The Essence of "Japanese-Style M&A"

M&A is becoming increasingly prevalent among Japanese companies as a means for business succession and growth strategies. This time, Tomoya Okutani of Dentsu Inc., who promotes management and business support for clients, spoke with Naoki Takeuchi , Executive Officer of Japan M&A Center, which has supported over 3,000 M&A deals, about "The Current State and Future of Japanese-Style M&A."

 

The catalyst for M&A in Japan. The issues of concern at the time

 

Okutani: Today, I'd like to discuss the nature and future of M&A in Japan. Since its founding in 1991, the Japan M&A Center has built a strong track record in this field. Back then, I imagine the concept of M&A wasn't yet commonplace in Japan. What led you to start the company in the M&A business?

Takeuchi: Consider an owner-managed company generating both sales and profits, with ample assets. If the president of that company passes away, inheritance taxes can amount to hundreds of millions of yen. Since non-listed company shares that aren't publicly traded can't be paid in kind, the family must come up with that huge sum in cash. I've heard that back then, liquidating the company to raise cash was often the only option.

However, liquidating the company leaves employees jobless. Moreover, a company that the founding owner worked hard to build and get on solid footing disappears simply because of succession issues. Our company was founded to find a way to prevent that.

Okutani: So the M&A business began as a solution to business succession problems. Do such issues remain unchanged even now, 25 years later?

Takeuchi: For Japanese companies today, the "absence of successors" is a major problem. It's said that two-thirds of companies nationwide lack successors. Currently, the average age of owner-managers is 66, meaning they'll be around 80 by 2030. This reality of aging owners without successors will undoubtedly become a significant challenge going forward.

Okutani: Two-thirds is a staggering figure. Why has the situation reached this point where so few successors exist?

Takeuchi: Consider a scenario where an aging president passes the business to an employee. Banks often lend money using the original owner-manager's home as collateral. Consequently, even if the business is handed over to an employee, the original owner cannot remove the bank's guarantee until the loan is repaid. The bank continues to monitor the original owner, not the new owner. This is hardly an ideal form of business succession.

Okutani: That's not healthy. Does that mean family succession is the only option?

Takeuchi: That's the smoothest path. However, it's not uncommon for the owner's son or daughter to be employed elsewhere. Furthermore, they might live far away with their own families, be highly satisfied with their current job, or simply not want to change their environment. Should they still be forced to take over? Considering the growth of the employees and the company, forcing a family succession in such situations isn't a fundamental solution. This is the background behind that two-thirds figure.

The "Japanese model" involves inheriting the founder's and employees' aspirations.

Okutani: So you propose M&A to companies facing this dilemma: their business is thriving, yet they lack a successor. You've facilitated over 3,000 M&A deals. What does your company prioritize?

Takeuchi: Consciously pursuing the form of "Japanese-style M&A." While M&A often focuses on acquisition price and business synergies as key negotiation points, for Japanese mid-sized and small-to-medium enterprises, the crucial factor is matching the vision of the owner and employees.

Okutani: Specifically, what aspects beyond economic terms are you referring to?

Takeuchi: When a company considers a sale through M&A, we first interview the owner. We don't just ask about financials or legal matters; we always inquire about the owner's family structure and how their family feels about the situation. We do the same for employees. For example, we ask about the sales manager's family situation and personality. We make sure to dig that deep.

Owners deciding to sell their company often say it feels "like giving away their own daughter." That's precisely why M&A isn't just about closing the deal; we must look into the hearts of the owner's family and employees afterward. That's what I believe defines Japanese-style M&A.

Okutani: Precisely because they are entrusting a company they've nurtured with care, it's not just about legal and financial matters. It's about how to carry forward the owner's will and passion. And it means conducting the M&A while considering the motivation of the remaining employees and even their families. The company's value ultimately lies in its people. It's crucial that employees continue to perform at or above their previous levels even after the owner changes. Perhaps incorporating that perspective is the essence of M&A.

In our management support work, we increasingly focus on creating strategies and action plans for internal stakeholders, centered around defining mission, vision, and values.

Takeuchi: That's crucial. Also, the timing of announcing the M&A to employees after finalizing the agreement is critical. For example, disclosing it on a Friday means employees spend the weekend with their families feeling anxious. But if disclosed on Monday, you can gauge employee reactions the next morning and follow up with those who seem troubled.

Okutani: Timing is key, but so is how you communicate it. When disclosing the potentially negative fact of selling the company, it's crucial to explain the background that led to this decision. That it's a decision "for the employees" and "for the company." We work with the owner to articulate that underlying intent.

Takeuchi: Furthermore, in M&A, the price is determined by mutual agreement between both parties. During negotiations, emotions can run high on both sides, so we, as intermediaries, must proceed with a cool head and make rational judgments. It's crucial to achieve a valuation that the owner finds acceptable. We strive to maintain a "warm heart" regarding the emotional aspects and a "cool head" regarding the process.

"M&A is marriage." What does that mean?

 

Okutani: Your company compares M&A to marriage, right? What you just said seems to connect to that idea.

Takeuchi: At first, I thought M&A and marriage were completely different things (laughs), but now I feel it's exactly right. The selling company feels more than just giving away their daughter, and for the acquiring side, how they grasp the company's feelings becomes crucial.

Okutani: Have you encountered any cases where you truly felt this?

Takeuchi: There was a case where the founder of a company passed away, and his widow chose M&A as the successor. Three companies were candidates, but she selected the one offering the lowest price. However, that company had taken the time to ask her in detail about the founder's vision and the company's history. I believe that's what drew her to them. Especially for mid-sized and small companies, employees are like family. So it's crucial not just to hand over the business, but to have someone inherit the founder's vision.

Okutani: It's not just about economic terms or business synergies. It's about understanding the company culture and the people involved, seeing if you can like each other and work together. That's really like a "marriage," isn't it? And that's what Japanese-style M&A is all about.

Takeuchi: In that sense, post-closing PMI (post-merger integration) is also crucial. We say "moving M&A from 'closing' to 'success'," and PMI is the key. There are various aspects like system integration and sales channel consolidation, but here too, "vision" and "people" are vital. It's about how to gain acceptance from employees during the ownership transition.

Okutani: Focusing on "success" rather than just "closing" is crucial. Of course, pre-M&A efforts leading up to the deal are important, but unless the post-deal phase is managed effectively, corporate value won't increase. Some might think PMI just requires setting detailed KPIs and monitoring them, but fundamentally, if two companies with different mindsets don't understand each other, business development and integration plans remain nothing but pipe dreams.

We sometimes support alliances between two companies. We start by implementing a facilitation program to build shared understanding. Initially, there's often tangled confusion about each other's intentions, but once that chaos is overcome, we believe it leads to leveling up not just in planning but also in human resources.

Takeuchi: Our CEO, Miyake, advocates this approach for PMI: "First, provide the former owner with a nice desk and chair. Then, the new president should sit in the previous president's chair, while the former owner sits at the new desk and chair, either beside or slightly behind the new owner." This makes employees feel respect for the former owner, which in turn fosters a willingness to cooperate with the new owner. Visiting clients also understand this isn't a negative M&A.

Okutani: That's interesting. At Dentsu Inc., we sometimes handle office design too, and the president's office is crucial. Employees are sensitive, and we focus on maximizing overall communication.

Your company thoroughly focuses on people's hearts to realize Japanese-style M&A. If this accumulates, M&A will become more commonplace in Japan, leading to corporate growth and Japan's growth.

Overseas expansion for scaling. What is growth strategy M&A?

 

Okutani: So far, we've focused on business succession. Finally, I'd like to consider M&A as a growth strategy. I believe the prevailing purpose of M&A in Japan has shifted. What are your thoughts?

Takeuchi: While business succession remains the overall majority, the past two to three years have seen an increase in owners choosing M&A as a growth strategy. For example, the mindset is: "We can grow organically for another five years or so, but beyond that, it becomes difficult. So rather than wrestling alone, we want to collaborate with another company." If the other party's direction aligns, it's a partnership strategy to develop together.

Okutani: It's the idea of leveraging another company's resources to scale your own business. In Japan, the traditional approach was often to aim for an IPO independently, but recently, more companies are considering M&A as an option.

Takeuchi: That's right. M&A is increasingly recognized as a means to that end.

Okutani: Companies with new products or technologies scaling up using larger companies' resources is precisely open innovation. M&A plays a vital role in enabling that. I believe it holds significant importance for the future of the Japanese economy.

Takeuchi: We're also seeing M&A with overseas companies. Our firm has an office in Singapore, and we're seeing cases where mid-sized companies from Kyushu are pursuing M&A with firms in Singapore or Vietnam. It's not just about large corporations; interactions with overseas companies are also becoming more active.

Okutani: When companies consider further growth, going overseas is a natural step. It's excellent that even mid-sized companies are pursuing cross-border M&A. While the differing cultures, economies, and legal systems of the target countries make integration more challenging, I expect this trend will increase.

Takeuchi: While M&A for corporate growth is indeed increasing, unfortunately not all M&A deals are successful. Our firm conducts "Growth Strategy Seminars Utilizing M&A" to help deepen understanding of M&A.

The decision to pursue M&A should be made after conducting an objective analysis of the company and formulating the optimal growth strategy. However, the reality is that the anticipated benefits of M&A often fail to materialize due to reasons such as insufficient recognition of management challenges or inadequate post-M&A management structures.

Our firm provides support starting from the stage of evaluating whether M&A is truly necessary. In some cases, we actually advise against pursuing M&A. After all, M&A should be a path to happiness.

Okutani: You're absolutely right—ensuring M&A brings happiness is paramount. I believe your company truly serves as that vital bridge in this process.