How Japanese companies have succeeded at cross-border M&A

21 Dec 2018

How Japanese companies have succeeded at cross-border M&A

As even traditional Japanese companies increasingly look beyond their borders for growth, what are the lessons for successful M&A initiatives?

To understand why Japanese companies haven’t been more successful in this area – and what they can do to increase their chances of a positive M&A result – Odgers Berndtson Japan spoke to a select number of Japanese executives in a variety of industries.

They told us about the challenges they faced and lessons learned in the process. The result is our white paper ‘Japanese cross-border M&A: Translating strategy into success.’

In this first of two extracts from the white paper, the Japanese executives explain how large cross-border M&A transactions are benefitting and transforming traditional Japanese companies.

Bringing change home

A large cross-border acquisition is likely to have implications for the Japanese parent company’s business lines, management structure and corporate governance policies. Adopting more globally recognized structures and policies in advance of such a transaction could help to make the integration process smoother. But the culture and traditional practices of Japanese companies are often well-established and resistant to change.

A growing diversity

Expanding rapidly into new markets can be very difficult to achieve without a strategic acquisition. For a senior leader at a financial services group, M&A was an attractive option because “to become one of the top 10 firms globally we need to grow our client-driven business overseas and this is not easy to achieve through organic growth.”

An electronics company executive concurred, “Having an overseas presence is important for our consumer electronics business and M&A is our best strategic option for growth. Buying an established business allowed us to quickly gain the tools and know-how needed to be successful in a new market.”

At times though, the purpose of cross-border M&A is not to grow an existing business line, but to acquire new ones.

One interviewee explained, “The goal of our M&A activity is primarily to diversify our business. Our target companies are, for that reason, most likely to offer us new technology or products. The financial crisis illustrated our vulnerability to a market downturn and the importance of mitigating our financial concentration risk by acquiring new income streams. Since then, we have pursued constant transformation, primarily through M&A.”

Managing M&A

Diversifying markets and business lines will have an inevitable knock-on effect for the company’s management structure. But some changes can be made in anticipation of major M&A activity. For example, bringing in a chair of the board who is a non-executive from outside the company. This is common practice in the west, but fairly unusual among closely held, traditional Japanese companies.

One executive we spoke to shared that before its first major cross-border acquisition, their company changed its management structure by appointing a CEO with international business experience. “We also listed on the NYSE and introduced a matrix management system. Still, the group was always operated by Japanese managers.”

A chief strategy officer at a different company noted how his company’s management structure changed following a series of cross-border acquisitions. “As a result of offshore M&A, we now have a couple of non-Japanese corporate executive officers in our global management team. They bring different views, insights and perspectives on how to develop, manage and grow the business. The quality of the discussion at senior executive management committee meetings and board meetings has improved greatly.”

Embracing change, adding competencies

A large cross-border acquisition can also attract the attention of regulators. A consulting firm executive noted, “After the acquisition, the Statutory Auditor began to show much more interest in us and our corporate governance structures. As a result, we decided to establish a global headquarters in Tokyo to oversee our international business.”

Overall, the mindset adopted by the companies we spoke to has been to embrace the changes brought about through cross-border M&A.

One senior executive told us, “Large-scale M&A will inevitably spur transformation, but we think hard about the direction of change and know exactly why we want to do it. We strategically acquire offshore businesses in order to grow and change and maximize our performance. Acquiring an entirely new business line in an area where we do not have any insight or experience requires HQ to adapt significantly and obtain new competencies in order to maximize the benefits from a strategic investment.”

Understanding the keys to success

Finding, acquiring and integrating large-scale foreign business operations is always an enormously complicated and difficult undertaking, but the challenges are even more numerous for traditional Japanese firms with ingrained, long-standing corporate structures and practices.

As a result, some Japanese companies are finding that promising cross-border M&A transactions have not achieved their anticipated results.

Luck and timing also play a role. A senior leader at a financial services group told us, “When the 2008 global financial crisis hit, we saw a one-in-a-million opportunity to acquire a distressed investment bank and become a truly global house.”

“It was a big gamble. Suddenly we owned a firm led by non-Japanese senior executives with a large investment banking practice, something that had not been part of our core business in the past."

“Furthermore, the crisis fundamentally changed the investment banking business model and reduced the appetite for risk, meaning that we weren’t fully able to take advantage of the talent, business model or clientele we had acquired.”

This financial crisis acquisition was a unique situation, but the company’s experience of not being able to fully reap the benefits of a large cross-border M&A deal is not.

So what steps can traditional Japanese companies take to improve their chances of success when undertaking a significant investment in cross-border M&A?

In the second and final extract from our Japanese cross-border M&A white paper, we distil the insights we collected from senior executives into four best practices for success.

Download our full white paper ‘Japanese cross-border M&A: Translating strategy into success.’:

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