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Writer's pictureLouis Gilmore

Japan Enters a New Corporate Age


Coverage of Japanese companies, such as 7-Eleven and FujiSoft, is a welcome sight. It signals renewed optimism from investors and several government reforms working as intended.


Recently, 7-Eleven, the world’s largest convenience store chain, became embroiled in a buyout attempt. Quebec-based Alimentation Couch-Tard, which operates 17,000 stores in 31 countries, sent an unexpected offer to the Japanese conglomerate. The move shocked many. A Japanese company of this size has never been bought by a foreign firm.


More recently, FujiSoft, a system software company, became the prize of a $4 billion private equity battle between KKR and Bain. The former secured a blocking position by acquiring over a third of the company’s shares, complicating the latter’s efforts. This is a rare direct contest between private equity giants in Japan, a market traditionally resistant to corporate control battles.


Companies like Fuji Soft and 7-Eleven are being targeted for their business operations but also for their undervalued assets. Analysts noted that 7-Eleven’s diverse portfolio, which includes convenience stores, supermarkets, and other retail businesses, may not be fully reflected in its current market valuation. Meanwhile, Fuji Soft's real estate portfolio, valued at close to $1 billion, makes it a particularly attractive target.


Yet, why has a market so resistant to foreign investors suddenly become host to renewed optimism, particularly from private capital?


Japan has, firstly, seen a slight rebound throughout 2024, following three decades of deflation and slow growth. The Nikkei, a major Japanese index, lagged behind global indexes like the S&P 500 yet finally broke the “iron-coffin lid” early this year. Inflation, a metric Japanese central bankers once seemed unable to prod, stabilised above the Bank of Japan’s 2% target.


The Japanese government has also taken several inviting steps to corporate investors. Investment in semiconductors totals $67 billion, enhancing manufacturing capabilities and inducing global supply chain reallocation benefits.


The TSE’s ‘Action to Implement Management that is Conscious of Cost of Capital and Stock Price’ modernised aspects of corporate governance and improved listed companies’ valuation. This included encouraging boards to make decisions that enhance stock price performance, particularly through reducing inefficiencies and boosting shareholder returns.

Japan’s Ministry of Economy, Trade and Industry (METI) issued guidelines to enhance fairness and transparency in the M&A process. Boards must thoroughly assess takeover bids, ensuring that proposals are properly considered, on merit, and whether they align with shareholder interests. Boards must then document and justify their decisions.


Together, the TSE’s action and the METI’s guidelines have aligned company operations with market expectations, attracted global investment and encouraged more dynamic corporate activity. This is, I imagine, to the frustration of many ‘traditional’ Japanese board members, the corporate landscape of which is in increasing alignment with international standards.

For foreign investors, Japan is one of the best leverage buyout (LBO) markets in Asia, comparable to North America and Europe. Japan-related M&A volumes increased by 20% in the first half of 2024 compared to 2023. Unsolicited offers and sponsor-led buyouts are becoming more common. Large conglomerates are divesting non-core businesses to focus on strategic growth areas. 


There have been several cross-border developments, too. Japanese companies are actively acquiring overseas assets, particularly in the US and Europe, leveraging undervalued opportunities. For instance, Nippon Steel attempted to buy US Steel for $14.9 billion. And, as previously mentioned, private equity firms globally are targeting Japanese companies.

This can pose several benefits for Japan’s productivity, which is consistently poorly ranked by the OECD. The problem lies in two more cultural malaises. First, employees tend to feel obligated to be present at the workplace beyond the required hours, contributing to inefficiencies. Think, sitting at a desk pretending to work until the boss leaves. Second, while Japan is known for technological innovation, sectors are very slow to adopt digital tools and automation.


And private equity, with its cut-throat, efficiency-is-everything approach, has, on several metrics, been identified as a catalyst for improving firm-level productivity. Research by the Economic and Social Research Council found that private equity-backed firms experienced a 4% productivity boost during the pandemic.


But many are still sceptical of the growing foreign corporate involvement. The Japanese owner of 7-Eleven has considered going private to avoid a foreign buyout and, in another twist, received a bid from Ito Kogyo, another Japanese conglomerate. Public opinion is, however, reasonably inconsequential. Many Western countries are vocally distrusting of the private equity giants to no avail. What matters is the board room, which, despite opposition, will be stifled by the recent reforms reducing the power of the anti-foreign traditional consensus. The abundance of wealth and power at the hands of private equity will likely conquer the evolving Japanese market.


Japan’s appeal as a private capital market grows and will continue to do so. This momentum signals a new era of dynamism and opportunity. But what must be considered for corporate Japan is who maintains control. Will Japanese boardrooms prevail? Or will the private capital powerhouses prove too much?



Image: Wikimedia Commons/Morio

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