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The digital transformation race and rising economic confidence to drive more M&A

2017.12.11
  • Half (50%) of Japanese companies plan to acquire in the next 12 months
  • 45% of Japanese executives expecting increased M&A competition see PE as biggest competitive threat
  • Cross-border dealmaking set to rise despite geopolitical and regulatory concerns

TOKYO - 11 DECEMBER 2017. Global mergers and acquisitions (M&A) conditions look set to drive dealmaking for the remainder of 2017, with Japanese companies taking confidence from strengthening economic activity in the Eurozone, and growth in China and the United States, according to the EY 17th Global Capital Confidence Barometer (CCB).

With all major engines in the global economy now synchronized in an upward trajectory, a resounding 99% of Japanese executive respondents believe global economic growth is stable or improving. Within that economic context, the biannual survey of nearly 3,000 executives across 43 countries, including Japan, finds more than half (56%) of these companies are planning a deal within the next 12 months. Similarly, 50% of executives from Japanese companies also expect to pursue acquisitions.

The majority (60%) of global executives expect increased competition for assets. Of the Japanese respondents 45% cite private equity as the biggest competitor in the hunt for assets, and almost a fifth (19%) of all executives foresee a rise in hostile approaches in the next year. A record high (98%) of Japanese executives believe the M&A market will improve or remain stable in the next year - and just 2% foresee a decline in dea

Vincent Smith, Representative Director, Chairman - EY Japan Transaction Advisory Services, says:
"There has been a significant improvement in the last six months in the confidence Japanese executives are showing in the state of the global economy and the M&A markets. The resurgence of private equity could be the biggest M&A story over the next 12 months both globally and in Japan, and may see corporates challenged more for assets than during the past five years. This rebound of private equity is set to take an even bigger role at the deal table in 2018."

Increasing globalization counters nationalistic sentiments

While concerns regarding regulation and market access have increased, almost three-quarters (73%) (Japan 72%) of companies are looking beyond their countries' borders for M&A investments.

According to the survey, Japan's subdued domestic growth prospects continue to drive the search for growth offshore. The US economic revival, and continued strength in the Chinese economy is creating a powerful draw for inbound investment from Japan. Meanwhile, the UK still remain a key investment destination for Japanese companies despite uncertainty over trade agreements relating to Brexit.

Smith says: "Recent US and European Union moves to strengthen inbound antitrust and national interest reviews may temper cross-border deal flows, but actions to ensure reciprocity of access should alleviate those concerns. Japanese executives continue to seek foreign investments to meet growth ambitions and we are seeing them proactively managing geo-regulatory risks, rather than being managed by them."

Sectors converge around technology's center of gravity

Convergence across all industries - and particularly in the technology sector - is highlighted in the survey, with many executives looking at technology investments as the gateway to their digital future. While 33% of Japanese companies aim to develop digital capabilities in-house, 30% intend to transform their digital future through acquisitions, joint ventures and alliances.

The top five sectors in Japan with the highest acquisition appetite are automotive and transportation (64% plan to acquire), life sciences (57%), consumer products and retail (50%), financial services (50%) and technology (35%).

Corporate venture capital (CVC) investments look set to be a key investment instrument across all industry sectors, with almost two-thirds of Japanese companies (66%) currently using or planning CVC to buy future opportunities.

Smith says: "Traditionally, technology companies have been at the forefront of CVC investing, but other sectors have now developed CVC expertise, especially life sciences, industrials and consumer products. All companies are now better able to scan their ecosystems for emerging technologies and new start-ups, enabling CVC strategists to quickly identify potential future disruptors for investment."

The survey finds that the top five investment destinations of choice among Japanese executives are Japan, China, South Korea, the US and the UK.

Shareholder activism still on the rise while inclusive growth demanded

Activist intervention continues its upward trend as investors look for higher returns in better economic times. Companies that are under-scale, cash strapped or struggling in consolidating industries are under more pressure than ever before from shareholder activists. The vast majority (80%) of Japanese executives expect the number of companies impacted by shareholder activism to increase or remain at already robust levels. Almost half (48%) of Japanese executives expect Asia to see the greatest increase in shareholder activism, while 38% cite North America and 14% cite Europe.

Smith says: "Any company with activist shareholders will tell you that managing today's broad range of stakeholder groups is becoming an increasingly complex demand for the C-suite. Perhaps most interesting is a newly emerging necessity among more than half of Japanese executives (53%) to clearly articulate deal rationale to a broader range of stakeholders within the concept of inclusive growth. It is also expected that this communication commence as early as possible if stakeholder support is to be maximized. Revenue growth alone may no longer justify the 'purpose' of a deal'."

Executives to deal with complexity through M&A

Greater confidence in global economic growth than almost any time since the global financial crisis, while positive, is creating powerful new challenges for global businesses, the survey finds. It requires an even keener focus on organic and inorganic growth, as well as cost efficiency to meet rising investor demands in an increasingly complex business environment.

Smith says: "M&A may not be making as many headlines of late, but executives clearly plan to make strategic headway through acquisitions. While we have seen few megadeals, due to regulatory and antitrust concerns, buyers are still busy making strategically important investments. With 64% of Japanese executives expecting the M&A market to improve over the next 12 months, there may be a return of the mega deal, and smaller and smarter deals will also be prominent as companies reshape their portfolios to respond to disruptive forces. This trend, coupled with the race to digital and economic confidence are creating an environment that supports continued, long-lasting strength in the M&A market."


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