It seems that there is a new pool of fish for the sharks to attack, the sharks being private equity firms and the fish being the Japanese market. The Japanese economy is built on mergers and acquisitions (M&As), and many of them fail. Not just that, there have been some serious integration problems, as well as lengthy litigation battles. The country may be going through an M&A boom, many of them are also failing. And this is an interesting development for the private equity field.
Executives from a range of private equity firms, including Eric Schiffer who is Chairman & CEO at Patriarch Private Equity, have now indicated that they are looking at a range of different options and deals. Some of these deals could mean that they could take over some of the more difficult assets that are currently struggling in Japan, offering their personal expertise, while at the same time working together with local businesses to have the local market expertise also needed to make a new business a success.
Since 2011, there has been a significant increase in the Japanese outbound M&A activity. In 2015, it hit a new record. Many Japanese companies are looking at a way to fight shrinkage of the domestic market and long term economic decline, by growing overseas. Unfortunately, the assets they purchased as part of this have turned out to not be as successful as they had hoped for.
Many financial experts are less than surprised by this. An M&A boom is almost always followed by a massive decline in economics, particularly when entering an unknown market. However, private equity firms could play a really big role in resolving this issue.
A number of key problems are appearing that are leading to the failure of so many M&As:
- Japanese companies overpaid tremendously for the new assets.
- Company executives are leaving to find more secure jobs elsewhere.
- The Japanese often do not have the necessary experience to run a business overseas.
Not only has there been a significant rise in failed M&As, litigation is also up, with disputes being very frequent. It is believed that all of this could be of benefit to private equity investors, however, and particularly those in the industrial and pharmaceutical sectors, where the cultural gap seems to be too big to overcome at present.
Again and again, it has been seen that the companies do not properly engage with acquired leadership or, when they do, they do so much too late. They don’t have good integration plans in place that have been shared around, leading to ever increasing problems. Added to that is the fact that there isn’t a large enough talent pool of executives in Japan yet, and particularly not one of people that understand private equity and M&As.
Private equity could, if done properly, present a real solution to the problem with Japanese outbound acquisitions. It is a system that is not well known yet in Japan, but since this concerns outbound companies, it shouldn’t be a problem. Those involved in private equity also usually have a lot of experience in M&As, so they understand the importance of getting the right people on board, while at the same time being able to access other talent pools. This is why those who are interested in the failed acquisitions already want to work together with the local Japanese market, essentially bringing the original, failed idea to a positive and profitable result. It will be interesting to see how the Japanese market will develop over the coming weeks and months.
