21 Dec 2018
The four best practices for successful Japanese cross-border M&A
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Japanese companies can minimise the risk and maximise the return from cross-border M&A, if they follow the advice of those who have already done so.
To understand what Japanese companies can do to increase their chances of a positive result, Odgers Berndtson Japan spoke to a select number of Japanese executives in a variety of industries for our white paper, ‘Japanese cross-border M&A: Translating strategy into success’. They told us about the challenges they faced and the lessons they learned in the process.
In the final extract from our white paper, we distil the insights we collected from senior executives into four best practices for successful M&A.
Read part one, which addresses how cross-border M&A is benefitting and transforming traditional Japanese companies.
1. Have a clear strategic vision
While growth is a worthwhile objective for any company to pursue, many executives we spoke to cautioned that having a clear-minded strategy is imperative.
M&A activity undertaken in the absence of a clear articulation of the company’s strategy and goals, and without adequate due diligence and preparation, is less likely to be successful in the long term.
A senior executive put it simply: “All our acquisitions must align with our well-defined strategy and growth objectives.”
A CFO added, “We are not seeking acquisitions of a particular size, we are looking for acquisitions that can offer us innovation, infrastructure, or new sales channels and that align with our overarching corporate strategy and vision.”
A Chief Strategy Officer of a different company spoke about the importance of pre-M&A discussions: “As a management team, we discuss each individual investment opportunity in terms of its affinity to our core technology and potential synergies. We proceed if we are confident that we will be able to manage that risk as a team.”
2. Become an M&A expert
One potential pitfall the executives highlighted was a lack of M&A-specific in-house financial literacy.
A CFO noted, “Investment bankers advise companies on these transactions, but the acquiring company needs to fully understand what they are trying to do before the fact.” Traditional Japanese companies tend not to have this capacity in-house and may not know where to find it.
Over-reliance on external advisors can lead to less-informed decision making about which M&A opportunities to pursue, which can cost the company more in the long run.
Having an in-house team with experience in cross-border M&A including due diligence, valuation, negotiations and post-merger integration, substantially increases a company’s chances of success.
Having learned from past transactions, one executive explained, “We now have an established methodology for cross-border M&A and we make sure we have all necessary information such as a detailed valuation model for the target company with more than 200 different projected rates of return based on the value of the transaction.”
3. Your CEO has to be highly committed
For most organizations, truly transformative change comes from the top. Traditional Japanese companies are no different. The proactive commitment of top executives to a particular transaction increases its chances of success.
An executive in a consulting firm noted that the Japanese firms that have been successful with overseas M&A “have very strong leaders who are often founders or family members of the founders. Only highly committed leaders are able to bring about innovative and disruptive transformation.”
“Any investment opportunity comes with uncertainty, but we are fortunate to have a CEO who (is a family member of the founder and) has the guts to make difficult decisions.”
However, even companies that are not led by members of the original founding family are able to undergo transformative change. A visionary and proactive leader will be able to reimagine and recast their role into one more suited for a globalized business.
As one senior leader explained, “CEO commitment is essential when undertaking a disruptive transformation of this magnitude. Our new CEO recognizes this and has taken responsibility for the international business (in addition to overseeing our domestic business) and all the regional business heads now report directly to him.”
This is a familiar hierarchical structure for most global companies, but traditional Japanese companies have tended to divide management responsibilities for domestic and international business at the very top between a CEO and a more internationally experienced COO.
The executive continued, “Our new CEO disrupted the long-standing, unwritten rule relating to the division of domestic and international responsibilities – none of his predecessors had attempted this. He also began to attend international conferences to learn from his counterparts in other global banks and meet global financial regulators, bringing an English translator with him for language support. This level of commitment is necessary for successfully transforming from a traditional Japanese company to a global firm.”
Without the commitment of top leadership, M&A transactions become much riskier and more difficult to close, but in some cases, the executives advocating the deal feel they have no choice.
An EVP in a consulting firm shared: “We have a strong domestic Japanese corporate culture and the first strategic acquisition abroad required a significant battle with our conservative and rule-driven headquarters. Another EVP and I were worried that in the time it would take to receive approval for the transaction, we would miss our chance to become a global player. We decided to take the risk and move forward with the investment. After our success with this relatively small acquisition, the management team began to feel more comfortable with the idea of global expansion and to consider much larger investment opportunities.”
4. Be willing to adapt
Large cross-border M&A transactions are necessarily transformative. The executives we spoke to told us that the earlier in the process a company confronts and embraces this fact, the better.
A commitment to change, learn and innovate is essential. One executive we spoke to noted, “Our founders’ commitment to change and enthusiasm for innovation and growth has influenced the entire organization. A long history of strategic acquisitions and an ambition to grow have resulted in a diverse business portfolio. Running a conglomerate is not always easy, but we are used to managing acquisitions now and we continue to use our acquired knowledge to change and innovate.”
In beginning down the path of transformation, a CFO noted that time is of the essence.
“We begin post-merger-integration with the target company right after we closed the deal.”
Without a willingness to adapt and learn from a target company, the full value of the investment is unlikely to be realized.
Japanese companies should be willing to make changes to their existing management and corporate governance structures and to adopt best practices that will enable global growth.
While no transaction is 100% risk-proof, for a traditional Japanese firm with global ambitions, implementing these best practices can improve their chances of fully reaping the benefits of cross-border M&A.
Download our full white paper ‘Japanese cross-border M&A: Translating strategy into success.’