Japanese Prime Minister Shinzo Abe Photo by Kazuhiro Nogi
Last year saw a record volume of outbound mergers and acquisition deals by Japanese companies. The strong yen meant that overseas assets were cheap, and Japan Inc. went on a shopping spree, with international law firms in Tokyo more than happy to help.
But what happens now that the Japanese government is pushing a weak-yen policy, the prospect of which has seen the currency fall 20 percent against the dollar since last fall?
All of us M&A lawyers in the market are focused on it, says Shearman & Sterling Tokyo partner Kenneth Lebrun.
According to Dealogic, announced outbound Japan M&A deals totaled $110.5 billion in 2012, and one of those deals, Softbank Corp.s proposed takeover of U.S. mobile carrier Sprint Nextel Corp. for $20.1 billion, will be the largest Japanese overseas deal ever. Only the United States had more outbound deals last year, a total of $165.4 billion.
But the government of Prime Minister Shinzo Abe, who took office at the end of last year following a landslide victory for his Liberal Democratic Party, has pledged to pursue monetary easing policies that will boost exports and, hopefully, pull Japan out of a decades-long cycle of economic stagnation. Many of his policies have yet to be enacted; the yens fall so far has been driven mainly by market anticipation.
Some lawyers already see a possible shift in outbound investment. Ive noticed an appreciable cooling in the market over the last couple months, says White & Case Tokyo office head Brian Strawn. This is probably the quietest February Ive had [since 2010]."
The last two months, because of changes in the Japanese government, people are saying, Lets wait and see what Prime Minister Abe will do to aid the country, he says.
Strawn says Japanese companies are no doubt giving additional thought to prospective overseas deals in light of the new government. Right now, international lawyers are working on deals that were put in motion earlier.
I think everybodys busy, but whether were going to be that busy six months from now, when the deals that would have started up now would be closing and signing, thats still a question mark, he says.
But Strawn, like Kamiya and many of their peers in Tokyos international legal community, is optimistic that Japans outbound M&A boom is far from over, despite the weakening yen.
I havent seen anything pulled because the exchange rate changed, says Shearmans Lebrun, and I had new inquiries on new deals since the currency changed.
These lawyers argue that, whatever policies the government is pursuing to boost growth at home, Japanese companies have come to realize that their futures depend on their ability to operate internationally. Demographics clearly point to a shrinking domestic market; Japans low birthrate and negligible immigration inflow mean that the countrys population is expected to fall by a third over the next 50 years, with the elderly constituting a much-larger share of the total.
Its no longer a value issue, Paul Hastings Tokyo partner Toshiyuki Arai says of overseas investment by Japanese companies. Its a long-term survival issue. You just cant put your bet on in a market like Japan for the long term.
Mori Hamada & Matsumoto Tokyo partner Yuto Matsumura agrees, saying that this need to expand their markets was a stronger motivation for Japanese companies to look abroad than the strong yen.
So even though they need to pay a 1020 percent premium [now that the yen has declined], that has not changed their strategy, he says.
Of course, Japanese companies have long recognized the economic and demographic writing on the wall, and many of them have responded mainly by burying their heads in the sand. But this time seems different, says Mark Weeks, Tokyo managing partner for Orrick, Herrington & Sutcliffe.
A decade ago, Japanese companies, banks, and the government were all in rough shape as they dealt with the fallout of the countrys 1990s recession. Today, Japanese banks are willing to lend, companies are flush with cash, and the government, currency policy aside, is supportive of overseas investment.
Ten years ago, companies more concerned with restructuring and getting healthy, says Weeks. And theyve done that, so now the focus is on growing revenue.
Not that the yen decline wont cause some hiccups for Japanese business development executives eyeing cross-border deals.
They may be selective in the future or have trouble getting approval from management if purchase price is higher, says OMelveny & Myers Tokyo partner Mangyo Kinoshita, but I dont think that the exchange rate will kill many deals or change the content of the deals.
Of course, just how far Abes policies might go remains something of a wild card. The exchange rate was 77 yen to one U.S. dollar last fall. Now, its around 96 to one. At some point, the extra cost imposed on overseas deals does start to become prohibitive, says Squire Sanders Tokyo managing partner Ken Kurosu.
If we get to north of 120 [yen to the dollar], then were in a completely different ballgame, he says.