The future of Japanese tōshi in Australia

Asahi’s proposed takeover of Carlton and United Breweries and Nippon Paint’s acquisition of Dulux come after previous deals in Australia involving iconic companies such as Japan Post and Toll. However, while these bigger deals hit the headlines over the last few years, there have also been a plethora of smaller M&A by Japanese investors in recent times.

“Not surprisingly, 85 per cent of the companies identified gaining a new sales network as a driver.”

So why are Japanese companies investing in Australia? The drivers for this lie both on the Japanese and the Australian sides.

From small to growth

On the Japanese side, the domestic to global corporate revenue ratio is shifting. Japanese merger and acquisition activity globally continues to break records, driven by Japan’s long period of ultra-low interest rates as well as the balance sheet power in the corporate sector from finally cleaning up after the bursting of the “bubble economy” in the 1990s.

The resulting massive corporate cash build has been raising a question as to where these funds should be deployed, especially with Japan’s demographics - the population peaked in 2008 and is now shrinking, a troubling factor especially for retail consumer-facing Japanese businesses.

On the other side of the world, Australia has gone from “small market” status to “growth market”. There is a very long and trusted history of trade from the late 1800s and investment from Japan from the 1970s. Not surprisingly, historically the investment has been concentrated in the core areas of resources and energy and commodities.

As Australia’s population continues to grow as a result of immigration and natural increases from the young family demographic having children, the country is now in the “growing market” segment with an additional benefit of having a high per capita income. (Relative to other developed markets.)

Spreading sectors

A recent survey by Herbert Smith Freehills (HSF) details the 54 acquisitions in Australia over the 2017-19 period by 47 Japanese companies. What is striking about these acquisitions is they are spread across a wide range of sectors - no longer confined to the historically narrow area of resources and commodities.

The HSF report concentrated on the target companies in Australia. The Australia Japan Business Co-operation Committee  (AJBCC) then examined that data and considered what might have been the drivers for these acquisitions.

This analysis tells us the cohort of potential Japanese companies who could be involved in future M&A in Australia will have:

• a corporate history of 75 years or more;
• turnover in the billions of Australian dollars or equivalent;
• already existing operations outside of Japan, especially in South East Asia; and
• an interest in looking to acquire ‘Australian know-how’ - or simply extend their sales network.

These characteristics describe a well-establish investor which has the resourcing and industry knowledge to select its target.

Seasoned investors

In the survey, respondents gave a number of reasons for an acquisition which could be consolidated into four key categories. Not surprisingly, 85 per cent of the companies identified gaining a new sales network as a driver. Other drivers included gaining know-how, a supply chain component or a new field of business.

What was especially surprising was that half of the acquisitions were motivated by acquiring “know-how”. This know-how was not merely local Australian market knowledge but, in many cases, locally-adapted systems, processes or distribution channels that are significantly different from the acquirer’s practices in Japan’s domestic market. Acquisition of this know-how provides businesses with the means to grow efficiently outside of traditional Japan markets.

It was significant that - with one exception - all of the Japanese companies who made acquisitions in Australia had investments in other countries. That is, despite there being 24 new entrants into the Australian market, the overwhelming majority were seasoned Japanese overseas investors rather than companies investing overseas for the first time.

Not surprisingly, of those who had already invested overseas, the region (based on number of countries, not investment amount) most correlated with an Australian investment was “Asia (excluding China) and Oceania”, at 87 per cent of the Japanese companies in the sample. By comparison, the regions of China, North America and Europe had broadly similar percentages, with around 70 per cent having existing portfolios in those areas.

The number of countries in which acquirers had existing operations was significant. The median number of countries was 12, suggesting that acquirers had extensive overseas experience.

Many of the Japanese companies making Australian acquisitions were also long established, mature companies. The median age of establishment of the company in Japan was 75 years with over three quarters of the companies having been established prior to 1980.

The Japanese acquirers typically had high turnover by Japanese standards with the median turnover being around $A5 billion.