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Japan Inc.'s Buying Tour Reaches Britain

It's been more than a decade since Japanese companies went on this kind of buying binge. Japan Tobacco's $14.7 billion bid for British cigarette maker Gallaher Group (GLH), announced on Dec. 15, ranks as the biggest cross-border takeover by a Japanese company. The deal, which is pending approval by Gallaher's shareholders, would bring together the world's fifth- and third-largest tobacco makers, respectively. Japan Tobacco would pocket some well-known names, including Benson & Hedges and Silk Cut, and gain a presence in growing markets like Russia and Eastern Europe.

Investors blessed the deal, sending Japan Tobacco's shares 3.1% higher in Tokyo trading on Dec. 15. But even before the smoke finally clears, the move is already being seen as a major shift in strategy for Japan Inc. After more than a decade of economic stagnation and mostly disappointing profits, Japanese businesses are back scouring the globe for growth opportunities. Says Japan Tobacco's CEO Hiroshi Kimura: "In the emerging markets of Central and Eastern Europe, cigarette sales volumes are still climbing. We can expect stable growth."

Diversifying beyond Japan has become a matter of urgency for many companies. The world's second-largest economy is in the midst of its longest postwar boom, now closing in on five years. But it's expanding at a rate of just over 2%, and nobody thinks it will ever return to the blistering growth of the early postwar decades. Add to that a graying population and you start to grasp the dilemma of Japanese companies. For many, it's a choice between building a global business and defending a shrinking market at home.

For Growth, Not Prestige

In some ways, the overseas spending spree this year echoes the late 1980s and early 1990s. Back then, Japanese investors awash in cash were snapping up high-profile U.S. landmarks, such as New York's Rockefeller Center and California's Pebble Beach golf course. This year's merger and acquisition activity is on pace to hit a two-decade record. In the first 11 months of 2006, it surpassed $45.5 billion, more than three times the total in all of 2005, according to MARR, a trade magazine published by Tokyo-based consulting firm RECOF.

This year has seen other big cross-border deals. Softbank's $15.5 billion acquisition of the Japanese unit of British wireless operator Vodafone (VOD) in March topped Japan Tobacco's bid for Gallaher, but that's considered a domestic buyout. Wireless operator NTT DoCoMo's (DCM) $9.8 billion takeover of AT&T Wireless Group in 2000 was previously the biggest cross-border takeover by a Japanese company.

But unlike in the era of Japan's bubble economy, Japanese companies are now chasing more than prestige. In many cases, they're out to secure a toehold in a growth sector. That's true for Japan Tobacco, which is dominant in Japan, Taiwan, and Malaysia but hopes to tap Gallaher's strengths in Kazakhstan, Russia, Ukraine, and other parts of Eastern Europe, where authorities have yet to choke off cigarette sales with steep excise taxes and smoking bans. The same goes for two other deals this year: Toshiba's $5 billion bid for the Westinghouse Electric unit that makes pressurized water reactors, now in high demand in China, and Japanese tire maker Bridgestone's $1 billion buyout of Iowa-based Bandag, a specialist in machines to retread tires.

Acquire or Be Acquired

Some of the dealmaking is also being driven by Japanese companies looking to get a leg up on the competition. Toyota Motor bought a stake in truck maker Isuzu in November as a way of staying ahead of the pack in low-emissions car engine technologies. "To beat out global rivals, Japanese companies have to be bold when a chance for M&A arises," says RECOF's managing director, Yoichi Inada.

Regions : Asia

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