Executive Summary of 2020 Masuda Funai M&A Survey Results
Japanese Investment in the United States is Expected to Grow in 2020 in Spite of Economic, Trade and Political Uncertainty
Respondents to Masuda Funai's 2020 Mergers & Acquisitions Survey expect inbound investment from Japan to increase in the coming year, notwithstanding concerns over the strength of the broader U.S. economy, political uncertainty during a U.S. election year, and increased scrutiny of foreign investment into the United States.
The consensus among respondents was that U.S. and Japanese economic growth in 2020 is likely to be stagnant or weaker than in 2019, but that M&A activity levels in the United States should remain stable and inbound M&A activity from Japan to the United States will likely rise.
Economic developments and demographic trends appear to be driving outbound investment from Japan, which sits as the third largest supplier of foreign direct investment into the United States. Asked to identify the three most important factors driving M&A in the United States by Japanese and Japanese-owned companies, nearly three-fifths of our survey respondents cited economic conditions and trends in Japan.
At the beginning of 2019, Japanese companies collectively held more than US$890 billion in cash on their balance sheets. Recent changes to Japan's corporate governance code, which were introduced as part of Prime Minister Shinzo Abe's "Abenomics" program, have focused on promoting capital efficiency and returns on equitable investments. As a result of these reforms, shareholders can now encourage Japanese companies with stockpiled cash to engage in share buybacks or strategic investment.
Japan's population is aging and its birth rate is declining, trends that lead to a reduction in 2018 of 430,000 in the number of native Japanese. Faced with this natural limitation on the pace of future domestic economic growth, Japanese firms are increasingly looking overseas for investment opportunities. Despite the presence of some economic and political uncertainty, the United States maintains its position as a premier destination for Japanese investment. Respondents noted a desire for greater access to American consumers and access to intellectual property and technology as leading reasons for investment in the United States. The position of the United States as a mature economic market also likely plays a role. Our respondents identified the U.S., Japan and the European Union as the most likely outlets for further investment, showing only limited interest in emerging markets.
Asked to identify prominent obstacles to further investment, respondents emphasized a lack of internal consensus and high valuations, while concerns about economic uncertainty and more U.S. federal scrutiny of inbound investment rated lower. Respondents had mixed reactions to recent developments in U.S. trade policy, with many acknowledging tariffs as a damper on investment but substantial minorities stating that trade policy would likely have no effect or a positive effect on their investment plans.
The notable findings of our 2020 survey of Japanese executives, professionals, service providers and thought leaders are set forth below, together with a more detailed description of results. We hope that you find these survey results helpful in planning your company's growth strategy for the year ahead.
Notable Findings of the 2020 Masuda Funai M&A Survey
- U.S. Economic Growth: Nearly half of respondents (46%) expect the U.S. economy to be somewhat or substantially weaker compared to how it performed in 2019, and another third of respondents (34%) expect it to be about the same. Only one in five respondents (20%) expects U.S. economic growth to pick up pace this year.
- Japanese Economic Growth: Over half of respondents (54%) expect the Japanese economy to be somewhat or substantially weaker compared to how it performed in 2019, with nearly another third (32%) expecting it to be about the same. No respondents expect a substantial improvement.
- Overall M&A Activity in the United States and Inbound Activity from Japan: Despite expectations of sluggish economic performance on both sides of the Pacific Ocean, a substantial plurality of respondents expect M&A activity levels in the United States to remain stable (44%) and inbound M&A activity from Japan to the United States to rise (42%). Respondents listed economic conditions and trends in Japan (57%), access to U.S. consumers (48%), and access to intellectual property and technology (43%) as the primary factors driving Japanese investment in the United States.
- Obstacles to Investments: Respondents listed lack of internal consensus (cited on 52% of responses), valuations (45%) and lack of quality targets (45%) as the leading obstacles to further investment by their companies in the United States.
- Key Diligence Issues: Asked to identify their most pressing areas of legal due diligence and risk assessment, (70%) of respondents chose quality of earnings, (30%) identified litigation and (30%) mentioned long-term contractual obligations. Traditional areas of concern for Japanese investors such as tax matters (15%) and environmental matters (18%) came further down the list.
- Trump Administration Policies: A substantial plurality of respondents noted that their companies would be less likely to invest in the United States (37%) as a result of recent changes to U.S. trade policy; however, a substantial minority (27%) claimed that they were more likely to invest. Interestingly, a third of respondents stated that trade policy changes would have no effect on their investment plans. Over 90% of respondents noted that the 2017 Tax Cuts and Jobs Act have had no effect on their actual investment or investment plans in the United States.
- Profile of our Respondents: Most of our respondents either work for a Japanese-owned company in the United States or for a Japanese company in Japan that invests in the United States. A small portion of our respondents are service providers to the Japanese business community in the United States. Of those employed by a Japanese or Japanese-owned company, a majority (60%) work for a company that considers M&A as part of its growth strategy, and over a third (35%) work for a company that has engaged in a merger, sale or acquisition within the last ten years. About half of the respondents (46%) expect their companies to engage in an M&A transaction or joint venture in 2020, with most expecting an equity or asset purchase rather than a divestiture. Respondents listed the European Union (now excluding the United Kingdom), the domestic Japanese market, Mexico, China and India as attractive third country targets for investment.
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