“Japanese companies have embarked on the biggest overseas acquisition spree in more than 20 years, echoing the deal boom of the 1980s,” as Lina Saigol detailed in the Financial News yesterday. In this interview with Asia Law Portal, Frank Aquila, Partner with Sullivan & Cromwell, explains what opportunities and challenges await Japan’s corporate investors in the United States in 2019.
Recent reports indicate Japanese corporations plan to increase foreign investment in 2019. In general, what opportunities and challenges exist for foreign investors in the US market as we approach 2019?
There appears to be a strong interest by Japanese companies in seeking significant acquisitions outside of Japan generally, and in the United States in particular. Given the demographic challenges that Japan will be facing over the next quarter century, now is the time for Japanese companies to seek acquisitions that will provide sustained, long-term growth for the foreseeable future. As with any cross-border acquisition, there are always additional factors beyond the typical issues in a domestic M&A deal. In the U.S., the newly enacted Foreign Investment Risk Review Modernization Act of 2018, or FIRRMA, significantly expands CFIUS’s jurisdiction to review and impose conditions on transactions involving foreign investment in U.S. businesses. Depending on the industry and the related technology, FIRRMA could make U.S. acquisitions more difficult for non-U.S. acquirors. Having said that, I suspect that it will not materially delay and impede most transactions by Japanese businesses. Japan is an important U.S. ally and Japanese businesses in the United States have proven themselves to be excellent employers and good corporate citizens. For the most part, Japanese corporations are viewed as preferred buyers. The United States is likely to receive significant inbound investment interest from Japan and I would expect that interest to be welcomed here.
How can Japanese investors capitalize upon opportunity in the US market while also avoiding danger?
Like any potential investor, doing extensive and thorough due diligence from the outset is essential. The most important step is selecting financial and legal advisors with substantial cross-border acquisition experience and a knowledge of the sector in which the potential buyer operates. If the management of the target business has been crucial to the success of the business being acquired, Japanese buyers should take steps to retain and incentivize the target company’s management team. While retaining the entire management team may not always be possible, rebuilding one from scratch immediately following Closing would certainly be extremely difficult and negatively impact integration.
Are there any specific US asset classes you see as potentially most attractive for Japanese investment in 2019?
Clearly consumer goods, luxury products, healthcare, automotive and transportation companies, traditional manufacturing and retail are all sectors where Japanese companies should be looking to for potential acquisitions. Beyond those sectors, I am confident that we will see Japanese acquirors buying companies in a wide range of sectors and asset classes. Also, my sense is that we will see deals for public companies, subsidiaries and divisions of public companies, private companies and even one-off asset purchases. Beyond outright acquisitions, we will no doubt see Japanese companies entering into joint ventures and other strategic ventures with their U.S. counterparts.
You’re work in facilitating cross-border mergers and acquisitions has been widely recognized. Based on your experience, what would you advise Japanese Corporate leaders to keep foremost in mind while they currently consider their strategic decisions about what M&A activity they may conduct in the US in 2019?
Think long term and do not lose focus on your strategic goals for the deal! The measure of whether an acquisition is successful is not merely whether it is accretive in the first or second year; revenue and earnings growth two, four and six years after the deal should be seen as the real measure of a good acquisition. Deals with low premiums may look like bargains at the time, but low margins can often mean that either the share price is too high or there are no other potential buyers for the target company. Whatever the price that is paid, remember that the best results are achieved when there is a strategic fit between the buyer’s business and the acquired company. Also, plan early for the post-Closing integration process and be sure to implement the integration plan quickly and efficiently.