Japan Europe M&A trends – January 2023

Following a recent trip to Japan, I came away with a clear sense that Japan Inc remains keen on making acquisitions and investments of UK and European businesses.

As set out in DC Advisory's (DCA) comprehensive Global M&A Outlook 2023, M&A markets are driven by mood and momentum. In 2019, pre-covid, the mood was positive and the momentum was strong off the back of 11 years of ever-increasing deal volumes. We then experienced two exceptional covid-impacted years where the mood vacillated from deep despair to unbridled exuberance and momentum from inertia to irresistible momentum. It is no surprise that the exceptional M&A year that was 2021 has not been repeated in 2022. DCA and others anticipated a reduction in deal activity, and that was prior to the global geo-political shifts caused by the invasion of Ukraine and US-China tensions. 

Intralinks' view is, "Despite headwinds, dealmakers are optimistic about opportunities in the next 12 months".

DCA points out three key aspects supporting this positivity:

• Lenders are resolving stress in their current portfolio; are resigned to some inevitable restructuring; and are beginning to contemplate new opportunities
• Private equity has spent time identifying businesses which can endure or benefit from inflation, have strong market positions, and generate significant margins and cash
• Corporates have realised that the febrile pace of deal-making that favoured private equity is now dramatically reduced

In addition, there is an expectation that valuations will come down as a consequence of reduced quantities of debt at a higher price, reduced confidence in delivering a business plan due to shifting geo-political sands creating a less predictable future, and reduced expectations of future valuations.

DCA anticipate that levels of deal activity will likely be flat in H1 and increase in H2 2023. Once the market is perceived to be stable, the impact of inflation better understood, and the new valuation reality established, decisions can be made.

So, which sectors will be active?

The two sectors mentioned the most on my trip were,unsurprisingly, energy and infrastructure and new technology. In the UK and Europe, there are a number of large Japanese corporates on the hunt for assets, cutting edge disruptive technology, and opportunities to acquire and invest in clean energy businesses. Words such as Carbon capture, offshore wind, electricity connectors, green hydrogen, ammonia, battery storage etc., roll off the tongues of many Japan corporates and advisors. One of the recent challenges for Japan Inc has been the challenge of participating in such a competitive market with high valuations. They have been locked out or unable to compete for many assets. The general view is this should improve through 2023, and Japan Inc is well-placed to benefit. 

By way of example, I have recently sourced and introduced a potential investment opportunity in the clean energy sector to a number of Japanese clients and we are in the early stages of creating a deal. Target is a spin out from a leading UK University specialising in nanomaterials that reduce the cost of separating, storing and transporting gas. Cutting edge, disruptive and very interesting for a number of Japanese corporates.

Another trend that will continue is the sale of non-core or under-performing businesses. Changes in Japan Corporate Governance regulations and overcoming an aversion to selling a business has allowed Japan Inc to embrace the disposal of costly assets that are propped up by parent company loans.

Does the UK remain an attractive place for Japan Inc to acquire and invest?

On the whole, the answer is yes. We are a leader in cutting edge technology, especially in financial services, insurance and clean energy. The pound is in a good place against the yen. Nomura are anticipating an appreciation of the yen, especially in the first half of 2023. Foreign direct investment (FDI) rules have been strengthened with the introduction of the National Security and Investment Act (NSIA), but the UK remains a relatively amiable environment for FDI screening, apart from a limited number of very sensitive areas.

Does Japan Inc's appetite for outbound M&A remain strong?

Very much so. Japan Inc is keen to continue outbound M&A – its population is ageing; domestic markets are saturated; and they have huge reserves of cash, estimated at USD900bn+.

On a personal note, I was very fortunate to have the opportunity to attend several kendo keiko whilst in Japan, including training with the SONY Kendo Club with some very experienced kendo players. I was reminded by one sensei that I should continue focusing on building my seme (application of pressure) and sutemi (commitment to an attack, without fear). Both concepts, which have a much deeper meaning than I am doing justice to in this short article, are also applicable to business. To build pressure in kendo you need to accept a lot of pressure from your opponent, be immensely patient whilst under intense pressure, remain calm of mind and body, but at the same time be ready to strike with all your spirit when the opportunity arises. Japan Inc and those involved in deal making need to do the same. So, it's back to the dojo for me so that I can be better prepared for H2!