EXECUTIVE SUMMARY: M&A, MBOs AND PRIVATE EQUITY IN JAPAN


March 1999




Japan has been much influenced by China and Prussia. From its late 19th century origins the modern economy has always been the means to the political ends: social solidarity and national autonomy. Economic thinking owes more to Friedrich List than to Adam Smith: it is obviously capitalist, but slightly less obviously developmental, rather than liberal, capitalist.

The real economy has rigidified into a first tier of competitive industries and a second and third tier of protected industries: it is a unique example of "arrested Listianism". The financial economy continues to have balance sheet difficulties as the financial services industry itself has been heavily protected. Much corporate restructuring is inevitable over the longer term.

Personal financial behaviour is strongly oriented to principal guaranteed products and there is great popular suspicion of marketable securities. Personal financial assets are 59 per cent held as cash and deposits -- Germany 41 per cent, France 34 per cent, UK 22 per cent and US 16 per cent -- the financial psychology is closest to that of Germany and quite distant from the Anglo-Saxon paradigm.

Japanese corporate governance is determined by high decisional untransparency and high social solidarity. It is stakeholder value type and is M&A negative -- resistance from both management and labour. The Anglo-Saxon type is shareholder value and is M&A positive -- resistance from neither management nor labour. The positions are once again very distant.

The M&A market is a leading indicator for the MBO and PE markets. Disclosed M&A transaction values rose strongly during the credit bubble to a peak of JPY3.1tr and then declined to a 1994 low of JPY0.4tr before rising again to a record JPY3.4tr in 1998. Cross-border deals are over-represented in the disclosed figures: considerable domestic "in-in" activity is occurring.

Venture capital firms originated in the 1970s as securities house affiliates and also took a very stakeholder oriented approach. This historical tail is still wagging the investor return dog. Japanese venture capital is fairly described as the ultimate in hands-off investment. There is total reliance on the exit of OTC market IPOs. There have been damaging booms and busts.

Ten disclosed MBO transactions have been made to date: all comparatively small in scale and half having originated out of foreign capital companies. Logically, the volume market should be disposals made by the Japanese corporate giants. However, senior management doubts the capabilities of its own salaryman employees and favours trade sales for relationship reasons.

PE as an alternative asset class has been assiduously studied by the Japanese investing institutions. However, in post-credit bubble shock and constrained by consensus management, they are unable to move. Given Japanese stakeholder value attitudes, there is a dearth of quality investable property on the market. PE dealing is available, but has come to nothing.

Elsewhere PE has been remarkably successful: venture capital in the US and MBOs in the EU principally. With the EU and US peaky and Other Asia unattractive, there is interest in a Japan simplistically viewed as being at the bottom. Japan PE professionals are concerned that there will be excessive funding, a shortage of investable properties and damaging accidents.

Japan is change within continuity. The M&A negative attitude will slowly move Germanwards to M&A neutral, while the restructuring of the second and third tier industries picks up. The M&A market should therefore continue to grow strongly. The MBO market should follow M&A, but with considerable delay. The venture capital market will remain largely unchanged.



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