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Barbarians at the Gate: Private Equity Storms Japan

Japan’s corporate reforms make for a target-rich environment

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Takeover interest for Japan’s Fuji Soft came after activist investors pushed the company for a sale. Photo: Kiyoshi Ota/Bloomberg News

A rare takeover battle has broken out in Japan between two American private-equity firms. For Japan, it is the clearest sign yet of a new era. 

KKR KKR -2.37%decrease; red down pointing triangle and Bain Capital are wrestling for control of Japanese software company Fuji Soft 9749 0.11%increase; green up pointing triangle. KKR made the initial bid, winning the support of the company’s board and some large shareholders. But Bain then came out with an offer that is 7.4% higher, valuing the company at nearly $4.2 billion.

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Fuji Soft’s stock now trades above KKR’s offer price, indicating hopes that either Bain will prevail or KKR might come out with a higher bid.

That is the latest example of the increasing presence of global private-equity companies in Japan. The total value of private equity-backed deals in the country amounted to 5.9 trillion yen, equivalent to $39 billion, in 2023—nearly doubling from the previous year. It averaged less than ¥1 trillion a year between 2011 and 2020. According to data tracker Preqin, total assets under management in Japan-focused private-equity funds amounted to $62 billion as of March this year, more than double the amount at the end of 2019.

Japan became the largest private-equity market in Asia-Pacific last year, accounting for 30% of the deal value in the region, compared with around 5% to 10% historically, according to Bain.

Japan’s push to improve corporate governance is the key reason behind the rise of private equity. Companies are being encouraged by the government, as well as stock exchanges, to slim down their balance sheets and improve shareholder returns. This means companies are being compelled to treat takeover offers more seriously, as well as to spin out or sell noncore businesses, all of which throws up acquisition opportunities for private-equity firms.

Shareholder activism is on the rise, adding to the pressure. Takeover interest for Fuji Soft, for example, came after activist investors pushed the company for a sale.

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The successful restructuring of industrial icon Hitachi could be a case study. The 114-year-old Japanese company with businesses from nuclear reactors to railways was brought to its knees during the financial crisis: It posted a net loss of ¥787 billion, then the largest-ever loss for a Japanese company. 

Hitachi, however, has had an impressive turnaround in the past few years—its share price has surged nearly sevenfold since the end of 2018. The company exited from many of its noncore businesses and returned the cash to shareholders or recycled it into more promising acquisitions such as automation and power equipment. Private-equity firms such as KKR and Bain have picked up many subsidiaries that Hitachi has spun off, including logistics, chip-equipment manufacturing and steel making. 

Japan’s continued push for its companies to improve corporate governance will keep bringing more opportunities for private-equity firms. Japan’s main stock exchange, for example, is pushing companies to bring their share price above book value. Japan’s low interest rates, despite the recent rate increases, make dealmaking in the country even more lucrative. The financing cost for leveraged buyouts is around 2% to 3% in Japan, compared with 9% to 10% in the U.S., according to private-equity firm Carlyle.

With ample funding, better returns and a plethora of potential targets, Japan has become the new playground for private-equity firms. They are likely there to stay.

Write to Jacky Wong at jacky.wong@wsj.com

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Appeared in the October 28, 2024, print edition as 'Private Equity Storms Japan'.

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