Kensington Swan’s Aaron Patience gives us a glimpse of the intricacies of Japanese M&A
The number of Japanese companies seeking expansion through outbound investment has increased steadily over the past decade. Japanese business investment into New Zealand is likely to rise as trade relations between the two nations become closer, with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership nearing ratification. This can present opportunities for New Zealand companies, but the Japanese approach to M&A may be new for domestic companies.
The Japanese approach to M&A emphasises building consensus. “Nemawashi”, “ringi” and other like concepts can flow through many stages of the M&A process. “Nemawashi” translates to “digging around the roots of a tree”. It refers to gaining support for a decision by seeking feedback from stakeholders before any formal actions are approved. If performed well, “nemawashi” increases commitment to the deal from the affected stakeholders. Similarly, “ringi” involves a proposal being prepared amongst the lower levels of the company and then being passed upwards for approval from the higher levels.
Due diligence may be more detailed for a Japanese acquirer. Japanese acquirers tend to focus on understanding the target company’s culture and how the transaction will impact existing relationships. When reporting on due diligence issues, it can be helpful to include step by step explanations about why a particular risk is important, especially if there are implications that arise from New Zealand law or market practice.
There may be tension between the Japanese approach and New Zealand market practice at the negotiation and documentation stage. For example, unlike in New Zealand, splitting liability caps for fundamental and non-fundamental warranties is not common.
Integrating the newly acquired business into the Japanese company post-acquisition may be challenging. Japanese acquirers often prefer existing management to stay involved in the business after the transaction through, for example, employment / services agreements, retained shareholdings, earn-outs and bonus schemes. The acquired company’s management can find it difficult adjusting to operating within the structures of a Japanese organisation. In these cases, it is key to agree upfront on the authority that existing management will have after the transaction. Post-acquisition restructures are less common with Japanese acquirers than with other acquirers.
It is a promising time for Japanese investment. Understanding how Japanese companies approach M&A can help New Zealand companies benefit from closer relations between Japan and New Zealand.