Population trends deliver boost for Japan's micro M&A boutiques

[TOKYO] Boutique advisers specialising in micro-M&A for mostly family-run firms are enjoying a boom in Japan, as an ageing, shrinking population brings in the boundaries on the country's small business landscape.

There are no industry-wide figures for deals between 500 million and 1 billion yen (S$6.25-S$12.5 million), but boutique advisers say they are benefiting as owners look to merge their businesses to cope with dwindling demand or as they reach retirement without a successor.

Japan's population, already the oldest among developed economies, is projected to shrink by a third by 2060.

Nihon M&A Center Inc, the largest of the three publicly listed boutique advisors, said on Jan 30 nine-month profit to end-December had risen 34 per cent to a record 5.3 billion yen on sales of 15 billion yen.

"Japan's population is shrinking... Ultimately none of the small companies will be able survive by itself," said Yasuhiro Wakebayashi, chairman and founder of the company.

"They have to be part of larger firms to grow. That is going to be a trend in this country, so the M&A market will only become bigger."

Nihon M&A brokered 406 deals in the first nine months of the financial year ending in March, comfortably on the way to beating the previous year's 420 total.

Smaller rivals Strike Co and M&A Capital Partners are also capitalising on the trend, brokering a combined 106 deals in the last financial year, up 23 per cent on the previous year and 74 per cent on the year before that.

Reuters has previously reported that private equity firms in Japan have had a similar boost to business after a long period of torpor, based on the same demographic imperatives.

"We are in a niche overlooked by big institutions," said Kunihiko Arai, president of Strike.

M&A activity among bigger businesses, arranged by financial heavyweights such as conducted has been Nomura Holdings, Daiwa Securities Group Inc and Mitsubishi UFJ Financial Group Inc, grew only 4.3 per cent to 2,137 last year, while deal value fell 10 per cent to 6.2 trillion yen, Thomson Reuters data show.

SHARE GAINS

Investors in the advisers have also benefited. Shares in Nihon M&A Center gained 56 per cent in the past year and M&A Capital Partners shares almost tripled, outperforming a 48 per cent gain in the Tokyo Stock Exchange's Topix Securities Index. Strike shares have more than doubled since listing in June.

Nobuko Inui, 59, who owned four dispensing pharmacies in Osaka, western Japan, was among those helped by Nihon M&A.

Last year Mr Inui sold the business she set up in 1994 to Tokyo-based, privately held Kraft Inc, which operates 630 pharmacies nationwide. Mr Inui found it hard to stay competitive as the government cut drug prices to reduce mounting healthcare costs.

"Drugs stores are under pressure to improve and diversify our services, but a small company like mine could not afford to hire more pharmacists, so I decided to sell my business," said Mr Inui, who runs the pharmacies for their new owner.

Strike says more consolidation is likely in the 7.8 trillion yen dispensing pharmacy market, where a big player like Ain Holdings Inc, with about 1,100 outlets, controls just 3 per cent.

Small firms are the backbone of Japan's economy, accounting for 99.7 per cent of its 3.8 million companies and employing about 70 per cent of the workforce, according to government data, but many are closing their doors as owners age.

Last year a record 29,583 companies closed, up 8.2 per cent on the previous year, according to Tokyo Shoko Research Ltd.

The boutiques largely get deals through referrals from regional banks and local accountants.

"There are cases where companies can keep their operations by conducting M&As. That means jobs are protected, which is good for revitalising local economies," said Tomoharu Sato, assistant manager in the corporate banking department for Toho Bank Ltd in Fukushima city.

"We rely on the small boutiques' networks to respond to the needs of clients seeking merger partners from further afield and in a limited time."

Such deals also provide a fillip to larger companies struggling to find organic growth.

Tokyo-based construction materials maker S E Corp is predicting a decline in net profit for the year ending March on rising labor costs, but one bright spot is a steel-frame construction firm it bought for 230 million yen in 2015 from Hiroshi Morita.

Morita, 47, still runs the firm, based in Yonago city in western Japan, under its new name S E Tekken.

The unit's sales have grown about 40 per cent to around 850 million yen since the acquisition.

"Small companies play a vital role for bigger firms by for example supplying key product parts," said Masashi Seki, manager for Tokyo Shoko Research.

REUTERS