Buying into Japan, Inc.

Japan has long been an inhospitable place for foreign companies. Yes, a few outsiders have built successful businesses in the country—McDonald’s, IBM, and Microsoft spring to mind—but they’re the exceptions. Most multinational corporations have had to settle for relatively small, low-profit businesses in the market.

But the climate is changing. After a decade of economic weakness, which has led to record levels of bankruptcies, the doors of Japan Inc. are opening for outsiders. Japanese managers and workers, traditionally fearful of incursions by foreign companies, are now beginning to recognize that their economy needs an influx of new ideas and ways of working if it is to rebound. In response, some aggressive U.S. and European companies are moving in to acquire struggling Japanese businesses. From 1998 through the first half of 2001, foreign acquisitions in Japan totaled $58 billion, up sharply from $7 billion in the eight years prior to 1998. Foreign purchases now account for 19% of all M&A activity in the country, up from 7%.

Our analysis of recent acquisitions provides some important guidelines for companies looking to buy in Japan. We’ve found that foreign acquirers now have considerable advantages over domestic acquirers. Seizing these advantages, though, requires thoughtful yet bold action.

Forget “Merger Of Equals”

Japanese mergers are traditionally approached as mergers of equals. They rely heavily on consensus building, which slows down decision making and prevents decisive action. Take the 1999 merger of three of Japan’s leading banks—Industrial Bank of Japan, Dai-Ichi Kangyo Bank, and Fuji Bank—into the Mizuho Group. Two years later, the banks continue to operate separately, with three co-CEOs overseeing the holding company. Integration efforts have slowed to a crawl.

In the meantime, foreign competitors have begun to grab hold of top spots in high-margin financial services businesses. Citigroup, for example, drove a hard bargain with Nikko Securities, a leading Japanese brokerage. Knowing that Nikko desperately needed capital, Citigroup agreed in 1998 to buy a relatively modest 20% of Nikko in return for control over its investment banking business. Citigroup left no doubt about who had the upper hand in the transaction. Although once considered culturally offensive, taking control in this way actually provides much-needed clarity to the management teams, employees, and customers of acquired companies.

Divulge Your Strategy

The specter of a Western owner has long made Japanese workers nervous. They fear that an American or European company will quickly move to cut employment rolls. In actuality, though, most foreign acquirers look to Japan, the world’s second-largest market, as a source of growth, not cost savings. When this objective is made explicit—to senior executives and division managers alike—Japanese employees eventually begin to realize that their jobs may be more secure with a foreign company determined to prosper in Japan than with the merger of two ailing domestic companies.

Cable & Wireless prevailed in its long struggle to acquire the Japanese telecommunications company International Digital Corporation (IDC) because it articulated a clear growth strategy. C&W planned to make IDC the Asian hub for its global business, and it was committed to investing heavily in the company. IDC’s other suitor, the dominant Japanese telecom company NTT, was much less open about its plans for IDC. C&W’s clear vision for preserving IDC and expanding its business was far more attractive to IDC’s people.

Let Outsiders Lead

Foreign acquirers have been timid about putting outsiders in charge of Japanese operations. That’s a mistake. Western executives have far more experience integrating and restructuring companies than do their Japanese counterparts. Think of the spectacular success of Carlos Ghosn, the Brazilian executive whom Renault brought in to turn around Nissan. Ghosn had already piloted drastic restructuring programs at Michelin as well as at Renault. He and his team of seasoned turnaround artists identified and worked directly with Nissan’s most talented and action-oriented middle managers, avoiding laborious, hierarchical consensus building. Under Ghosn, Nissan achieved net profits of $2.7 billion in 2000, after posting a loss of $6.8 billion the year before.