Boutique advisers specializing in micro mergers and acquisitions for mostly family-run firms are enjoying a boom as the aging, shrinking population puts the squeeze on Japan’s small business landscape.
There are no industrywide figures for deals between ¥500 million and ¥1 billion, but boutique advisers say they are benefiting as owners look to merge their businesses to cope with dwindling demand or as they reach retirement without a successor.
Japan’s population, already the oldest among developed economies, is projected to shrink by a third by 2060.
Nihon M&A Center Inc., the largest of three publicly listed boutique advisers, said Jan. 30 that its profit for the nine months through December jumped 34 percent to a record ¥5.3 billion on sales of ¥15 billion.
“Japan’s population is shrinking. Ultimately none of the small companies will be able survive by itself,” said Yasuhiro Wakebayashi, chairman and founder of Nihon M&A Center. “They have to be part of larger firms to grow. That is going to be a trend in this country, so the M&A market will only become bigger.”
Nihon M&A brokered 406 deals in the first nine months of this financial year, which will end March 31, comfortably on the way to beating the previous year’s 420 total.
Smaller rivals Strike Co. and M&A Capital Partners are also capitalizing on the trend, brokering a combined 106 deals in the last financial year, up 23 percent from the previous year and 74 percent from the year before that.
“We are in a niche overlooked by big institutions,” said Kunihiko Arai, president of Strike.
M&A activity among bigger businesses, arranged by financial heavyweights such as Nomura Holdings, Daiwa Securities Group Inc. and Mitsubishi UFJ Financial Group Inc., grew only 4.3 percent to 2,137 last year, while deal value fell 10 percent to ¥6.2 trillion, Thomson Reuters data show.
Investors in the advisers have also benefited.
Shares in Nihon M&A Center gained 56 percent in the past year and M&A Capital Partners shares almost tripled, outperforming a 48 percent gain for the Tokyo Stock Exchange’s Topix Securities Index. Strike shares have more than doubled since listing in June.
Nobuko Inui, 59, who owned four dispensing pharmacies in Osaka, was among those helped by Nihon M&A.
Last year, Inui sold the business she set up in 1994 to Tokyo-based, privately held Kraft Inc., which operates 630 pharmacies nationwide. Inui found it hard to stay competitive as the government cut drug prices to reduce mounting health care costs.
“Drugstores are under pressure to improve and diversify our services, but a small company like mine could not afford to hire more pharmacists, so I decided to sell my business,” said Inui, who runs the pharmacies for their new owner.
Strike says more consolidation is likely in the ¥7.8 trillion dispensing pharmacy market, where a big player like Ain Holdings Inc., with about 1,100 outlets, controls just 3 percent.
Small firms are the backbone of Japan’s economy, accounting for 99.7 percent of its 3.8 million companies and employing about 70 percent of the workforce, according to government data, but many are closing their doors as owners age.
Last year a record 29,583 companies closed, up 8.2 percent from the previous year, according to Tokyo Shoko Research Ltd.
The boutiques largely get deals through referrals from regional banks and local accountants.
“There are cases where companies can keep their operations by conducting M&As. That means jobs are protected, which is good for revitalizing local economies,” said Tomoharu Sato, an assistant manager in the corporate banking department for Toho Bank in the city of Fukushima. “We rely on the small boutiques’ networks to respond to the needs of clients seeking merger partners from further afield and in a limited time.”
Such deals also provide a boost to larger companies struggling to find organic growth.
Tokyo-based construction materials maker SE Corp. is predicting a decline in net profit for the year ending in March on rising labor costs, but one bright spot is a steel-frame construction firm it bought for ¥230 million in 2015 from Hiroshi Morita.
Morita, 47, still runs the firm, based in Yonago, Tottori Prefecture, under its new name SE Tekken.
The unit’s sales have grown about 40 percent to around ¥850 million since the acquisition.
“Small companies play a vital role for bigger firms by, for example, supplying key product parts,” said Masashi Seki, manager of Tokyo Shoko Research.