Japan “is ripe” for more mergers and acquisitions as companies have ample cash and the level of takeover activity is lower than it should be, according to Goldman Sachs Group Inc.
Japanese companies should consolidate in industries where there is excessive competition, and be more aggressive in making acquisitions in Asia, where the long-term growth potential is high, Kathy Matsui, chief strategist for Goldman in Japan, said Wednesday.
Corporate cash balances are at record highs, the yen is near its strongest level in 15 years, share valuations are low and companies are selling cross-held shares, making mergers and acquisitions more attractive, Goldman said in a Saturday report.
“Increased M&A activity is likely to be positive for Japan as a whole since it can lead to higher growth potential and result in economies of scale to enable Japanese firms to compete more effectively in global markets,” Matsui said. “Despite being flush with cash, the absolute level of Japanese M&A activity is nowhere where it should be.”
While Japanese M&A activity has been sluggish since 2005, deals this quarter have increased 28 percent to $22 billion on a quarter-on-quarter basis, Matsui and five other analysts and strategists wrote in the report. The strong yen, which increases Japanese companies’ buying power abroad, is near a 15-year high against the dollar, according to data compiled by Bloomberg.
Japan is “growing ripe for increased M&As,” as about 70 percent of companies on the Topix’s first section trade below book value, the report said. The Topix index’s price-to-book ratio is at 0.97, its lowest level since April last year, according to Bloomberg data.
Chinese companies spent $120 million in the first half of this year to acquire Japanese enterprises, according to the report. That was a six-fold increase as Chinese firms sought to gain brands, technology and distribution networks, Matsui said.
Also, a selloff of cross-holdings is increasing the percentage of free-float shares on the market, which will make acquisitions easier, Matsui wrote. The ratio of cross-held shares to free-float shares fell to 32.6 percent in March from 34.8 percent a year earlier, the report said.
Meanwhile, the amount of cash held by nonfinancial companies on the Topix’s first section reached a record high of $580 billion in March, increasing the “firepower for acquisitions,” the report said.
“We believe the environment has become even more conducive to increased Japanese M&A activity,” Matsui wrote in the report. “In terms of cross-border Japanese M&As, Asia-linked transactions are on the rise.”
Asian transactions are increasing and account for 20 percent of M&As involving Japanese companies, compared with 4 percent in 2000, the report said.
Companies likely to be involved in M&A activity include those with high internal rates of return, companies that have at least $2 billion in cash and subsidiaries that may be acquired by their parent, the report said.
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