Lawyers Still See Obstacles to Foreign M&A in Japan
Following last month's $1.67 billion acquisition of Panasonic Corp.'s health care unit by KKR & Co., some are wondering if Japan Inc. is starting to cast off a longtime aversion to private equity.
“Many Japanese corporations have recognized that if they don’t sell noncore businesses, they will likely not survive," says Ropes & Gray Tokyo partner Scott Jalowayski. "Foreign private equity can take the asset off of the books, add value, and ideally turn the businesses around. They are coming in to help.”
That certainly seems to have been the case for Panasonic. Once a symbol of Japan's economic and technological prowess, it and other Japanese electronics giants have since been outpaced by the likes of Samsung Electronics Co. Ltd. and Apple Inc. In each of the past two years, Panasonic has reported a $7.5 billion loss, and its management has decided to pare the number of its business units from almost 90 to 49.
Other struggling Japanese companies may follow suit. But cultural norms die hard, which is why many lawyers in the market aren't holding their breath for a boom in foreign acquisitions in Japan, least of all by private equity groups. Though outbound investment by Japanee companies has boomed in recent years, inbound investment to Japan, though rising, remains low compared to other countries in Asia. The country’s inbound foreign investment accounts for 4 percent of its GDP, lower than North Korea’s 12.5 percent. In the first half of 2013, foreign M&A deals in Japan were valued at $3.6 billion; that compares to almost $16 billion in China.
Jobs are at the core of Japanese resistance to foreign investment. Though the country's famous tradition of lifetime employment has been on the wane, it is still considered an important part of the culture at many large conglomerates. Shearman & Sterling Tokyo partner Kenneth Lebrun says that's a major reason why they have so many relatively unproductive business units in the first place.
“When the core business is unable to support a company’s employees, instead of laying people off, they create subsidiaries and move people there so they will still have a job, ” he says. “It may be good for the society, but not very healthy for a business. ”
Yoshinobu Fujimoto, a partner with Tokyo's Nishimura & Asahi, agrees, noting that selling an asset is an emotionally difficult decision for Japanese management to make. “They believe that business continues forever and see the continuity of employment as a high priority even in the event of a financial crisis,” he says.
Selling to foreign private equity, with its reputation for reorganizing companies and orchestrating mass layoffs of employees, is often seen as the worst possible outcome, short of liquidation.
“Historically, companies are often less willing to sell to private equity than a strategic buyer because of the perception that private equity tends to do more major restructuring and to break up the business into little pieces,” says Edward Johnson, a partner at Orrick, Herrington & Sutcliffe in Tokyo.
But for such perceptions, notes Jones Day Tokyo partner Steven DeCosse, foreign private equity firms would be logical buyers for many struggling subsidiaries of large Japanese conglomerates. They are often able to pay higher prices than other potential acquirors, and they also have experience with complex deals, such as extracting a business unit from larger group.
But other aspects of Japanese business culture further hamper potential foreign buyers, such as the lack of independent directors who might focus more on shareholder returns and actively push for divestitures.