Peak US Asset Prices? Japanese Acquisitions Hit Record

Their buying binge in the US goes into the “Contrarian Indicators” category.

After eight phenomenal years of surging stock prices in the US, buyers are getting cold feet: Acquisitions targeting US companies dropped 15% so far this year, to $789 billion, according to Dealogic. In Japan, it’s worse: Acquisitions targeting Japanese companies have plunged 41% to $33.6 billion.

But despite the M&A downturn in both countries, there is one peculiar element that is booming: Japanese companies are acquiring US firms at record pace. This year’s 141 deals exceed the prior record for this time of the year by 18%.

In a deal announced on August 24, SoftBank, a Japanese multinational telecommunications and Internet conglomerate that already owns some US jewels such as Sprint and has $135 billion in interest-bearing debt, invested $4.4 billion in US startup WeWork. The deal is rumored to value WeWork at $20 billion.

The deal, done via SoftBank’s Vision Fund, has two parts: $1.4 billion in funding to help WeWork expand in Asia (which includes the previously announced $500 million investment in WeWork China), and $3 billion in funding for WeWork’s parent company.

US commercial real estate – the sector WeWork is in – boomed for seven years straight and prices reached such highs that even the Fed is now consistently mentioning it as one of the big reasons for removing “accommodation” and unwinding QE. It’s worried about $4 trillion in debt that is collateralized by this inflated commercial real estate.

So just in the nick of time. According to Dealogic, SoftBank’s $4.4 billion deal is Japan’s largest outbound real estate deal on record.

SoftBank is all over the place. In June, it announced that it would take two robotics firms – Boston Dynamics and Schaft – off Alphabet’s hands, after Alphabet tried to unload them for a year. Terms of the deal were not disclosed.

At about that time, a JP Morgan report marveled at the Japanese M&A efforts:

Japanese corporations have increasingly embraced outbound M&A to fund growth and advance their strategic objectives … they historically did not embrace M&A as a core element of their strategy.

The mindset regarding acquiring international businesses has changed, as it has become necessary to enhance competitiveness and growth.

There’s also some smaller fry: Big Beer’s purchase of another US craft brewer. In early August, Anchor Brewing Co. — the San Francisco brewer was founded in 1896, saved from extinction in the 1960s, and is now the 22nd-largest craft brewer in the US by sales volume — announced that it will be acquired by Sapporo Holdings for $85 million.

Beer consumption in Japan has been declining for years. So the fourth-largest brewer in Japan wants to muscle in on the craft brew boom in the US in order to find some growth.

Alas, Big Beer sales in the US have also been declining for years, except that craft brewers have surged out of nowhere, and their sales have largely made up for the decline in Big Beer brands. With this deal, Sapporo hopes to expand its foothold in the US market.

“The Japanese brewers do not have a distinguished track record with regards to M&A outside of their home markets,” Tom Russo, a partner at Gardner Russo & Gardner, told Bloomberg. The firm is a large shareholders of Big Beer competitors Anheuser-Busch InBev and Heineken Holding NV, both of which have acquired major US craft brewers.

And the Japanese deals go across the spectrum…

In early July, Konica Minolta – which makes copiers, printers, and other equipment – announced that it and the state-backed investment fund INCJ would acquire genetic testing firm Ambry Genetics in California. Konica Minolta will take a 60% stake; INCJ will take a 40% state.

The deal, valued at $800 million, could expand to $1 billion based on Ambry Genetics’ earnings performance over the next two years. Growth in the equipment business is kind of slow, and so Konica Minolta is trying to get into healthcare.

And, again just in the nick of time, there’s the US brick-and-mortar retail meltdown, welcoming Japanese buyers. In April, Adastria Co., a Japanese apparel company with 1,358 retail stores in Japan and 108 stores overseas, acquired Los Angeles–based Velvet LLC that owns the Velvet by Graham and Spencer label. It’s all about “the luxurious but laid-back appeal of coveted LA style,” as it says on its site. It sells its goods in its own eight retail stores in the US, in high-end boutiques, and in premium department stores, such as Neiman Marcus, that are at the center of the brick-and-mortar retail meltdown.

“We have strong expertise in retail operations,” said Adastria COO Masa Matsushita. So this is going to work out.

Nomura Securities, after eliminating about 900 jobs in the US and Europe over the past 12 months, is looking “once again” to hire bankers to expand its share of deal-making by Japanese firms in the Americas, Nomura Securities’ new president Toshio Morita told Bloomberg in April. The hiring round in the US could be larger than before, he said.

“We will have to expand in the Americas once again as Japanese companies are increasingly doing global M&A in the region, and the region will generate the biggest fees,” he said.

“There are plenty of client needs for the Americas,” Morita said. “Listed firms in Japan are anxious that the business landscape would change in 10 years because of the falling and aging population.”

So now Japanese companies, struggling with a low-growth economy at home, are seeking growth via a record acquisition binge in the US after US asset prices have run up at an astounding pace for eight years straight, and after other buyers are cold feet. File this in the Contrarian Indicators category.

It comes as markets in the US face some peculiar conditions that they’ve never before faced: the unwind of QE. Prices could drop sharply, but “let markets clear,” the banks tell the US Treasury. It’ll be just “a financial engineering shock.” Read… Stock & Bond Markets in Denial about QE Unwind, but Banks and the US Treasury Get Antsy

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  24 comments for “Peak US Asset Prices? Japanese Acquisitions Hit Record

  1. raxadian says:

    Jspan used to go first in many things, they had music CDs and CD players almost a decade before most of the world, and not just as a novelty. But now it looks like things are weirder than usual in the land of the Rising Sun.

    • TJ Martin says:

      The CD bit is pure unadulterated Urban myth . Phillips in Europe and the Japanese ( Sony & Panasonic ) developed the CD in tandem with CD’s hitting the market worldwide at the same time with ‘ early adapters ‘ changing over from vinyl / cassettes to CD across the globe at the same time .

      • alex in san jose says:

        This is a good read on the history of CDs

      • raxadian says:

        Considering music CDs weren’t an instant hit in Europe as they were in Japan, the term you are looking for is “partially true.” Japan did adopt the use of music CDs faster than anywhere else but CDs were also released in several European countries in the same time period.For years it was more of a rich kids thing in Europe than true mainstream media.

  2. Bill says:

    Let’s hope the Japanese are acquiring the Boston Dynamics and Schaft robotics firms to help them make some progress with the ongoing and still frightening Fukushima disaster.

    • Frederick says:

      Doubt that very much There is NO solution to tons of molten highly radioactive corium which has obviously flown the coop All the nonsense you read about is just for the sheeples consumption and worthless dribble

  3. Boiled Coffee says:

    I suspect that a lot of this deal making is courtesy of the Bank of Japan, which has been directly purchasing ETFs for its QE program and now owns about 3/4 of all shares in Japanese listed ETFs. These inflated share prices, courtesy of BOJ, help to reduce already ridiculously low borrowing costs for Japanese firms to the point that despite high valuations, acquisitions can be justified because they are supported with essentially free money. Meanwhile, Japanese central bank debt has surpassed 200% GDP in a country with negative population growth. It amazes me that people have the temerity to talk about the profligate Greeks when here is a country that has more debt than it could ever dream of repaying and is printing money to give it directly to its companies who are essentially using it to finance LBOs. There is no way at this point but to conclude that QE is the most disastrous central bank policy ever envisaged, doing nothing for the real economy but boosting asset prices (when very few people actually own investment assets) supported by a mountain of sovereign-backed private debt.

    • MD says:

      Yes you gotta love this ‘free market capitalism’, haven’t you?

      Seems too many people coming to see – well, everything that can be bought with credit – as a can’t lose, one-way bet, because there will always be a state-subsidised backstop.

      Will we ever see price discovery and the apparently efficient market doing its job?

      Not in our lifetime according to Janet!!!

      • Meme Imfurst says:

        We…that is most of the Western World, are no longer “capitalists” and haven’t been since the 1960’s, maybe even before that going back to the Depression. It has been a ‘slow boil’, so slow you grew up with it and didn’t know it.
        “state-subsidized backstop”…you bet, it is called social democratic philosophy. It didn’t work for pre WWII Germany, It didn’t work for the USSR, didn’t work in Vietnam, Venezuela, and is failing in China, among others.

        But we, like Japan, think “this time is different” and it can be controlled. If you don’t follow the program you are a problem not a solution.

        Beware of terms used to disguise the very act the term is trying to become. We are being lead down a path of no return, just look at so called ‘social media’ for the clues.

      • Sam says:

        Right on. Same thing with the US housing market. Many Americans are getting way over their heads buying overpriced homes with less than even 10% down because home price appreciation is a “can’t lose” bet. They then engage in bidding wars with other similarly stupid, emotionally driven people due to FOMO, driving prices even higher.

        If/when a correction in asset prices is allowed to occur, these people will whine and cry that they were duped by the system – that true price discovery is “not fair”, and their house is worth far more than the current market value. Of course the Fed will then be happy to oblige and print as many USDs as required to reinflate these assets even higher…

      • nick kelly says:

        Japan’s exports just hit a record, check driveway near you. Japanese debt is mostly held internally. Unlike Greece, it is not asking other countries or the IMF or the ECB to bail it out.

        If I was a citizen of the US, I would worry more about problems at home than some imagined Japanese crisis. One thing to understand, there are virtually no internal cultural, racial, religious, or even much in the way of political, fractures. There is virtually no violent crime. You can leave your wallet at a McDonalds and an hour later it’ll still be there. Women especially feel much safer after dark than in even a ‘nice’ US hood, let alone all its no- go zones.

        The Japanese will face whatever problems the future holds together.

        By contrast note the recent official NRA announcement that it is ‘coming for’ liberal readers of the New York Times.

    • Maximus Minimus says:

      Just a small correction; BoJ does not have a debt, it has a bloated balance sheet. The government of Japan has a debt well over 200% of GDP. The issue is a matter of trust in both government and society in general; Japan – high level of trust, Greece – next to nothing.

  4. Willy2 says:

    – My take is that these japanese companies will get burned (again), like they were in the early 1990s

    • Frederick says:

      Willy 2 No doubt

    • cdr says:

      Agree. I like this book. It has a nice chapter on Japan in the 1980-1990s and explains their financial collapse well. Here we go again.

      Thank you Japan. Your repatriation of US dollars is welcome. Your desire to pay prices that are too high is an added bonus. When you go bust again and sell your purchases for whatever you can get, they will probably become wholly owned US assets once again.

      My only question .. how are you going to QE your way out of the next Japanese financial implosion?

      Thanks, again.

    • fajensen says:

      OTOH – They can figuratively and literally “buy the dip” in Houston, TX.

      Some insurers are going to get really cheap to acquire too. What will be interesting is who ends up with The Bag this time. Who will be the stupid insurer at the end of every re-insurance chain?

  5. MD says:

    Leveraging up into even more debt and buying assets at peak – what could possibly go wrong?

    The only thing we learn from history is that human beings don’t learn from history.

  6. Hiho says:

    Stupid asian money. What a surprise… Rockefeller center 2.0? It seems that somehow the japanese are good at burning and losing their hard-earned money.

  7. Lee says:

    Some comments:

    1. Japan Post blew several hundred million bucks from buying Toll Holdings, a delivery company, here in Oz. They were supposed to take on Australia Post which has appalling service and super high prices. So much for that……….

    2. Maybe these Japanese companies want to get some of their capital outside of Japan in case the yen falls as a hedge. A falling yen will produce gains even if the value falls less than the yen falls.

    3. Lots of good, cheap companies are still around in Japan. They are found on the second sections of the stock exchanges. These companies are basically ignored by foreign investors and aren’t being bought up by the major funds or the BOJ QE actions.

    Many Japanese companies offer good value and high yields compared to what one can get from bonds. Growth in Japan has picked up a little as well.

    Compared to the sky high ridiculous valuations found in the USA, Japan is cheap.

  8. d says:

    I wonder if there is a currency trade, and trade deficit angle, to some of this activity.

    American company (Japanese Owned) exports to Japan with no Entrance issues, trade deficit reducing. Profit flow to Japan, indirectly, increasing.

    These purchases are also huge US $ buys.

    • d says:

      Then there is the political angle this can be shown to Trump, as Japan investing in America “CREATING JOBS”

      Nomura Hiring in the US again. To get what? More over paid, under-skilled American’s. Who brought their degrees, and don’t have any real business acumen, or the level of intelligence the degrees suggest.

      Nomura can still remember dumping a considerable volume of such, in America, recently.

      If you look at the purchase by Japan inc in that light. This dont look here, look at evil china psychology, is cheap, compared to the costs of orange sanctions against Japan.

  9. Petunia says:

    As a former fashionista, I remember well my encounters with Japanese fashion. Japan was exporting their clothing without any regard to the sizing of women in the west. I avoided Japanese clothing because it vacillated between severely undersized or oversized and weird.

    I will say that the fabric designs were always innovative and exceptional. I always loved buying sheets and bedding designed in Japan, as well as other household items. I can see Japanese housewares making a big comeback in America considering the lack of design innovation coming out of America via China.

  10. ASP says:

    Does anyone know why SoftBank is buying Fortress Investment Group? For 3.3 billion.

    FIG does real estate, skiing resorts, newspapers, and distressed properties.

  11. Pat McKim says:

    Joel Kotkin once said in the early 1990’s to me that Japan was at the end of the information food chain. Well put.

Comments are closed.