Japan Records Highest Ever M&A Despite Global Recession...In Reality, 'Tearful Store Closures'

Global M&A Shrinks... Japan Records Highest Since Survey Began
Domestic M&A in Japan Increases... No Successors, No People Leading to Sales

[Image source=EPA Yonhap News]

[Asia Economy Reporter Jeon Jinyoung] Amid a global economic downturn causing a slump in the worldwide mergers and acquisitions (M&A) market, Japan recorded the highest number of M&A deals last year since records began, showing an unusual trend.

However, experts point out that this figure is more closely linked to Japan’s current social issues such as low birth rates and aging population rather than expectations of an economic rebound. While some M&As are aimed at preparing for the post-COVID-19 era, the increase in deals also includes cases where companies proceed with M&A out of necessity due to a lack of successors.

◆Record High Number...But Mostly Domestic Deals

On the 3rd, Nihon Keizai Shimbun (Nikkei) cited a report from M&A advisory firm Lecoff, stating that from January to December last year, the number of M&A deals involving Japanese companies increased by 1% year-on-year to 4,304, marking the highest number since the survey began in 1985.

This trend is the exact opposite of the global market. The global M&A market has been significantly contracted due to interest rate hikes in Europe and the United States, as well as market uncertainties caused by the Ukraine war. According to M&A market intelligence firm Dealogic, as of the 20th of last month, the global M&A volume was $3.66 trillion (4,700 trillion yen), a 37% decrease compared to the previous year.

Typically, an increase in the number of M&A deals is interpreted as a sign of expectations for an economic rebound. However, both inside and outside Japan, the prevailing analysis is that Japan’s record-high number of M&A deals does not necessarily indicate economic recovery. In fact, the overall M&A deal value has significantly decreased. Last year, the total value of Japanese M&A deals fell 32% year-on-year to 11.4356 trillion yen, marking a negative turn after two years.

In other words, while the total M&A value declined, the number of deals increased. Domestic M&A among Japanese companies rose 26% year-on-year to 4.0059 trillion yen, but acquisitions of overseas companies by Japanese firms halved to 3.4743 trillion yen. Similarly, acquisitions of Japanese companies by foreign firms dropped 40% to 3.9552 trillion yen during the same period.

This means that large-scale M&A targeting overseas major corporations decreased due to global interest rate hikes, while small-scale M&A within Japan increased. Nikkei also analyzed that "the smaller number of large-scale M&A compared to 2021 had an impact."

◆20% Are Business Succession Deals...Selling Due to Population Decline and Lack of Successors

Notably, 20% (700 deals) of all M&A transactions were aimed at business succession. Japanese M&A experts point out that this is closely related to Japan’s current issues of low birth rates and an aging population.

The Japan M&A Research Institute explained in a report analyzing the increase in M&A within Japan that there are three main characteristics. The first is business succession due to the inability to find successors, a phenomenon commonly seen in medium-sized and small enterprises as well as manufacturing industries. The institute stated, “Traditionally, medium and small enterprises have chosen successors from their children or relatives, but baby boomer generation owners face difficulties finding successors due to population decline and fewer children. Additionally, urban concentration of the population means most children move to cities or declare they will not inherit the business, forcing owners to sell to third parties.”

The second reason is the aging of business owners caused by the lack of successors. According to the Japan Small and Medium Enterprise Agency, the peak age of business owners rose rapidly from 47 in 1995 to 66 in 2015. The institute noted, “Beyond the issue of finding successors, there has been an increase in cases where aging owners sell their businesses due to physical limitations.”

The last reason is labor shortages caused by population decline. The institute mentioned that due to the continuous decrease in young workers caused by low birth rates, companies prefer to join large corporations to recruit talent through their hiring activities.

◆Can a Rebound Be Expected?...M&A for Post-COVID Preparation Also Underway

Ultimately, the record-high number of M&A deals reflects social issues such as ‘store closures,’ but hopeful M&A aimed at rebounding in the post-COVID era have also begun.

For example, Olympus sold its scientific business, which manufactures industrial microscopes, to Bain Capital in the United States last August. The company plans to focus investment on the medical device sector going forward. Nikkei reported, “As the economy recovers from COVID-19, companies are accelerating business selection and concentration.”

Sony has conducted M&A for digital transformation. Sony acquired the U.S. game company Bungie to gain synergy in content development.

Hideyuki Ishii, Executive Partner at M&A specialist KPMGFAS, told Nikkei, “With the recovery from the COVID-19 crisis, domestic corporate M&A is expected to continue increasing. However, due to the global economic slowdown, deals involving foreign companies are likely to decrease.”

This content was produced with the assistance of AI translation services.