Corporate Finance (Asia)
A yen for global growth
The Japanese experience in cross-border M&A
January 2012
Keiko Honda
Keith Lostaglio
Genki Oka
Contents
A yen for global growth: The Japanese experience in cross-border M&A
Perspectives from the trenches
2
Perspectives of the acquired 4
Four approaches 5
Establishing mentorship or exchange programs to build leadership talent
6
Creating a special unit to effect change at the division level
6
Developing local trainers as change agents 7
Implementing company-wide culture infusion programs 7
2
A yen for global growth:
The Japanese experience in
cross-border M&A
Without much fanfare, Japanese companies have embarked on an international
acquisition binge in recent years. Can they learn from past failures and create value from
cross-border deals?
An appreciating yen and a stagnant domestic market make
global expansion a logical move for Japanese companies
with bold growth aspirations. Indeed, Japanese companies
are making international forays, albeit quietly: it is a littlereported fact that the number of outbound M&A deals in
Japan has been on an upward trajectory in recent years. If
the trend continues, Japanese cross-border M&A activity
will soon surpass its 1990 peak.
Deal levels would be even higher if Japanese companies were
not haunted by past M&A failures. Pitfalls abound along
the road to international M&A, and although some of them
are now well-known and thus studiously circumvented,
others—particularly those having to do with fundamental
differences in business and management culture—can
seem almost impossible for Japanese companies to avoid.
Retaining foreign talent presents a particular challenge.
To gain insights into how Japanese companies should
manage international acquisitions, we interviewed
Japanese and non-Japanese executives who have been
involved in large cross-border M&A deals within the past
decade. We also screened more than 2,000 Japanese
companies, selected those with a significant overseas
presence, and homed in on the experiences of a handful that
were able to boost international sales through cross-border
M&A. We focused on deals in which the acquirer sought
partial integration (neither full autonomy for the subsidiary
nor a complete merger) since this is a common model applied
by Japanese companies, many of which do not have the
confidence to fully integrate an overseas entity. Our findings
indicate that there is no “silver bullet” approach to capturing
the greatest value from an international acquisition.
Companies have had success using a variety of approaches,
each tailored to the acquirer’s strategic intentions, its unique
characteristics, and the dynamics of the industry. Although
a company’s particular situation should dictate the specific
tactics it uses, the approaches we studied can give acquirers
a starting point to consider.
Perspectives from the trenches
Japanese companies’ quest for growth through global
M&A is already under way. Frustrated by the lack of growth
potential in their home market, Japanese companies that
have never ventured overseas are now dipping a toe in
international waters. Whereas outbound deals accounted
for a mere 15 percent of Japanese M&A transactions in
2004, that figure has exceeded 50 percent in three of the
last six years (Exhibit 1). As of September, the total number
Exhibit 1: Outbound deals now account for a large portion of M&A.
Breakdown by nature of deal
¥ trillion
100% =
Domestic
M&A between two
Japanese companies
Cross-border deals
12.2
11.8
15.1
78
53
81
4
4
6.8
37
55
7
24
59
57
9.1
30
10
60
6
5
15
14
2004
2005
2006
2007
2008
2009
2010
20111
21
19
61
47
63
46
64
70
1 Annualized based on January–September 2011 data.
Note: Figures may not add up to 100% because of rounding.
Source: RECOF M&A Database
7.9
9
57
% of cross-border deals
12.5
37
39
Inbound
Foreign company acquiring
a Japanese company
Outbound
Japanese company acquiring
a company overseas
12.4
37
23
Corporate Finance (Asia)
A yen for global growth: The Japanese experience in cross-border M&A
3
Exhibit 2: The number of Japanese outbound M&A deals is at its highest since 1990.
Number of deals
500
450
400
350
300
Major deals:
▪ Matsushita/MCA
▪ Sony/Columbia Pictures
▪ Mitsubishi Estate/
Rockefeller Center
250
200
150
100
50
0
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 111
1985-2000
2000-2011
1 Annualized based on January–September 2011 data.
Source: RECOF M&A Database; literature search
of outbound deals in 2011 was on pace to match the highs of
1989 to 1990, when Sony acquired Columbia Pictures and
Mitsubishi Estate bought Rockefeller Center (Exhibit 2).
Closing a deal, however, is easier than capturing value
from it. In a 2004 survey of Forbes 500 CEOs, the top three
reasons that respondents cited for M&A failures all relate
to postacquisition management: incompatible cultures,
the acquirer’s inability to manage the company it has
acquired, and difficulty implementing change. Similarly,
in a recent McKinsey survey of 25 financial executives at
large Japanese corporations, respondents said the lack
of expertise in postacquisition management was one of
the top three barriers to successful M&A execution. (The
other two were a dearth of institutionalized businessdevelopment skills and the absence of a standardized
decision-making process.)
Traditionally, Japanese companies have used one of
two postacquisition governance models in cross-border
contexts: filling the majority of the acquired company’s
board seats with executives from the parent company or
deploying Japanese executives in watchdog roles. Both are
ineffective by themselves—neither the board members nor
the watchdogs know the details of the acquired business,
and neither have postacquisition-management expertise
because historically they have been content to oversee their
subsidiaries remotely. Through interviews with Japanese
managers who were directly involved in recent Japanese
cross-border M&A deals, we learned that postacquisition
management is often plagued by four issues: misalignment
between the acquirer and the target company, a onesize-fits-all mind-set on the buyer side, neglect of targetcompany employees, and insufficient integration skills.
ƒƒ Misalignment between the acquirer and the
acquired. Disagreement between the two parties—
whether it is about how much value ought to be captured
immediately after the deal closes or the positioning of
the new subsidiary within the parent company—is a
frequent cause of M&A failure. The acquired company
resists the parent’s directives; the parties have different
interpretations of how predeal promises should be
fulfilled; confusion and distrust ensue.
4
ƒƒ A one-size-fits-all mind-set. According to our
interviewees, Japanese leaders tend to think that what
works for their company must work elsewhere. But
applying approaches that have been successful for the
parent company can backfire if differences in context are
not taken into account. For example, the parent company
might impose on the target company the rigorous quality
standards in which Japanese companies take pride, but
those standards may be unnecessary—and too costly—for
certain product lines; the higher cost structure results in
higher prices and lower market share.
ƒƒ Inattention to target-company employees.
Providing incentives to and motivating employees of the
acquired company is a critical but often-overlooked aspect
of postacquisition management. For instance, a Japanese
company that does not offer stock options might choose
to abolish a new subsidiary’s stock options without first
considering how much they matter to the subsidiary’s
employees.
ƒƒ Lack of postacquisition-management leadership
and skills. Many Japanese companies opt to use
Japanese executives and managerial staff at either the
parent or target company to take on all postacquisition
responsibilities, whether or not these individuals have the
requisite capabilities. They may create an integration team
but then fail to define clear decision rights; as a result, no
one is formally charged with leading the integration. The
people actually tasked with postacquisition management
have no decision-making power and always have to check
back with the corporate office, making “business as usual”
much harder for line leaders to carry out. The lack of
postacquisition expertise puts Japanese companies at a
competitive disadvantage against foreign companies with
greater know-how and sophistication. Foreign companies
typically have more M&A experience (and have thus built
capabilities in postacquisition management) or are more
open to hiring external advisers.
Perspectives of the acquired
The above pitfalls should by now be familiar to most Japanese
executives who have played the global M&A game. What
may be less familiar—even surprising—to them are the
observations of executives at US and European companies
that have been acquired by Japanese companies. Interviews
with executives from six such companies of various sizes
(between $200 million and $1 billion in value) indicate
several stumbling blocks. The first four, in particular, are
detrimental to talent retention; they are the main reasons that
non-Japanese executives do not stay for long.
ƒƒ Being left alone. Although Japanese executives may
think the acquired company would prefer to be left alone—
and although the parent company’s restraint may at first
appear admirable and wise—many foreign executives
come to feel it is the wrong approach. One major benefit
of being acquired, they say, should be that the subsidiary
can fully leverage the capabilities of its parent company.
Foreign executives want the acquirer to engage with its
new subsidiary and jointly tackle issues as they arise.
ƒƒ The ambiguous power structure. Non-Japanese
executives have difficulty figuring out where the true
power lies within a Japanese organization. For example,
the deal executive in an M&A situation could have a
lofty title (such as senior managing director). The target
company might therefore focus on building a relationship
with this person, continue to interact with him
postacquisition, and belatedly find out that he actually
has no direct reports and no influence over day-to-day
business. In one case, the deal executive was kept on staff
only because he was a favorite of the former CEO.
ƒƒ The tyranny of the middle. Our interviewees said
that middle managers at the parent company can be
destructive forces: they derive power from their proximity
to the Japanese CEO and try to control information. A
common example we heard: if the acquired company
requests additional capital investment for growth, middle
managers may choose not to raise this request to the CEO.
When the leaders of the acquired company follow up
with the CEO a few months later, they learn that the CEO
never even heard of the request. Incidents like this make
middle management lose the respect of line leaders at the
acquired company.
ƒƒ The glass ceiling for foreigners. The general
assumption among foreigners is that non-Japanese
employees can rise only so high in the organization.
Foreign executives thus consider leaving not because of
unsatisfactory compensation, but because they feel their
careers are unfairly capped.
ƒƒ Detail orientation. American and European executives
have difficulty understanding Japanese leaders’
meticulous attention to detail. A Japanese company’s
due-diligence checklist, for example, is typically three
times as long as that of a Western company, in part due to
Corporate Finance (Asia)
A yen for global growth: The Japanese experience in cross-border M&A
Japanese companies’ risk aversion. In a postacquisition
setting, a Japanese company would want to understand,
for instance, the discrepancy between a sales forecast
and actual sales. It could very well decide to investigate
assumptions made a year ago, whereas a typical Western
company would care only about the actual sales figure and
how to improve it.
ƒƒ Poor postacquisition planning. Their attention to
detail notwithstanding, Japanese executives tend to be
laissez-faire about what happens immediately after the
deal closes. According to our interviewees, few Japanese
acquirers make any effort to create a concrete architecture
in the interim to ensure a successful transition. Foreign
executives often lament that transition governance
and interim processes for decision making, resource
allocation, and escalation of business-critical issues are
insufficiently discussed.
ƒƒ Sudden metamorphosis from friendly partner
to distant boss. Our interviewees reported several
experiences in which the initial integration phase was
friendly and collaborative, then abruptly morphed
into an intense discussion about steep cost reduction.
Although this happens in non-Japanese settings as well,
it is particularly pronounced in Japanese M&A because
Japanese buyers can be extremely polite—sometimes to
5
the point of being misleading. In one case, even
though the acquirer had already decided to eliminate
the target company’s research department, executives
still made multiple visits to the target’s research sites.
When employees at the target company learned that the
decision was made months ago, their trust in the parent
company crumbled.
Four approaches
To find out how Japanese companies have managed to
address one or more of these pitfalls, we screened more
than 2,000 listed Japanese companies and selected the
228 that generate more than half their revenues from
overseas markets. We then narrowed down the sample to
the very small number of companies—14, to be exact—that
completed at least 5 acquisitions during the last decade. Of
the 14, only a handful made public some elements of their
strategy for postacquisition management: among those
companies are Hitachi Construction Machinery, Suzuki
Motors, Takeda Pharmaceuticals, and Toshiba. For each
company, we studied a cross-border deal that helped boost
overseas sales.
In each of the deals we examined, the acquirer used
a different postacquisition approach (Exhibit 3). The
approaches are not mutually exclusive. A company can
Exhibit 3: Japanese acquirers used four types of postacquisition change programs.
Focus of change
Management approach
Top management
Establishing mentorship/exchange programs to build leadership talent
• Pairing local high-potential managers with
executives from parent company for one-on-one coaching
• Mutual exchange of senior-management members
Division
Creating a coordination office/unit
• Large team from both parent and acquired company
• Small team for intervention chosen by parent company
Front line
Developing local trainers as change agents
• Trainers from the acquired company being trained by the parent company
Entire organization
Implementing company-wide culture-infusion programs
• Mechanisms that model the parent company’s values and conduct
Source: Literature search; McKinsey analysis
6
emulate elements from all of them, depending on its
particular industry, context, and objectives.
their professional advancement, giving them confidence
that they can break through the perceived glass ceiling.
Establishing mentorship or exchange
programs to build leadership talent
Creating a special unit to effect change at the
division level
For acquirers whose main objectives include leadership
development, one tactic involves pairing high-potential
managers from the acquired company with an executive
from the parent company as a coach and mentor. This helps
build alignment between the acquirer and the acquired.
The frequent and direct communication between leaders
at both entities—without having to go through middle
management—also allows for tighter coordination.
Another model entails the creation of a dedicated
coordination office or unit to manage the integration.
Depending on the company’s objective, the unit can be large
or small. A large coordination office may make sense if there
is a strong appetite for capturing value from cost synergies
(by streamlining operations) and revenue synergies (by
launching new initiatives that leverage both companies’
strengths). If the goal is intervention in one or two functions,
a smaller, SWAT-type team may be more apt. In either case,
the model helps avoid a leadership gap in postacquisition
management. With a dedicated team, there is no question as
to who is leading the integration effort.
When in 2002 Japanese automaker Suzuki Motor acquired
a majority stake of Indian company Maruti Udyog, Suzuki
engineered change at the top. It appointed a Suzuki
executive as president and CEO of Maruti and took over
6 of the 11 board seats. But it also promoted four highpotential Maruti leaders—in sales, marketing, R&D, and
administration—to corporate-officer roles and assigned
each a functional executive from Suzuki as a mentor. The
pairs were held jointly accountable for formulating new
strategies. If postacquisition performance is any indication,
the mentorship program has worked: Maruti’s sales have
quadrupled, and profits are up 17 times from 2002 levels.
Another promising tactic is two-way dispatch of executives
(from acquirer to target and vice versa). When Takeda
acquired US pharmaceutical company Millennium in
2008, it engineered an exchange of personnel to facilitate
mutual understanding of corporate cultures. It invited
Millennium’s CEO to join Takeda’s management team.
Researchers from both companies traveled between
Japan and the United States to strengthen their research
capabilities. In 2011, Takeda transferred several Millennium
researchers to its new research center in Japan. And
Takeda recently named Millennium’s head of strategy—a
Westerner—as head of business development for Takeda,
showing the company’s openness to high-potential leaders
from its subsidiary. Thanks to Millennium, which has
been put in charge of all oncology efforts at Takeda, the
company is now preparing to begin trials of three or four
cancer drug candidates per year—a significant increase
from historical levels.
These talent-development programs signal to foreign
executives that the parent company is willing to invest in
Toshiba acquired US-based Westinghouse Electric in 2006
to raise Toshiba’s global presence in nuclear generation.
Toshiba sought to influence Westinghouse while also
allowing it a degree of autonomy—which was critical,
since the two companies had different types of nuclear
technology. Toshiba set up two coordination offices: one
within Westinghouse, whose members were drawn from
Toshiba and its strategic partners Shaw Group and IHI (both
of which had minority stakes in Westinghouse), and another
within Toshiba. The offices worked together on strategy
development and implementation. Three years later,
Toshiba had record orders, including its first US orders for
two large-scale projects.
Hitachi Construction Machinery took a slightly
different tack when it acquired a majority stake in
Indian construction-equipment manufacturer Telcon,
a joint venture with Tata Motors, in 2010. With the goal
of increasing the quality of Telcon’s products, Hitachi
dispatched seven Hitachi experts to the Telcon functions
that needed fundamental change, such as quality assurance
and product design. This specialist team, which was
expanded in 2010, had full authority to direct Telcon’s
performance-improvement efforts and created plans to
optimize manufacturing processes, support services, and
employee training.
By creating a dedicated team, a company can begin to
build internal skills that will prove useful in subsequent
acquisitions. In the best cases, the individuals chosen for
Corporate Finance (Asia)
A yen for global growth: The Japanese experience in cross-border M&A
7
the coordination office are high-potential executives with
excellent communication skills and business savvy.
Implementing company-wide culture-infusion
programs
Developing local trainers as change agents
To infuse the Japanese culture into an acquired company,
acquirers can launch initiatives that are completely
different from what existed before and ensure frequent
communication on all fronts (for example, through
employee newsletters or town halls). The most effective
initiatives appear to be informal mechanisms that model
Japanese norms while also bridging the divide between
management and the front line. Company-wide programs,
implemented correctly, can help motivate and retain targetcompany employees.
In the third model, the front line is the focus of change.
Employees from the foreign company are brought to Japan
for “train the trainer” sessions that are more than a means
of technology transfer—they also become opportunities
to promote Japanese corporate values and management
philosophy. These sessions help create a sense of belonging
among the acquired employees that can, in turn, lead to
greater motivation and higher employee-retention rates.
When a Japanese manufacturer acquired a Southeast
Asian company in 2006, it became the industry’s secondlargest player. The acquirer was deliberate in how it
chose to transfer its technology to its new subsidiary: it
abandoned its traditional system of sending senior Japanese
engineers to overseas subsidiaries to serve as trainers.
Instead, select employees from the acquired company
came to Japan for training, then went back to their home
countries to train local employees. Approximately 700
non-Japanese employees have now undergone training in
Japan; 60 of them have gone on to further study and have
been designated as expert trainers. While the Japanese
corporation suffered along with the rest of the industry
during the economic crisis, the combined company was
recently able to beat the market leader for a high-profile
contract—an achievement in which the new subsidiary
played a critical role.
By choosing not to dispatch their own employees, but
rather to bring in employees from the acquired company,
Japanese companies can create room for “translation”—the
change agents at the new subsidiary come to understand
the corporate strategy and the vision for the integrated
entity, and they develop a greater understanding of and
appreciation for the technical advantages that each company
offers. These change agents become effective champions of
Japanese techniques and practices.
Suzuki, for instance, gave all Maruti employees sufficient
exposure to Suzuki’s unique way of doing things. It
promoted an open corporate culture, which was foreign and
jarring in the Indian context. Today, top management and
employees eat in the same cafeteria. Everyone, from the
CEO to the factory worker, wears the same uniform to work.
All employees—again, including the CEO—participate in
morning exercise routines. (Although the ritual of morning
exercises is held dear by several Japanese companies, to our
knowledge no other Japanese companies have introduced it
in a non-Japanese subsidiary.)

These case examples should give Japanese executives
the confidence to venture beyond Japan’s borders. Our
findings indicate that there are a variety of promising
approaches to postacquisition management, and that
leaders of Japanese companies must develop their own
winning approach—sometimes through trial-and-error
and constant refinement. Their first step should be to
compile a list of acquisition targets that make sense given
their strategic intentions. They should then come up with
guiding principles and a blueprint for a postacquisitionmanagement approach, tailored to their company’s
strengths and the key value drivers of the industry. Japanese
companies can—and indeed, if they want to grow, they
must—go global.
Keiko Honda is a director in McKinsey’s Tokyo office, where Keith Lostaglio is a principal and Genki Oka is an associate principal.
Contact for distribution: Parmeet Kaur
Phone: +91 (124) 433 1352
E-mail: [email protected]
Corporate Finance (Asia)
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