HONG KONG (Reuters Breakingviews) - Japan is finally warming up to buyouts. The world’s third-biggest economy should be a prime hunting ground for private equity: Japanese firms make great products and are often parochial, poorly run, and undervalued, offering lots of room for improvement. Yet the country has long frustrated foreign PE shops. This year offers proof things are improving.
A few early triumphs, like the 2000 takeover of what became Shinsei Bank, sparked a backlash against “vultures”. And bosses have tended to mistrust leveraged buyout specialists. So some big private equity names, like Permira, have done just a few deals. Others, including Advent and TPG, have left or scaled back.
Now Bain Capital is leading an $18 billion takeover of Toshiba’s memory unit. That will be a record-breaking LBO for Japan, and an unorthodox one, given the involvement of Apple, Dell and others. Thanks largely to this single deal, buyout volumes have already topped $20 billion this year, Preqin data shows. That is a massive uptick on recent years.
Those statistics maybe skewed, but last year was also busy, and it is revealing that private equity’s involvement with Toshiba was not politically controversial. Meanwhile, Bain is simultaneously bidding for local advertising agency Asatsu-DK, and Blackstone is expanding in Tokyo.
Elsewhere, Prime Minister Shinzo Abe’s drive for better returns is weakening the corporate taboo against shedding non-core businesses. Buyers have also adapted, becoming better at convincing blue-chip sellers they will be responsible stewards of unwanted units, helping them grow rather than relying on cuts to generate profits. Hitachi, Nissan and Panasonic have all done deals with KKR, for example. These tie-ups can be a long process and favour the few firms with deep roots in Tokyo.
The next question for buyout firms is how to snag more deals. Shareholder pressure means there are likely to be many more corporate cast-offs. So buyout firms need to be better at spotting upfront how they can make businesses more valuable, says Jim Verbeeten of Bain & Co, the consulting firm, or they will be routinely outbid by corporate rivals. Still, all the signs suggest that private equity has broken through the ice in Japan.
(This article has been corrected to remove a reference to Advent and Apax steering clear of Japan. Advent closed its Tokyo office in 2011, while Apax had a joint venture with Globis Capital Partners.)