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  Acquisitions in Japan

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Foreign Investment in Japan
Japan is the second largest economy in the world, representing more than 70% of the combined total of all Asian economies. For  foreign companies a presence in Japan means participation in a large, homogeneous and potentially attractive market. Liberalization and deregulation are creating new opportunities for foreign investment in Japan.

The structural changes taking place have implications for the way foreign companies do business with Japan. Many foreign companies have discovered that the process of change that is happening in Japan provides them with new opportunities.

A recent survey of foreign-invested companies in Japan indicated that annual sales of those companies are rising faster than those of Japanese companies, whereas the activities of foreign-invested companies in Japan tend to be more profitable than those of their  Japanese competitors.

The acquisition of a Japanese company is becoming a realistic option as a result of these structural changes, which have also led to a palpable change in attitude towards foreign investment generally.

Acquisitions in Japan
The acquisition of a Japanese company has become a viable option for expansion of a foreign company's presence in the Japanese  market. However, the question is not only whether foreign companies can do acquisitions in Japan; it is also - and more importantly  - a question whether a foreign company is equipped to do so successfully. An acquisition is generally not a good "market entry" strategy if a company has no prior experience in doing business with Japan.

It is difficult to give a categorical answer to the question of whether a particular foreign company will be able to do a successful acquisition in Japan. The Three C's (congenial/credible/constructive) test may assist in determining this: 

Congenial:

• Shareholder value is a relatively new concept in Japan. The determination of the value of a company is more complex than looking at stock prices. The social or economic function  of the company is viewed as important. Accordingly much prominence is given to the broader group of stakeholders rather than the much more narrow group of shareholders. Stakeholders include management, employees, banks, suppliers, and clients. In extreme cases even competitors!
• Taking into consideration the interests of stakeholders practically rules out unfriendly take-overs. It also often complicates the decision-making process. However the acquisition will have better chances of succeeding if all parties take a positive stance. 
• Acquisitions in Japan are more likely to take the form of a process rather than a transaction. It will often be easier to start with the acquisition of a minority interest in a company, build the relationship gradually and at the same time increase the ownership interest. It takes time but the chances of success improve.  

Credible:

• There is always the assumption on the part of Japanese companies as well as individuals - when dealing with foreign companies - that a foreign company will be unable to comprehend the intricacies of Japanese business relationships and customs. In extreme cases this concern becomes xenophobic; in milder cases it may still be an obstacle to smooth business transactions.  A proposed investment by a foreign company will generate apprehension at all levels. The situation will be mitigated if the foreign investor can demonstrate that he is familiar with the Japanese way of doing business, e.g., by having a business presence in Japan, well-qualified Japanese staff, and a long  history of doing business in Japan.  

Constructive:

• As part of the integration process of an acquisition it always makes good sense to explain to the investee or acquiree what is in the deal for them. Particularly in Japan it is very important to develop a solid rationale for the investment. If the management of the target company is convinced of the benefits of the proposed transaction, it will be easier for them to convince other stakeholders.