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