Japan Inc. Goes on Buying Spree, Shrugging Off 1980s Bubble

By Patrick Rial
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Aug. 26 (Bloomberg) -- Japanese companies are increasing overseas acquisitions, using their cash-hoards to snap up assets beaten down by the global credit crisis and economic slowdown.

The value of foreign purchases by Japanese companies this year has already topped 2007's total by 91 percent, according to data compiled by Bloomberg. That's the biggest gain among the world's 10 largest markets and contrasts with fewer deals in the U.S. and U.K., where credit is drying up after the subprime rout.

Takeovers by companies including TDK Corp. and Daiichi Sankyo Co. are putting Japan on course for its biggest buying spree since the 1980s bubble, when Japanese buyers overpaid for assets like New York City's Rockefeller Center and California's Pebble Beach Golf Links.

``Pebble Beach and those kinds of trophy assets, it's clear those were crazy deals, but now they're buying things that are earnings enhancing and using cash that's been generating no income to do it,'' said London-based Scott McGlashan, who manages Japanese stocks as part of J O Hambro Capital Management Ltd.'s $4.7 billion in assets. ``It's a very opportune time for Japanese companies looking to make acquisitions overseas.''

Japanese companies have cash equal to 11 percent of their assets, the second-highest amount after China among the world's 10 biggest equity markets, according to Bloomberg data.

Buying-Spree

Foreign purchases climbed to $48.6 billion so far this year from $25.4 billion for all of 2007, Bloomberg data show. The value of deals in the U.S. is down 67 percent from 2007 and U.K. acquisitions are off 66 percent as debt financing costs climb.

McGlashan said he is on the lookout for deals that mirror Daiichi Sankyo, Japan's No. 3 drugmaker, which has gained 11 percent since it agreed June 11 to buy India's biggest drugmaker Ranbaxy Laboratories Ltd. for $4.6 billion. Nikko Citigroup Ltd. analyst Hidemaru Yamaguchi boosted his share price estimate for Daiichi Sankyo by 7 percent after the purchase.

TDK, Japan's largest maker of magnetic heads for hard-disk drives, announced plans last month to acquire Germany's Epcos AG, which makes components for Nokia Oyj, for $1.87 billion. TDK paid 6.1 times Epcos's earnings before interest, taxes, depreciation and amortization, or Ebitda, less than the 8.7 times average for Epcos's 15 closest European peers.

``In general, M&A doesn't benefit the acquirer because it tends to occur during boom times when management is overconfident and they pay too much,'' said Seiichiro Iwasawa, chief strategist at Tokyo-based Nomura Securities Co. Ltd. ``Japan is unique because they remember their massive bubble-era failures and have such low confidence that they are being extremely careful to do deals that make sense.''

Takeda, Kirin

Pharmaceutical companies may use their above-average levels of cash to make purchases and food producers may pursue takeovers to grow outside Japan's shrinking domestic market, Iwasawa said.

Takeda Pharmaceutical Co., Japan's largest drugmaker, had $15.5 billion in cash and securities as of March 31, equal to more than half its total assets. The company agreed to buy U.S.- based cancer drug specialist Millennium Pharmaceuticals Inc. for $8.8 billion on April 10. Takeda shares gained 3 percent since then, beating the Topix's 2.4 percent decline.

Kirin Holdings Inc. spent more than $3 billion the past two years on acquisitions in Asia. The nation's biggest beverage maker has said it's ready to spend almost $3 billion more by 2010.

The buying spree helped Goldman Sachs Group Inc. report record profit in Japan for the year ended March 31. The New York- based firm holds the top spot among merger advisers for deals where Japanese companies are acquiring overseas assets, according to Bloomberg data. UBS AG ranked second and Nomura Holdings Inc. was first among domestic companies.

`Buy for Profit'

Paul Sheehan, chief executive officer of Thaddeus Capital Management, a Hong Kong-based hedge fund, said companies are using foreign acquisitions to boost their size, rather than shareholders' wallets.

``The deals are nowhere near as accretive as returning cash to shareholders or buying domestic competitors and profiting through consolidation and cost saving,'' he said. ``I don't buy for growth, I buy for profit.''

Mitsubishi Estate Co. bought Rockefeller Center for $1.4 billion in 1989 and lost it seven years later after defaulting on the mortgage. Pebble Beach, the site of the 2010 U.S. Open, was snapped up by Japanese golf magnate Minoru Isutani in 1990 for $841 million. It was sold less than two years later at two-thirds the purchase price as Isutani's company went bankrupt.

Recent buyouts have been more successful. Toshiba Corp.'s 2006 purchase of U.S. nuclear reactor designer Westinghouse Electric Co. is paying off as the unit's profit rose almost five- fold in the first quarter, paring an overall loss caused by weakness in Toshiba's semiconductor business.

Japan Tobacco Inc., which bought U.K.-based Gallaher Group Plc in 2007 in Japan's largest foreign takeover, expects gross profit in overseas markets to climb 10 percent this year, while domestic earnings are forecast to fall 15 percent as the number of smokers declines.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.