Japan's M&A landscapes remain challenging, despite enhanced governance, as demonstrated by Seven & i's acquisitions.
In a significant turn of events, Japanese retail giant Seven & i Holdings has rejected a $46 billion takeover bid from Canadian retailer Alimentation Couche-Tard. This rejection marks a hurdle in what would have been the largest foreign takeover by a Japanese company in history, creating a global retail powerhouse.
The decision by Seven & i Holdings, known for its iconic Seven-Eleven convenience stores, is not indicative of a broader trend in Japan, according to Nicholas Smith, a veteran Japan strategist at CLSA Securities. The rejection is rather specific to Seven & i Holdings, which has a history of innovation and a strong family influence, as the company is backed by the Ito family.
The complexities surrounding cross-border acquisitions of major Japanese firms are well-documented. The confluence of deep-rooted family control, cultural emphasis on consensus and risk aversion, governance structures prioritizing legacy, regulatory hurdles, and differing notions of company value make such acquisitions exceptionally complex and often prolonged.
Foreign bidders frequently underestimate the intrinsic value of Japanese companies, particularly their operational excellence, brand equity, and dominant domestic market positions. In the case of Seven & i Holdings, the board valued the firm’s profitable core operations far higher than Couche-Tard's premium offer.
Moreover, Japanese corporations typically have a slow, methodical approval process based on consensus-building and respect for hierarchy. This can confound foreign buyers accustomed to faster, more centralized decision-making. Additionally, Japan’s M&A environment involves regulatory complexities and a traditionally fragmented market that inhibit smooth integration.
Despite these challenges, Japanese companies are under pressure to improve shareholder returns and consider credible acquisition offers due to a regulatory overhaul. Kei Okamura, managing director at asset manager Neuberger Berman in Tokyo, stated that more Japanese companies, especially smaller ones, are realizing they need to change, given the stark economic outlook.
The rejection of the bid by Seven & i Holdings sets a precedent for capital and M&A markets in Japan, according to one investor who spoke anonymously. However, had Couche-Tard approached a smaller Japanese company with a different management outlook, they might have had a different response.
The M&A boom in Japan is driving a rebound in Asia, according to LSEG. The rejected bid by Couche-Tard is not deterring foreign firms from pursuing acquisitions in Japan, but it does highlight the complexities involved and the need for a nuanced approach.
In recent years, Seven & i Holdings has faced calls for change after years of breakneck growth. The company announced in March that it would sell its superstores and other peripheral businesses to Bain Capital for some $5.5 billion, a move seen as a step towards streamlining operations.
Investors have accused Seven & i Holdings of dragging its feet for years, with Artisan Partners and ValueAct Capital calling for the company to shed what they consider as bloat. The rejected bid by Couche-Tard may lead to these investors reconsidering their positions in large-cap potential acquisition targets.
Couche-Tard, in response, accused Seven & i Holdings of a "calculated campaign of obfuscation and delay." The Canadian retailer has not yet announced its next move.
[1] "Japan's M&A market: What's holding it back?" Nikkei Asia, 25 May 2021. [2] "Why it's so hard for foreign firms to buy Japanese companies," BBC News, 22 February 2021. [3] "The challenges of foreign acquisitions in Japan," The Japan Times, 15 March 2021.
- Given the complexities in the M&A landscape of Japan, characterized by deep-rooted family control, cultural emphasis on consensus and risk aversion, regulatory hurdles, and differing notions of company value, foreign investors like Couche-Tard might need to approach Japanese companies with a nuanced and patient strategy.
- The economic outlook for Japanese corporations, under pressure to improve shareholder returns, is leading some companies, such as Seven & i Holdings, to consider acquisitions as a way to streamline operations, and savvy investors might reconsider their positions in large-cap potential acquisition targets.
