STRUGGLING with a demographic time-bomb at home, under pressure to do more with their money and facing growing competition, Japanese companies are spending big on overseas acquisitions.

In 2015 Japanese outbound dealmaking surpassed Y10tn ($82bn) for the first time. The buying is being led by a new generation of chief executives — leaders who appear driven more by necessity than narcissism this time around. They have seen the demographic charts that promise long-term decline at home and are now scrutinised by shareholders no longer tolerant of trophy purchases.

The overseas acquisition boom predates the 2013 arrival of Abenomics but has swollen under its influence. Prime Minister Shinzo Abe’s new corporate governance code means companies are under intense pressure to raise their return on equity and justify their vast stockpiles of cash. Some have bought back shares, others have raised dividends, many have opted to do acquisitions. The result has been a collective lunge by Japan Inc for businesses ranging from banks and niche cigarette brands to logistics companies and the Financial Times. In the insurance sector alone, Japanese companies struck $25bn of deals during 2015.

Prime Minister Shinzo Abe’s new corporate governance code means companies are under intense pressure to raise their return on equity and justify their vast stockpiles of cash

The overseas spending is strongly tipped to continue even as Japan battles a spendthrift reputation that has led some critics to quip that if it paid Y10tn for its various prizes, it probably overpaid by Y5tn. The criticism dates back to whimsical acquisitions in the 1980s. But if Japan Inc has overpaid in the past 12 months the motivation for doing so seems clear: business survival. More than a quarter of Japan’s population is aged over 65 and its birth rate is among the lowest in the OECD.

The insurance business has been one of the first to feel the full impact of this demographic shift, hence its position as the most active buyer overseas this year.

Large-scale immigration has been all but ruled out, leaving companies in the banking, retail and consumer products sectors facing a declining domestic market and economic growth in long-term jeopardy. Amid such stark projections the premium paid for overseas assets, say deal advisers, is seen as the going rate to stay in business.

“It’s a nightmare for CEOs when top line growth is declining,” says Yoshihiko Yano, head of M&A at Goldman Sachs in Tokyo. “Everybody wants to do an overseas acquisition. Even a company with just a $1bn market capitalisation may want to acquire another firm that is larger than itself.”

Behind the dealmakers, quite apart from the ultra-low interest rate environment, is a banking sector desperate for long-term lending opportunities.

The Japanese deals come on the back of a bumper year for mergers and acquisitions worldwide, totalling $4.9tn. The pivotal question in Tokyo however is whether this resurrected Japanese dealmaker is any good at making deals. A growing number of companies including Japan Tobacco, Suntory and Ajinomoto have in-house M&A departments. Wary of the ever more competitive international environment for landing quality assets, its companies have also learnt to be more nimble.

“[Japanese companies] want good quality assets and they want to keep the existing management team in place,” says Peter Eadon-Clarke, chief Japan strategist at Macquarie. “What you are seeing is Japanese companies paying a full price to achieve that.”

Figures by Dealogic, the data provider, show that the median premium [based on a pre-deal target share price] paid by Japanese companies for overseas deals exceeded 35pc this year, twice the figure paid by US buyers. However, when judged by enterprise value to earnings before interest, tax, depreciation and amortisation Japanese and US buyers paid almost the same to secure their targets. Equally, say others, Japanese deals are not always driven by cost but more often by revenue and products.

The lack of strong domestic growth — the economy expanded at an annualised rate of 1pc in the third quarter — is just one of many long-term threats that have driven Japanese companies abroad. The recently agreed Trans- Pacific Partnership deal, a multilateral free-trade agreement that will remove some of the protections Japanese companies have enjoyed is another catalyst. “To expand their businesses and profits, relying on Japan alone is not sensible,” says Shinsuke Tsunoda, the global head of M&A at Nomura.

Insuring against the future

More than a quarter of the population is over 65 and the insurance sector is feeling the full force of the demographic shift. Driven by lower interest rates and a need to diversify from a shrinking domestic market, the insurance industry has accounted for nearly 30pc of the value of outbound deals by Japanese companies this year, according to Dealogic.

The spending represents a synchronised response to an approaching crisis. A deal was announced each month between June and September by the sector’s biggest players. All of these deals gave the Japanese companies greater access to the US, the world’s largest life insurance market.

Bankers are counting on more activity in the insurance market, but also in other sectors facing the same long-term dilemma. Nomura, the country’s largest brokerage, on December 21 agreed to pay $1bn for a 40pc stake in US American Century Investments.

“For insurance companies, the government itself is pushing them to purchase overseas assets. Otherwise, policyholders in Japan may not be protected over the next 50 years,” says one M&A banker at a US brokerage.

Paying a premium

M&A advisers say that Japanese companies operate on different financial metrics and investment timescales that can often explain chunky premiums. When executives talk about synergy, for example, the Japanese aim to expand market share and product profile, while US companies focus on squeezing costs. Some Japanese buyers such as Bridgestone, which bought US tyremaker Firestone in 1988, are willing to wait a decade to recover acquisition costs, a time-horizon not given to companies elsewhere facing shareholder pressure.

There is substantial global consolidation in a number of key industries of Japanese interest’.“The price of M&A deals keep rising.” Mr HideoTakasaki, chief executive of Nitto Denko, complains. “It’s becoming like a bubble.” Japanese buyers are increasingly targeting companies in developed markets where prices tend to be lower and where assets are considered better quality, says Shinsuke Tsunoda, the global head of M&A at Nomura. According to Dealogic, the US was the most popular destination for Japanese buyers last year, accounting for 39pc of outbound deals, while the UK made up 11pc.

Published in Dawn, Business & Finance weekly, December 28th, 2015