Japanese investors are making their presence increasingly felt in global M&A markets. But what is driving this and what can Japan’s leading companies do to increase their chances of success?

Japanese outbound investors need to overcome a range of tough and fast-changing challenges if they are to make a success of important cross-border transactions. But adhering to a relatively simple set of rules and principles can increase the chances of success, a major new report from Allen & Overy and PwC suggests.

The report – Expanding global reach – Overcoming the challenges Japanese corporates face and realising value in cross-border M&A – is published this month and is based on extensive research among some of Japan’s most successful outbound investors. Allen & Overy and PwC surveyed 100 corporate leaders in Japanese companies, across a wide range of sectors, which had recently completed a cross-border M&A deal.

The findings, gathered between April and May of this year, provide a fascinating insight into what is motivating the current upswing in cross-border transactions by Japanese investors, their chosen acquisition strategies and the obstacles they see standing in the way of success.

Japanese companies have been highly successful over the years in completing cross-border acquisitions and joint ventures and then turning them into success stories. But patterns of investment are changing fast, with targets now more likely to be in emerging markets rather than in stable and mature markets, favoured previously. That throws up a whole range of new economic, regulatory and cultural challenges.

Our survey findings make it quite clear what is driving this new wave of outbound activity – and it is mostly about seeking alternative markets outside Japan’s still-stagnant domestic economy. For 21% of respondents, the chief motivation was to expand internationally and boost overseas earnings; 12% said the outbound activity was designed to offset the low levels of activity in a stagnant domestic market; and 11% cited changes in global and local economic conditions.

Other factors listed included diversification (10%), reaction to shareholder pressure (8%) and acquiring complementary technology and resources (6%). Vertical integration, bolstering the capital structure of the business, changes in regulation, and acquiring new sales and marketing channels all rated lower scores.

Favoured target markets proved an interesting contrast between future aspirations and recent reality.

Although China was the favoured destination in the year ahead – a surprisingly high 72% put it in their top three target markets – the reality is this may be wishful thinking, especially at a time of rising political tensions, the report says. Indeed, since 2007, China has accounted for only 5% of outbound deal flow from Japan and for only 0.8% (USD2.8bn) of total deal value.

While more mature markets, notably the U.S. and Europe, remain attractive to Japanese investors, there is undoubtedly a pick-up in interest in emerging markets, particularly in

South East Asia. Indeed, as noted in recent editions of this index, M&A activity in the whole Asia Pacific region has tended to be dominated by intra-regional deals, many led by Japanese investors.

So if they are to make a success of these deals in less predictable markets, what are the rules and principles that should guide them in preparing for, launching and, hopefully, completing successful deals? While each deal is unique, we suggest five general issues warrant close attention.

Strategy

It starts with getting the M&A strategy right. Companies should develop a solid rationale before venturing abroad. This should include weighing up the benefits of the deal, the regulatory and economic situation in the target market, and the investment options and deal structure to be pursued.

This important piece of strategic work takes time and effort, and it requires senior managers to be involved throughout, as well as clear and effective delegation of responsibilities and decision-making to the dedicated deal team. This will bring drive and focus to the execution of the deal.

Sourcing a deal

As the strategy is being developed, it is important to adopt an opportunistic and systematic approach to identifying and building ties with potential new partners. Relationships here are absolutely key. So, too, is the need to devote real time and effort to unlocking the priority targets.

Due diligence

It can be fiendishly difficult to find detailed and accurate information on the target, no matter what market investors are looking to enter. Understanding local business practices and the best ways to control associated risks is also a significant challenge.

At this point, advisers are essential. Consulting specialists with the right global and local market insight can help reduce the stress of due diligence and streamline resources throughout the deal process.

Investors should build a favoured financial model that homes in on what will create value in the proposed transaction, and balance this with a plan, based on robust business practices, to control compliance risks. It is also essential to include in the deal team all the in-house expertise you will need, from finance through to IT and human resources.

Negotiations

The various types of deal – whether exclusive, auction or joint venture – require different negotiating skills, but a few principles are essential.

It is important to work out how best to make your company stand out against potential competitors, for example. Consider the best way to convey your aspirations for the deal, and once consensus begins to grow, back that up by demonstrating an ability to work at speed – auctions and exclusive deals have a habit of taking unexpected turns, which require bidders to act quickly.

But it is also important to retain the ability to walk away, even when negotiations are at an advanced stage, if the deal is not right. Wasted deal costs may be significant, but will be much lower than the cost of doing the wrong deal.

Post close

Many transactions fail to deliver the expected benefits because too little attention is given to the integration process that follows the closing of a deal.

Here it is important to be aware of the intricacies of merging corporate and national cultures once the integration process begins. Investors should plan ahead for this phase, working out how the acquired company will fit into their organisation, deciding who will be responsible for managing the investment, and ensuring that future plans for the combined business are properly communicated and understood.

This is an essential part of the process and work on this aspect of the deal should start as early as possible – ideally, as soon as the target is identified.

The report includes a number of case studies of recent transactions carried out by some of our respondents in a range of developed and developing markets, which we believe offer a real insight into the challenges facing Japanese investors.

Taken together with the principles we outline above, the report offers an invaluable guide to cross-border dealmaking. Although the principles are general – and each deal will require subtly different approaches – we believe they offer Japanese investors a real chance of navigating the cross-border deal process successfully at a time of growing activity.

Expanding global reach – Overcoming the challenges Japanese corporates face and realising value in cross-border M&A is available here.