TT-455 -- Small M&A's heat up, ebiz news from Japan

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General Edition Sunday, February 3, 2008 Issue No. 455


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According to M&A specialist Recof Corp., there were 2,696
M&A deals involving Japanese companies last year, down
around 7% over 2006. Around 80% (2,334 deals) of these took
place within Japan, versus 363 cases of a Japanese firm
taking over someone overseas. Among deals done by listed
firms of their smaller unlisted competitors, the volume
dropped off by a surprising 26%. The reason for this is that
in April 2006, new accounting rules came into effect for
listed firms, causing them to have to amortize the
goodwill portion of a buy-out as a sales and
administrative expense over 20 years, rather than as a
one-time extraordinary loss, as used to be the case in the
past. This of course hits the financial performance of the
company on an ongoing basis and makes M&A deals
a lot less attractive to shareholders.

So while overall domestic-only deals (not just those
involving listed companies) were down 8%, those involving
a foreign firm taking over a Japanese one leaped by 70% to
307 deals. Some of the more notable deals involving
foreigners to hit the press were Citigroup's acquisition of
Nikko Cordial, Morgan Stanley's buy-out of ANA's hotel
business, and Macquarie Bank's acquisition of 20% in Japan
Airport Terminal, the operator of facilities at Narita and

One might be tempted to read something into the rising wave
of foreign ownership last year, but we believe that the
most of the deals made involved Japanese firms cleaning
house of low-performance divisions that never fully
recovered from the bust of the 1990's. In fact, trend-wise
there has been a significant pick-up of larger Japanese
firms increasing cross-shareholdings of each other, a
practice buoyed by the extra cash that exporters are
holding back in reserve. As a consequence, the number
of Japanese companies really for sale are those which are
sick, broken, or owned by funds or banks looking to book a

...with the exception, that is, of smaller, owner/founder
run companies. This is so, because the business environment
is changing radically for these smaller firms and an exit
by the founder may be the only solution for some of them.
Not only are the owners getting older and needing to change
the guard, but competition is also forcing them to modify their
businesses and invest a lot more in technology and smarter
people. Regulatory changes, too, are making life harder.
Take for example the government dropping its willingness to
guarantee business loans, a necessity for SMEs trying to
get money out of risk averse banks. This simple piece of
legislation has caused traditional funding sources to dry
up and is putting the viability of a lot of SMEs at risk. They
can no longer get the capital they need to stay up with
foreign and larger domestic competitors.

[Continued below...]

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[...Article continues]

As a successful businessman once told us, "The smallest
fish are the sweetest." And indeed, we believe that where
M&A will make the biggest changes in Japan is with smaller
firms -- those with sales of less than JPY10bn, and which
are healthy, profitable, and self-sustaining. We don't hear
much from the media about deals at this lower end of the
market because they're not sensational enough. "The
foreigners are invading" makes a much better headline.
However, a closer examination of related statistics and
trends will show that the market for smaller M&As is
growing rapidly. And it's a trend that foreign firms should
be following closely.

One increasingly popular form of M&A is the Management
Buy-out (MBO), probably because it is non-confrontational
for the present owners, the staff, and the vendors. Again,
we don't get to hear about most of these deals in the
media, but according to Recof, there were 88 MBOs
last year, up 10% over 2006, and most involved unlisted
SMEs. When you think about it, this trend is not
surprising, as many SMEs were founded 30-50 years ago,
and thousands of once-young CEOs are now in their late
60's and many do not have potential successors in the
family. Health problems and the need to make new
investments and take new risks are causing their
businesses to atrophy and good younger staff to quit in

These types of CEOs are of great interest to the M&A
divisions of banks and credit rating firms, and indeed,
many are tracked for their "buy-ability," as defined by the
absence of a relative of the CEO, working in the
management of the company. If there is no such relative
for the CEO to trust to take over the reins, he/she is
faced with his own mortality and most likely pressure
from the family to sell and provide some concrete
returns -- before it is too late.

Another increasingly popular form of buy-out comes from
acquisitive Internet companies that are buying attractive
web sites and their advertising traffic. With the Japanese
corporate penchant for conservative investment and "not
invented here" mentality, you'd think there would be
much of a market for web sites. But in fact there is.
With the advent of Google Adwords and Overture
advertising management services, it is now viable for a
small 1- to 2-person website aggregation company to
make millions of yen profit a month by buying out already
successful sites then maintaining them by adding some
outsourced content (think outsourcing to home-based
otaku amateur writers). For a good example of this type
of market in action, and to get some idea what
your website or blog might be worth, go take a look at

And in case you're wondering, is run by just one

One sign of the fact that the younger end of the market,
that of internet and software companies, is starting to
open up, is the appearance of web pages listing such
companies available for sale. Several websites doing this
include: M&A Capital Partners at,
and Strike Company at Of course these
listings send any interested buyers directly back to the
two companies owning the sites, but we find it interesting
that there are potential sellers willing to have their
business described sufficiently that their competitors
could probably recognize who it is for sale.

As some readers will know, Japan Inc. itself has an M&A
Advisory Team. Headed by Jack Turner, within the Japan Inc.
Holdings (JIH) company, the Advisory Team specializes in
three main areas: 1) Searching for companies to buy for
foreign firms, 2) Helping foreigners who've established
successful companies in Japan to sell them, and 3)
Arranging joint ventures and MBOs of Japanese firms. The
Team works with a number of M&A brokers in the
under-JPY2bn range of deals, and has noticed a definite
uptick in both the number of deals becoming available and
also the number of companies searching for such deals --
which can only be a good thing for company owners, and
for foreign firms looking for a beach head into Japan.

One example of an MBO deal that is now becoming more
common, is that of a Japanese technology firm headed by the
same President/owner for the last 35 years. The President
is now in his mid-60's and wants out, but feels very
responsible for the well-being of his 50 or so employees.
He has no family involved in the business and little
prospect of his professionally qualified kids ever
wanting to do so. As a result, he has been discussing with
the Vice President about the VP doing an MBO of the
business. The foreign ingredient in the deal, and why the
VP asked JIH to get involved, is that he wants to re-cast
the business into a different area of the market involving
technology import, and thus he wants a strategic foreign
investor in the deal.

This of course is illustrative of the window of opportunity
offered by an MBO. New blood and new ambitions
taking over at the top spell change for even the most
hide-bound Japanese company, and an opportunity for a
foreign firm to inject some cash and be part of the
successor's future plans. We predict that as more and
more retiring SME CEOs discuss the merits of selling
their businesses with their colleagues, the greater the
volume of new deals that come to the market.

In essence, it's an education process.


One way to get your own M&A going is to establish a company
in the first place. The first Japan Inc Entrepreneur's
Handbook seminar kicks off on March 1st (Saturday) in
Shinjuku. For more information on the seminar, which covers
everything from funding and starting a company through to
selling it, see the EVENTS section below.

...The information janitors/


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+++ NEWS

- 24.81Mpxl digital camera
- Wages fall 1.9%
- 8m inbound tourists in 2007
- Best-selling keitai serials
- Foreign ownership limits may not occur

-> 24.81Mpxl digital camera

Sony has announced that it has developed a CMOS image
sensor for its digital camera range, which has an effective
resolution of 24.81 megapixels. Sony says that the new
sensor will allow them to build camera with a resolution
far beyond that of any of their competitors. Production
begins this year and cameras featuring the higher
resolution specs are expected before the end of the year.
(Source: TT commentary from, Jan 31, 2008)

-> Wages fall 1.9%

Although some news reports in the last week have indicated
that Japanese household spending is up slightly, we can
only imagine that the extra yen flowing out are involuntary
-- mainly going on the increasing costs of fuel and food.
At the same time the government has revealed that in fact
the wages of salary men fell 1.9% this last 12 months, as
SME firms have been hit by increased costs for raw
materials and fuel. The slow-down also appears to be
hitting employment ratios, as there were only 98 jobs for
every 100 applicants in December, down considerably
from the start of last year. (Source: TT commentary from, Feb 1, 2008)

-> 8m inbound tourists in 2007

Believe it or not, the number of tourists is indeed
steadily increasing. By far the bulk of them are coming
from Asia, with 31.2% from South Korea, up 22.8% over last
year; 16.6% from Taiwan, up 5.8%; 11.3% from China, up
16.2%; and 9.8% from the USA, which was actually down
0.1%. Looking at outflows, 17.3m Japanese in return
traveled overseas, down 1.3% over last year. (Source: TT
commentary from, Jan 28, 2008)

-> Best-selling keitai serials

A good AFP story last week covers the popularity of novels
serialized and downloadable on cell phones. AFP says that
the majority of Japanese high schoolers with cell phones
spend at least 2 hours a day on the phone, and just 26
minutes a day reading books. The top-selling novel, with
1.95m copies sold, has been "Koizora," or "Love Sky." The
tale is an autobiography of a first-year high school
student who gets involved in drugs, sex, rape, and love.
The home page of the novel's book publisher features titles
from other writers as well. The company says it now carries
around one million titles from amateur authors. (Source:
TT commentary from, Jan 26, 2008)

-> Foreign ownership limits may not occur

Luckily some people in government have started questioning
the Ministry of Transport's proposal to set a limit for
foreign ownership in the nation's airports. The Ministry
has been planning legislation so as to counter a planned
public listing of the Narita airport in FY2009. Speaking in
opposition to the proposed limits, the Finance Minister has
been saying publicly that opening up such investment
opportunities to foreigners is crucial to getting foreign
capital to invest in Japan again. (Source: TT commentary
from, Feb 2, 2008)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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