Deep Dive: M&A in Japan

"The art of deal making transforms an everyday company into a business empire." Warren Buffet

Introduction

If the whiff of stagflation turns into a lingering odor in the US, then the investor enthusiasm for US exceptionalism will surely wane, if it hasn’t done already. Short-term, there might be a bounce in US equity markets, but the author believes, as discussed in previous editions, it’s wise to look further afield now.

Other markets in the world offer alpha opportunities regardless of what happens in the US, such as Japan. This week, for example, KKR and JIC Capital announced they would be investing in a $2.3 billion management buyout of Japan’s optical equipment manufacturer, Topcon.

The buyout is being led by Takashi Eto, Topcon’s President and CEO. The offer price will represent a 99.5% premium compared to the simple average closing price over the 12 months to December 9th, 2024. The tender offer will commence at the end of July 2025.

10 years ago, this would have been THE story of the year in Japanese capital markets. Firms rarely were taken private. In 2025, it’s just one of many similar announcements that will come during the year. The resurgence of China naturally took away some of the attention paid to Japan over the last few months, but the author would argue that the Japan story still has a long runway.

Japan is undergoing a revolution in corporate governance that still hasn’t played fully out yet. Companies are now more shareholder friendly than many of their counterparts around the world. They are buying back shares, raising dividends and using the ample cash on their balance sheets to merge with and acquire companies in Japan and overseas.

This week the newsletter will jump into Japanese M&A, with a focus on the potential trading opportunities the theme creates. It will cover the following topics:

1. What is driving M&A in Japan?

2. What are the major M&A themes seen recently in Japan?

3. Why Japan’s listed parent-child company dynamic creates opportunity for alpha capture?

4. The companies with high market share that might be a target for acquisition.

5. The companies with high free cash flow in Japan that should be on your buy list.

Japanese M&A: What is driving it?

Forget Paul Singer. Forget Carl Icahn. The most effective activist on the planet is the Tokyo Stock Exchange (TSE). If an activist’s raison d’etre is to be an agent of change, no fund comes even close. The TSE has spearheaded a revolution in corporate governance.

The only difference with the typical activist hedge fund is the TSE is not motivated by Gordon Gekko-style greed. Rather, it has been driven by a higher calling. It is focused on the long-term survival of Japan.

But the TSE doesn’t work in isolation. It’s part of a comprehensive top-down effort by the Japanese government, which includes some very effective ministries. Whitehall in the UK might not be what it once was, but the Japanese didn’t make the same mistake of outsourcing their government to foreign consultants. They have maintained a very talented bench of civil servants.

In the background, Japan’s Ministry of Economy, Trade and Industry (METI) has been working on key reforms to make everything possible. Once an influential powerhouse, despised in Washington in the 1980s for its “mercantile capitalism”, the ministry seemed to lose its standing during the “lost decades” in Japan. Since Shinzo Abe decided to Make Japan Great Again in 2013, however, the once great ministry has re-discovered its mojo.

One inspired guideline implemented by METI stands out. In 2023, it proposed guidelines where corporate boards had to respond to unsolicited “bona fide offers.” METI wanted to encourage consolidation by creating a more transparent M&A market.

Japan’s domestic industries are very fragmented. This newsletter has criticized the concentration of ownership in certain industries in the US (healthcare) as part of the reason why inflation has remained stubbornly high. But the opposite is also true. The excessive competition in Japanese retail for example has been deflationary until recent years. METI wanted change.

It was an inspired move by METI as corporate boards in Japan tended to ignore proposals from other companies. Today, they must respond. That has made a great deal of difference. To some extent, we saw that play out when Seven and I was approached recently by Alimentation Couche-Tard.

But that’s not the only reason why the M&A market has boomed over the last few years in Japan. The volume of M&A transactions was up over 20% last year. There are five other principal reasons:

1. Rise of Shareholder Activism: This newsletter has discussed this at length in the past. Japan is the promised land for activist investors these days. Cross-shareholdings, which limited activism in the past, have been largely unwound and the TSE has set up conditions for firms like Elliot to thrive now. Corporate boards are naturally on their toes.

2. Sponsor-led management buyouts: Sponsor-related deals have increased from around a 5% share in 2015 to around 15% in 2023, according to JP Morgan. Interest rates are low. Valuations are cheap. And the banks are willing to provide much more leverage than they are in the US. There’s a reason why KKR tells its grads to learn Japanese.

3. Liquidity: With an estimated $4.4 trillion in cash held by corporate balance sheets and $3 trillion in unspent capital by private equity firms, there is ample liquidity available for investment.

4. Economic landscape: Japan’s economy has recovered but Japan’s big companies must look outside of Japan for growth opportunities. The author would argue that Japanese corporates have been much more successful with their M&A activities over the last 10-15 years than they used to be: Recruit’s purchase of Indeed.com and of course, the Japanese homebuilders’ foray into the housing market in the USA’s growing Southeast. The export of Japanese capital for M&A is going to be a huge theme for the rest of the decade.

5. Succession Issues: Many businesses in Japan, like in the West, are owned by ageing boomers. They need a succession plan. Some of the businesses have IP and high market share in their niche. But the owner’s kids don’t want the business. This has resulted in a relatively high-profile cottage industry of business brokers, who specialize in the sale of these businesses. Some of them are listed. It has also resulted in what would be described as Search Firms in the US. The author recently had a meeting with 319A Next Generation Technology Group. It’s focused on manufacturing businesses. The banks are more or less fully financing its acquisitions. Wow.

Recent M&A Trends

Below is a list of the recent M&A activity in the market. What has stood out is the healthy premiums being paid by the acquirer when it comes to M&A activity with listed companies. It’s also worth noting how active foreign private equity firms have been. Given how woeful conditions are globally for private equity firms, the author would suggest this dynamic continues.

As the former head of KKR, Henry Kravis, noted, “the opportunities in Japan are like the opportunities I saw in the US in the late 1970s and early 1980s.” The bidding wars will only get more competitive as more US based global PE firms set up an office in Tokyo.

Parent-Child Dynamics

Parent-child stock listings in Japan refer to situations where a parent company and its subsidiary are both publicly traded. Other countries also have parent-child listings, but Japan's approach has been shaped by its historical business practices, such as keiretsu (corporate groupings) and cross-shareholding arrangements.

This structure has traditionally faced criticism for potential conflicts of interest and concerns about minority shareholder rights. Recent reforms, such as updates to Japan's Corporate Governance Code, aim to address these issues by encouraging companies to unwind such listings and improve governance standards.

Companies are already improving asset efficiency and focusing on core competencies. And there is an active movement amongst corporates to sell non-core businesses and make subsidiaries wholly owned.

For example, Nippon Steel announced in January 2025 that it would make Sanyo Special Steel, a specialty steel manufacturer, a wholly owned subsidiary. Sanyo Special Steel received a tender offer bid (TOB) at a premium exceeding 40% compared to the closing price the day before the announcement.

Similarly, Aeon announced the complete acquisition of Aeon Mall, which operates shopping centers and Aeon Delight, which handles shopping center maintenance. Aeon Delight received a 15% premium while AEON Mall will be acquired through a share exchange.

As a strategy, the author would suggest having the parent-child listings on your radar. Some are obvious. You just need patience. Sanyo Special Steel was a good example. Nippon Steel is under pressure to improve its ROE. When the US Steel merger failed, the author told his clients it was just a matter of time before it re-focused on its subsidiaries back home.

The author thinks it might make sense to be aware of cash rich parent companies that are listed on the TSE. They might buy their child companies. Here is the list: