1/87 MERGERS & ACQUISITION - JAPAN IS NEW FOCUS?

In view of the Boesky scandal and other unfortunate events in the US, "Mergers & Acquisitions" may no longer be the center of attention for the best and the brightest. Yet that need not be so in the case of Japan. Japanese acquisitions involve no innuendoes of the inside information or the use of greenmail to coerce payments from corporate management. To the contrary, what we have here is the simplest, and most profitable, type of investment banking transactions. The Japanese have mountains of money and are itching to get rid of it. After helping to finance a significant share of massive US government deficits, and buying almost every remaining desirable building in major American cities, Japanese businessmen are now simply buying up companies. A simple purchase transaction, with no hints of impropriety.

As the yen has appreciated by 40% against the dollar since September 1985, foreign corporations, American corporations in particular, look much more inexpensive than ever before. In the year ending September 1986 acquisitions of foreign corporations with the assistance of the Big Four Japanese securities firms were 60% more than in the previous year amounting to 40 cases. Yamaichi Securities for example, doubled its staff in the mergers and acquisitions division. Yamaichi has a list of 2,000 companies that are potential acquisitions. Japanese long term credit banks and city banks are also hungrily working the market. The five most active banks, including Sanwa Bank and the Long Term Credit Bank of Japan handled more than 20 acquisitions during April-September 1986. During the whole fiscal year, Japanese banks are thought likely to handle 50 acquisitions and mergers. Although Japanese trust banks thus far have little experience in the field, they are all aggressively developing merger and acquisition departments. Major acquisitions and investments include Sun Chemicals by Dainippon Ink, Goldman Sachs by Sumitomo Bank and Fairchild Semiconductor Corporation by Fujitsu. About 90% of the mergers and acquisitions business with the Japanese involves the acquisitions of foreign companies. Nevertheless, there are indications that there may be movements towards acquisitions of Japanese corporations as well. Japanese institutional investors have never been as influential as they are today and they are reportedly more willing to take profits, valuing less than ever before shareholding for relationship purposes. Interestingly, much of the business for acquiring foreign corporations has come from medium and small sized Japanese corporations. Their reasoning being that it would take at least 2-3 years to start operations in foreign markets from scratch. The easiest way to enter foreign markets is thus via the acquisition of existing corporations. (of course, this begs the question of why it is so difficult for foreigners to acquire Japanese corporation when it is the foreigners who desperately need to develop the Japanese market). Acquisitions in the US were further fired in late 1986 by changes in the US tax laws. With taxes on capital gains going up in 1987, American sellers were more eager than ever before to sell before the higher tax rates went into effect.

The Japanese believe however, that the US government is growing concerned over this aggressive acquisition of American corporations. Witness the severe restrictions imposed on the investment in Goldman Sachs by the Federal Reserve Bank of New York (see Bank vs. Securities Companies, this issue) and the investigation of the acquisition of Fairchild Semiconductor by the Department of Defense.

THE JAPAN LAWLETTER. January 1987. By Roderick Seeman