2007/9 Research & Review

Understanding How and Why M&As are Proliferating in Japan: Developing the Research Frontier in Corporate Governance

Faculty Fellow, RIETI
Professor, Graduate School of Commerce, Waseda University
Vice Director, Waseda Institute of Finance

From the late 1990s through the early 2000s, the structure and behavior of Japanese companies have changed remarkably. Amid these changes, a sharp rise in the number of mergers and acquisitions (M&As) has been very closely watched, becoming an issue of major public concern. The M&A boom, which began with the appearance of large mergers for the purpose of industrial restructuring and the creation of mega-banks, has since undergone a series of major developments, as seen in the remarkable growth of some information technology (IT) companies through aggressive M&A strategies, the increased presence of buyout funds and their acquisition of significant blocks of shares, and the uproar over Livedoor. M&A activities have expanded in scope to today increasingly include takeover proposals and major takeover bids (TOBs) by business corporations. Following the recent enactment of a new law allowing triangular mergers, M&As with foreign companies as acquirers are also becoming increasingly plausible. With M&As no longer unusual events, hardly a day passes without an M&A-related article in the newspapers or economic magazines.

However, while somewhat overheated debate weighs the pros and cons of hostile takeovers and buyouts by foreign companies, few empirical studies have analyzed M&As, which leaves many questions unanswered. Firstly, why has the number of M&As increased sharply in recent years? What economic roles have been played by M&As? Are M&As actually boosting corporate value? If so, where does that increased value come from? Does the sharp increase in M&As indicate the emergence of a market for corporate control - one equivalent to those in the U.S. and U.K. - in Japan?

A recently published book on M&As in Japan, authored by a group of researchers including myself, attempts to answer these questions as comprehensively and empirically as possible1. I would like to briefly discuss the purposes and essence of the book.

Corporate governance analysis and M&As

The book is a result of the study undertaken by a RIETI research team on corporate governance2.

Formed in 2002 under the leadership of then RIETI President Masahiko Aoki, the team initially worked on theoretical and empirical analysis of changing corporate governance in Japanese companies. Specifically, we focused on the changing main bank relationship and the unwinding of cross-shareholdings, while attempting a comprehensive analysis of human resource management and factors determining reforms of boards of directors3. Later, as these projects arrived at tentative conclusions, the team embarked on a new research theme of economic analysis of M&As, sorting out findings from preceding works and conducting hearings with companies and investment banks. Since M&As can be defined as a market for corporate control, one of the critical mechanisms for corporate governance, it is quite natural for the corporate governance research team to address the sharp rise in the number of M&As as a theme.

However, M&As are extremely diverse in substance. Bulk purchases of shares by buyout funds, frequently coming under the media's gaze, are just one aspect of M&As that can take on diverse forms. In fact, a large portion of M&As are friendly, primarily by business corporations, such as those moving toward realizing industrial restructuring and strategic M&As, and M&A decisions both on the part of the acquirers and acquirees are significantly affected by the governance structure of individual companies involved. This necessitates a comprehensive approach in analyzing M&As; a key task in this is to empirically identify M&As' impacts on the real economy.

Key messages of the book on M&As in Japan

The book is composed of two parts: a quantitative analysis of M&As and a case analysis investigating the source of creating corporate value. More specifically, in Part I, we attempt an empirical analysis of factors driving the M&A boom, as well as the effects of M&As, by applying standard analytical methods seeking to construct a new, original database. Part II illustrates how and through what channels M&As help increase corporate value, examining case studies of recent M&As in Japan such as Vodafone-Softbank in the telecommunications industry, Nissan-Renault in the automobile industry, a range of M&As by NIDEC as a growth strategy, and the case of Snow Brand Milk Products as a means of large-scale restructuring. The introductory chapter provides basic viewpoints for understanding M&As and covers their brief history in Japan since the beginning of the 20th century, while the final chapter summarizes the characteristics of M&As in Japan as derived from an international comparison4.

The book carries some key messages. The recent, rapid increase in M&As in Japan has been driven primarily by economic shocks - both positive and negative - such as technological innovation and sharp falls in demand. M&As are steadily taking root in Japan as a market mechanism for assessing business models. Japan's M&As, however, have some unique transactional and organizational characteristics which cannot be observed in M&As in the U.S. and U.K. These are characterized by the way the Japanese corporate system has evolved. The increasing M&As have facilitated resource allocation in terms of downsizing less profitable divisions and expanding high-growth divisions, thereby contributing to the improvement of organizational efficiency through the transfer of management resources and know-how. This kind of transfer is particularly evident in M&As in which a foreign company is the acquirer, though these are limited to certain industrial sectors. Meanwhile, hostile takeovers and bulk purchases of shares by buyout funds are beginning to affect Japanese companies' financial policies. For the moment, however, M&As vary widely in their degree of impact on organizational efficiency, leaving much room for further improvement.

Sources of increased corporate value, achieved as a result of M&As, are diverse. Apart from the realization of economies of scale and scope, inter-organizational learning, know-how transfer at an operational level, and industrial and organizational factors, such as enhancement of bargaining power as a result of corporate consolidation, are all significant. Apparently M&As have generally contributed to the structural adjustment of the Japanese economy and oft-cited negative aspects of M&As - such as overvaluation of target companies and a breach of trust - have not been systematically observed. Therefore, although careful consideration should be given to possible over-prevalence and anticompetitive effects of M&As, institutional infrastructure for facilitating them must be built in order to promote structural adjustment of the Japanese economy and expand the scope of growth areas.

Developing the research frontier in corporate governance

Following the publication of this book, RIETI's research team on corporate governance has continued to develop the research frontier in corporate governance. Specific subjects of current and future focus include the following.

First, we are trying to expand the scope of the above-discussed research with an immediate focus on identifying the types of M&A likely to result in increased corporate value. Another important theme for us is to analyze the ownership structure of Japanese companies in the era following one characterized by pervasive cross-shareholdings. Such examination is especially significant in terms of M&A's association with anti-takeover measures. Also, we consider the issue of the governance of startups and listed subsidiaries to be a subject requiring urgent attention; all the more because no sufficient examination has been carried out in this area. Finally, we will find out how the internal governance - the reform of boards of directors and changes in the compensation system - of traditional major companies related to their business portfolios and internal organizational structures. This is an attempt to comprehensively understand finance, corporate governance, and corporate organizational structure, which we believe will become an important issue in the coming years. In the process, we will inevitably shed light on the question of whether the Japanese corporate system will converge into the Anglo-American system or maintain its uniqueness. As our research proceeds, we will publish our findings in each of these areas.

>> Original text in Japanese

  1. Miyajima, H. (ed.) et al., Nihon no M&A: Kigyo tochi, soshiki koritsu, kigyo kachi heno inpakuto [M&A in Japan: The impacts on corporate governance, organizational efficiency and firm value], Toyo Keizai Inc., June 2007.
  2. Developing the Research Frontier in Corporate Governance Analysis."
  3. Findings from these earlier research projects are published as M. Aoki, G. Jackson, and H. Miyajima eds., Corporate Governance in Japan: Institutional Change and Organizational Diversity from Oxford University Press, 2007.
  4. The final chapter is available in English: "The Comparative Features and Economic Role of Mergers and Acquisitions in Japan," RIETI Discussion Paper 07-E-056, September 2007. For international comparison, refer to G. Jackson and H. Miyajima, "Varieties of Capitalism, Varieties of Markets: Mergers and Acquisitions in Japan, Germany, France, the UK and USA," RIETI Discussion Paper 07-E-054, September 2007.

October 22, 2007