Japanese companies look outside for expansion opportunities

HONG KONG -- A shrinking economy, aging population and strong yen are pushing Japanese companies to seek growth overseas, from emerging markets to U.S. shores.

So far this year, Japanese firms have made more than $52.5 billion in global acquisitions, compared with $34.34 billion in all of 2010. Overall, Japanese companies are the second-largest acquirers in the world this year, behind the United States, according to Dealogic, a deal-tracking firm.

It's a trend that analysts expect to continue, and possibly accelerate, as Japanese companies diversify their operations away from Japan's stagnant economy and toward high-growth sectors such as health care, food, industry and technology.

The government has set aside half of a $100 billion fund to aid companies in resource-related acquisitions; the rest is aimed at encouraging corporations to trade yen reserves for dollars. A strong yen, while making Japanese exports less competitive overseas, is giving Japanese companies more firepower to buy foreign assets.

"Companies are hesitant to do M&A, but given the strong yen and the (weak) domestic market, they realize they have to," says Patrick Shearer, a partner in Deloitte's merger and acquisition practice in Tokyo.

Last year, Japan ceded to China its place as the world's second-largest economy. Its economy is shrinking as its population ages. The double whammy of the quake and tsunami in March only exacerbated the country's problems, by disrupting factory production and crippling domestic businesses.

For many Japanese companies, though, the disaster served as a wake-up call about the danger of focusing solely on the domestic market.

Since the disaster, "the mind-set has been that it's doubly important to push ahead (with deals) outside Japan," says Gideon Franklin, deputy head of mergers and acquisitions at Mizuho International, a Japanese financial firm.

Japanese companies have a reputation for proceeding cautiously in foreign markets. But they're starting to move with more haste as they realize a need to expand overseas to compete in the global economy, analysts say.

Japanese companies from Canon to Brother are looking to add foreign assets to portfolios. Canon is interested in acquisitions of medical equipment makers because it's an area that "offers high growth potential" for the company, spokesman Richard Berger says.

Meanwhile, Japanese companies without the resources to make acquisitions are looking to expand their product lines overseas, says Yui Yoshikawa, a Tokyo-based director for Mintel, a market research firm. Expanding overseas is the "only means in my mind for Japanese companies to survive," Yoshikawa says. "They don't have a choice but to tap into other markets" given Japan's the aging population.

In the late 1980s, Japanese companies acquired trophy assets, such as Rockefeller Center. In the late 1990s, they sought out technology, media and telecom companies. Japan Inc.'s latest buying spree is more broad-based, reaching across an array of sectors from health care to retail.

Within the health care industry, Japan's biggest deal of the year was the $14 billion purchase of Swiss drugmaker Nycomed by pharmaceutical company Takeda. Analysts believe more such acquisitions are likely on the way, as Japanese pharmaceutical companies face more competition from generic drugs as patents on brand-name products expire.

Traditionally, Japanese companies haven't invested heavily in Southeast Asia, but they're increasingly seeking out acquisitions in this region because it's among the fastest growing in the world, Shearer says.

At the same time, Japanese companies aren't discounting the value of acquisitions in developed markets such as the U.S. and Europe, says Tadashi Kubo, a partner in the M&A group at Deloitte. These investments tend to be less risky than those in emerging markets, which can be politically unstable, he adds.

U.S. companies are the second-largest acquisition targets for Japan this year, according to Dealogic, behind Switzerland. In recent years, Japanese companies have acquired large U.S. companies such as Gambro's CaridianBCT unit, which makes medical equipment, to smaller names such as mobile gaming company Gameview.

American companies are appealing despite a faltering economy because "you're not just buying exposure to the U.S., you're buying international strategies," Franklin says. "You can buy a U.S. company and it can take the lead with globalization of management."