Editorials

Learning from overseas M&A cases that went wrong

The number of Japanese companies’ mergers and acquisitions of overseas firms continues to rise as companies seek to explore more business opportunities abroad at a time when the rapidly aging and shrinking population clouds the prospects of the domestic market. That trend has been accompanied by a recent string of high-profile failures and massive losses involving overseas companies acquired by Japanese firms. Companies that have an appetite for overseas M&As need to learn from the cases of acquisitions that went wrong.

According to M&A consultancy Refco Corp., last year saw a record 636 cases involving Japanese companies buying overseas firms, with their combined value topping ¥10 trillion for the second year in a row. That included SoftBank Group’s $31 billion acquisition of British semiconductor designer ARM Holdings PLC, the largest foreign acquisition by a Japanese firm. The trend is believed to be continuing this year, with companies across different sectors and of varying size showing interest in buying overseas firms to explore new markets abroad.

We have also witnessed a series of overseas acquisitions by major Japanese companies go wrong.

Toshiba Corp. was forced into a serious management crisis after incurring nearly ¥700 billion in losses at Westinghouse Electric Co., its nuclear power business unit it bought in 2006 for ¥600 billion. Japan Post Holdings Co. fell into the red for the first time since its 2007 privatization in its latest business year after booking ¥400 billion in impairment losses related to its Australian logistics service provider, Toll Holdings Ltd., which Japan Post bought for ¥620 billion just two years ago as part of an effort to expand overseas. In February, major brewery Kirin Holdings sold its Brazilian beer unit, bought for roughly ¥300 billion in 2011, for ¥77 billion after it performed poorly against the backdrop of a troubled local economy.

These cases are said to highlight a lack of experience on the part of many Japanese firms in overseas acquisitions, and in supervising and controlling the overseas units they have bought. Toshiba’s top management was reportedly unaware of the massive losses at Westinghouse due to huge cost overruns and delays in the construction of nuclear power plants in the United States, until shortly before they were disclosed last December. Japan Post Holdings president Masatsugu Nagato acknowledged the purchase of Toll Holdings was “expensive” — a concern that had been raised at the time of the acquisition.

Many Japanese companies have only 10 years or so experience in overseas acquisitions. They lack in-house staff who are well-versed in M&A matters and in managing associated risks. Most of the firms that acquire overseas companies are said to rely on the advice of financial institutions that act as intermediaries in the sale of businesses.

Several years ago, an overseas acquisition by a Japanese life insurance company prompted others to quickly follow suit — as if they did not want to lose out in the competition with rival firms to expand their business opportunities abroad. Such companies often lacked a long-term business strategy on what they would do with their acquired firms. Some acquisitions ended up being very costly deals because the management of the Japanese companies were essentially guided by the intermediary financial institutions.

To learn from past mistakes, Japanese firms exploring overseas M&As are advised to establish a long-term strategy for deals and spend sufficient time to find the right targets. They should set a clear goal regarding what they seek to achieve by buying an overseas firm, and hold sufficient discussions on how to integrate the operations of foreign firms, which have different corporate cultures.

Attempts to merely impose a Japanese-style management policy on a foreign acquisition will likely not work, but leaving the management up to the executives of the acquired firms could result in a loss of control over the overseas subsidiary. M&A experts say the key to averting management friction with a foreign unit is to engage in constant communication with managers in broad layers at the acquired firm. But few Japanese companies are said to be successful in doing that due to language barriers. As a result, it is believed that only 30-40 percent of the overseas acquisitions by Japanese firms in the past decade have successfully produced the intended synergy effects over the long term.

Given the tough prospects of growth in the domestic market, not just top-notch companies but many small and medium-sized firms are said to be eyeing overseas M&As as a means of exploring global markets. They need to stop and think why some of the M&A deals by others went wrong, and learn from their mistakes.