By Rochelle Kopp and Pernille Rudlin
Avoiding the bubble era mistakes
The international M&A spree by Japanese companies in the late 80s was legendary for its excess and for its failures. Just as many Japanese firms lost billions on high profile foreign real estate investments during the bubble period, many others were similarly burned on the companies they acquired. With little due diligence, Japanese firms snapped up what appeared to be bargains. They often found that the companies they acquired were not in as good shape as they had assumed, and they were saddled with having to pour in more energy and cash than anticipated to whip them into shape. And in other cases, a healthy acquired firm quickly ran aground when the new Japanese parent sent large numbers of expatriates to manage it, who clashed with the existing staff and were not sufficiently sensitive to the local culture.
Now that decades have passed, Japanese firms are again embarking on an international M&A spree. However, this time it’s different. Rather than spending cash willy-nilly, today’s Japanese acquirers are more strategic in their approach, and are consciously seeking to avoid the mistakes of the past in their approach to international M&A.
In this article, we will look at what’s special about today’s Japanese international acquirers. Then we will examine what causes mergers and acquisitions to fail, and how those failures can be avoided through proper management of the post-merger integration process. We will particularly look at what areas need to be paid attention to when M&A happens cross-border and thus cross-culturally. This is important not only to Japanese firms acquiring foreign companies, but also foreign firms making acquisitions in Japan.
What went wrong last time
Between 1987 and 1990, Japanese firms spent billions on international acquisitions. The impetus of course was the bubble economy, which gave Japanese firms a bundle of cash that was burning a hole in their pockets. Using that money to buy prestigious foreign assets was tempting, leading to a string of large deals. Sony and Matsushita both bought Hollywood movie studios. The Saison Group purchased the Intercontinental Hotels Group. Renown bought two top British clothing brands, Burberry and Aquascutum. Dai Nippon Ink and Chemicals bought Reichold Chemical, Sun Chemicals, and Polychrome. Bridgestone bought fellow tire maker Firestone. And these are just the more prominent ones – smaller yet significant deals seemed to be happening right and left.
In these deals and others, the Japanese were inexperienced acquirers. Just as with the trophy real estate properties being purchased by Japanese at the time, the prices were often inflated, based on the assumption that the Japanese had a lot of money to spare. In many cases, the strategic rationale behind the merger was fuzzy at best, amounting to little more than “because it’s cool, and because we can.” Often the Japanese companies did not do enough due diligence, leading them to buy a “pig in a poke” – in other words, to discover that the company they had purchased was not as financially sound as they had expected.
Not only were the acquisitions ill-conceived, they were often mismanaged. Inexperienced doing M&A at home, the Japanese firms of the bubble era had few skills or concept of post-merger integration. In some cases, the acquirers sent over large numbers of Japanese expatriates, who alienated the existing staff and caused them to leave, thus destroying the original corporate culture. In other cases, the acquired firm was never integrated into the company as a whole, left to operate on its own so that its assets were not leveraged sufficiently company-wide.
Today’s acquirers – sharper strategy
Today’s Japanese acquirers have sharper, better-thought-out strategies for their international acquisitions. Although the recent improvement in the Japanese economy has led to a rise in consumption, any Japanese company with ambitions to grow has realized that there is a definite limit to how much more growth can be expected by relying on domestic demand alone. And for many Japanese firms, they have realized that they need greater scale and/or geographic coverage in order to be more than bit players in their industries on a global basis. (This is also the rationale behind many mergers between Japanese companies, such as 2005’s merger of Fujisawa and Yamanouchi pharmaceuticals to create Astellas). Japanese firms also have money right now to invest in growth – average cashflow at listed Japanese companies is at a record high.
The aggressive expansion overseas by the Japanese car industry (Toyota in particular, and also Honda and Nissan) is also a driver, as Japanese parts suppliers look to find ways to service the new factories both in North America and in developing markets such as the BRICs countries of Brazil, Russia, India and China and Eastern Europe. The $3.9bn acquisition of British blue chip company Pilkington by Nippon Sheet Glass is one such example of an acquisition being made for geographic synergies. It was certainly not an acquisition which fits the old model of acquiring a company because it was weak or failing, or of knocking out a smaller competitor. Pilkington’s consolidated turnover was nearly double that of NSG. As a result, the NSG group moves from a 4% to a 14% global market share, almost on a par with the global number one company, Asahi Glass. The acquisition gives NSG improved access to European car manufacturers for its automotive glass and in building materials, and whereas NSG only had factories in Asia, it can now add Pilkington’s 26 factories in 25 countries including China, Russia, and Eastern Europe.
The majority of Japanese overseas acquisitions are at the mid-market level of less than $1bn. For example, the Japanese cosmetics group Kao bought Molton Brown, a British luxury bath, body, skin and hair care maker for $299m. Again, although a midget compared to Kao, there was nothing wrong with Molton Brown financially. It had shown steady growth and high profitability over the past few years with annual sales growth in the double digits. Kao is clearly trying to build a premium end global personal care business and is expecting Molton Brown, with its outlets in Harrods, Selfridges, Neiman Marcus and Nordstroms and supply of toiletries to prestige hotels and British Airways, to increase Kao’s access to luxury markets and to mesh well with its existing brands of Jergens, Bioré, Curél and John Frieda.
Japanese companies in the business services sector are also joining the acquisition wave. Whereas in the 1980s they expanded overseas by starting their own branches and simply for the reason that their Japanese manufacturer customers were expanding overseas, they are now taking stakes in foreign companies, in order to find alternative sources of income to the matured Japanese market. Japanese banks in particular are finding that large Japanese companies are not borrowing so much from them, but at the same time, the banks’ lending legacy means that they are still very exposed to Japan-side risk. In the past few years Bank of Tokyo Mitsubishi UFJ and Mizuho have taken stakes in banks not only in major Western markets but Asia and the Middle East.
Why mergers don’t work
As Western companies have found to their cost, however, acquisitions which look strategically impeccable on paper can turn out to be value destroyers in reality. Companies believe they are acquiring and merging with other companies to increase the scale of operations, enhance the services and products they offer to customers, or to expand into new markets. The combined entity is expected to deliver greater economic value to customers, investors and owners. Over time, mergers and acquisitions have become larger, more global, and increasingly complex. What they haven’t become is more successful.
While increasingly popular throughout the world as a business strategy, mergers and acquisitions have a poor track record. In fact, less than half of all mergers are considered “successful.” Few companies achieve the synergies, create the profits or realize the cost savings they anticipated. This happens for two main reasons. First, a merger must make business sense. Second, a plan for combining the entities must be in place. Despite all the due diligence and financial projections, these items are often forgotten. As a result, key people leave, internal power struggles prevail, corporate cultures clash and decreased morale and productivity reign across the now larger organization.
Smart companies recognize that there needs to be a compelling reason to join two companies. They also understand that employee support is necessary or anticipated benefits could be lost. When companies openly communicate with and help prepare employees for change in the workplace, the probability of success increases. For an organization to thrive after a merger or acquisition there needs to be a plan to smoothly manage the process of combining the companies.
The above are all doubly true when a merger or acquisition is a cross-border one. Differences in culture can make it particularly challenging to achieve the desired synergies or efficiencies. Furthermore, Japanese organizations with their rigid approach to human resource management and tendency to form cliquish groups tend to have particular difficulties with mergers and acquisitions even between Japanese firms. Just look at the legendary case of Dai-Ichi and Kangyo banks, which decades after their merger still had separate personnel departments to handle the staff originally hired by Dai-Ichi and those originally hired by Kangyo. Or look at any of the more recent mergers of Japanese banks, which have led to bloated organizations reluctant to achieve efficiencies by eliminating even obvious redundancies.
The following are some of the factors that can have an adverse effect on merger success, and that need to be planned for in the post-merger integration process:
Each company has its own distinct corporate culture – how decisions are made, how communication happens, the degree of formality, the amount of risk-taking, etc. Even with the same country, and the same industry, corporate culture differences can be very sharp – just compare Apple to IBM, Sony to Matsushita, or Toyota to Honda. Such corporate culture differences can doom an acquisition if they are not addressed. Then, add on top of these national culture differences such as communication style, attitudes towards time, and degree of hierarchy, and the gaps can become insurmountable if nothing is done to help bridge them.
As dangerous as differences in corporate and national culture are the images that each side holds about each other. If allowed to persist, stereotypes can become barriers that prevent people from working together effectively. “Those Japanese” or “those Americans” become powerful images that have the potential to be catchalls for all negative feelings about the merger. Stereotypes can also introduce concerns that are not necessarily based on actual observation of the other group. For example, based on what they have read in the media, non-Japanese employees may feel concern about how the Japanese will treat women, even if the acquirer’s staff has never exhibited any bias towards women.
Strong belief by both parties in own superiority
It’s natural for anyone to feel that they way they have been doing things is the best. However, when there is a merger or acquisition, everyone will have to change at least some aspect of how they do their work. If each group is stuck in the attitude that their way is best, it can lead to friction and also delay in implementation. We have observed in particular that many Japanese, having worked their entire lives at the same firm, are extremely attached to their company’s traditions and approaches. While many non-Japanese fear that a Japanese acquirer will come in and force them to adopt foreign practices such as morning exercises or singing the company song.
Insecurity about the future
Employees of an acquired firm often feel concern that they might lose their jobs or otherwise suffer as a result of the merger. These fears can be exacerbated if there is insufficient communication about the plans for the post-merger entity. The language barrier and different approaches to internal communication can often prevent Japanese acquirers from being optimally effective in communicating future plans to non-Japanese employees of an acquired firm.
Failure to fully address differences in compensation/benefits of employees
Issues that affect people’s pocketbooks are obviously sensitive ones, but it’s surprising how many company overlook issues of compensation and benefits when planning for post-merger integration. This issue has particular potential for difficulty at senior levels – American chief executives of major companies are paid on average over 500 times that of the average worker, whereas in Japan the multiple is not much more than 10.
Failure to establish a plan to combine the two entities
In many cases, companies are caught up in “the deal” and don’t put enough effort into thinking through what will happen after the merger is completed. Post-merger integration planning needs to begin well before the ink is dry on the contract.
We see evidence in our work that both Japanese companies and their acquisition targets are becoming increasingly sensitive to these kinds of issues and are trying to address them as pre-emptively as possible. Japanese companies are more aware this time round that they lack sufficient internationally experienced Japanese managers to perform all management functions across their overseas operations. They also do not want to repeat the experiences they had in the 1980s, where key local executives quit after the acquisition, to take their inside knowledge and experience to a competitor. As well as cross cultural training programs, we have seen Japanese senior executives try to create mutually agreed corporate strategies and mission statements in collaboration with their overseas counterparts. More freedom and authority is being given to non-Japanese executives than even the Japanese executives have. Merger synergy teams are being established with representatives from both companies on an equal footing.
Some blood on the boardroom carpet may be inevitable, however. In the 21st century knowledge economy, it is not enough just to transfer technical skills to overseas operations. Customer service, quality control and after sales care are all part of the unique selling proposition that a Japanese company needs to replicate overseas to be as successful in other countries as it is domestically. SECOM, the Japanese security company, tried to retain the senior management of the British security company, Ambassador, post-acquisition. The senior management was resistant to SECOM’s philosophy of being a service provider rather than a box provider, and the sole Japanese expatriate, the chief executive, had to put his US business school MBA to work by ‘releasing them to the industry’.
While each M&A situation poses its unique challenges, and thus requires unique approaches, the common element is that careful attention needs to be paid to the complex people issues involved. This is something that Japanese acquirers were often not sufficiently sensitive to in the bubble period, but it appears that this second way of acquirers today is striving to not repeat the mistakes of the past.
If you are being acquired by a Japanese company, you may be interested in our post merger integration services.
I was discussing with a client recently the way accepted terminology keeps changing in the UK busine
apanese expatriates must accept that their job is not simply to report back to Japan headquarters wh
The editors of this book have tried to stitch a rather eclectic group of papers together as proof th