in the market, he added.


A private equity source echoed this view and said that during such a phase, there is a certain period where the expectation between sellers and buyers do not match immediately – sellers tend to keep higher expectation based on the previous price range, while buyers are seeing the bottom, he continued. This sort of mismatch will be resolved soon after companies enter into bankruptcy, and owners will get to know what the real range is, he noted.


Prior to the outbreak, Japanese private equity activity had been on the rise, helped by banks aggressively extending financial leverage to about 10x EBITDA due to the negative interest rate policy adopted by the Bank of Japan, the fourth banker said. However, in light of the ongoing situation, financial leverage could contract to below 5x or even 3x EBITDA and this would affect private equity activity in terms of investments and exits, the fourth banker added.


On the other hand, the economic slowdown is making private equity firms pay more attention to asset-light targets such as companies in the IT and e-commerce sectors whose business models are less affected by the outbreak, a second private equity source said.


The novel coronavirus has affected almost all industries across Japan, but the consumer and leisure sectors have been hit particularly hard as the government has requested citizens to stay home and cancel large-scale events. The manufacturing industry has also been affected as many Japanese manufacturers have their factories in China, with the supply chain disrupted.


The Japanese government has asked companies to encourage employees to work from home since 25 February. Prime Minister Shinzo Abe has also requested schools nationwide to close temporarily. This summer’s Olympic Games remains a question mark, although IOC officials have said that the games will continue.


The Nikkei 225 index fell 6.08% last Friday (13 March), responding to the World Health Organization’s declaration of a pandemic the day before as well as on US President Donald Trump’s decision to restrict travel from 26 European countries. Japan’s benchmark index has plunged 25% YTD.


From the start of this year until 12 March, Japan recorded 84 deals with a total deal value of USD 11.9bn, according to Mergermarket data. In 1Q19, Japan had 117 deals with total deal value of USD 8bn. In 2019, Japan had 465 deals with total deal value of USD 75.2bn.


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