Japan outbound M&A slows sharply in 2016; Brexit risk may add to caution

By Thomas Wilson

TOKYO (Reuters) – Japan Inc’s overseas shopping spree slowed sharply in the first half of the year as financial sector deals dried up, dragging overall Japan mergers and acquisitions activity back to 2014 levels – and the situation could be worsened by Britain’s vote to leave the European Union.

Companies will become cautious on deals, with some likely to put M&A on hold as they scramble to come to terms with the political and economic uncertainty sparked by the vote, four M&A lawyers said.

“Brexit is already having an impact and it is likely that there will be caution over Europe generally,” said Alexis Papasolomontos, an M&A partner at Herbert Smith Freehills law firm in Tokyo.

Outbound deals involving Japanese firms have totalled $17 billion so far this year, Thomson Reuters data showed, 65 percent down on the same period last year and the lowest half year total since 2013. The number of deals fell to 343 from 369.

The fall in Japanese outbound activity is in contrast to a spike in such activity by Chinese companies, which has more than doubled in two years to hit a record $120 billion in total deal value so far in 2016.

But the reasons for Japanese companies to buy abroad – a shrinking population and weak domestic growth, allied with record cash reserves – remain in place, and the overall trend will continue, the lawyers said.

The decline in outbound M&A was led by a collapse in financial sector deals to $2.2 billion from $22.9 billion. The number of deals fell less sharply, to 57 from 71.

Last year, outbound M&A activity was swollen by big-ticket purchases of foreign firms by insurers such as Tokio Marine Holdings Inc <8766.T>, which in June 2015 bought U.S. insurer HCC Insurance Holdings Inc for $7.5 billion, the biggest acquisition ever by a Japanese insurer.

M&A bankers and lawyers said that some financial institutions have this year been digesting large purchases made in 2015, while other companies became cautious amid global market volatility.

“Insurance firms made large acquisitions last year, and they are currently focusing on post-merger integration,” said Yusuke Asai, head of investment banking at Citigroup Global Markets Japan Inc. “The financial sector was certainly the driver of deals last year.”

The value of all deals involving Japanese companies – including deals between domestic companies and purchases of Japanese companies by foreign entities – was an aggregate $63.2 billion between January-June, down 20 percent on the same period last year, the data showed.

(Reporting by Thomas Wilson; Editing by Martin Howell)