Japan embraces management buyouts as pressures mount at listed groups

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Management buyouts in Japan have accelerated to their fastest pace in more than a decade as shareholder activism, intensifying governance pressure and a still open window of cheap financing trigger an exodus from public markets.

A flurry of buyout announcements this month — involving companies in the education, basic materials and karaoke industries — are fuelling predictions by global and domestic private equity firms that MBOs could become the country’s biggest driver of deals in the coming years.

“Over the last decade, the sale of non-core assets by large conglomerates has been the priority [for private equity buyers], but now management-led take-privates are reaching the same level of importance,” said one Tokyo-based private equity executive, who said he expected MBOs to continue growing in frequency and value.

This month alone, senior executives at six listed Japanese companies, including Fuji Glass and karaoke operator Shidax, have announced plans to take their businesses private, putting the country on track for its strongest year for MBOs since the 2008 financial crisis.

There have been 26 MBO announcements in 2023, with a combined value of $2.4bn, according to data from LSEG. The biggest has been made by Benesse, the country’s largest provider of education services and fee-paying care homes. Backed by Swedish investment house EQT, it is worth $1.3bn. The last time Japan saw such a high number of management buyouts was in 2010.

Lawyers and bankers familiar with two of the recent management buyouts said the accelerated pace was in large part due to low-cost financing still being readily available, with interest rates in Japan anchored at low levels by the Bank of Japan’s ultra-loose monetary policy. Concerns about the BoJ “normalising” its policy in the coming years have created an urgency around doing deals now, they said.

Bankers point to other factors, including recent updates to the corporate governance code and takeover guidelines. The governance code creates massive pressure on listed Japanese companies to offload the large portfolios of shares many of them hold in other public companies — a process that can quickly put significant stakes in the hands of shareholder activists. 

Bankers at six institutions who advise Japanese companies on how to defend against activists said the new merger and acquisition guidelines were — perhaps unintentionally — likely to spur activism and more aggressive dealmaking. The guidelines in effect force companies to formally consider genuine takeover proposals at the board level, where previously they had the freedom to dismiss even legitimate approaches. 

The MBOs are in many cases led by members of the founding families, who feel increasingly under siege from the relentless rise in shareholder activism, said bankers and investors directly involved. Whereas previously, being listed on the Tokyo Stock Exchange was a matter of prestige and financial necessity, the burdens for many now outweigh the advantages, they said.

“The taboo against being unlisted has begun to disappear,” said the Asia head of one global private equity firm involved in a recent Japanese MBO, who did not wish to be named.

Investors say some executives might prefer to take their companies private — in the belief that they better understand the intrinsic value of the business and its assets — rather than take short-term measures to lift stock market valuations, as the Tokyo Stock Exchange is vocally exhorting them to do. They may also seek to take advantage of hidden pockets of value in their balance sheets.

Longtime analysts of the Japanese market cautioned that many of the deals were likely to exploit the relatively weak rights of minority shareholders in many situations.

“Doing an MBO means the private company doesn’t have to sell its crossholdings in others and it enables founders to engage more professional management without losing face, learn behind a closed door, take money off the table and do estate planning for succession issues,” said Travis Lundy, an independent special situations analyst who publishes on Smartkarma.

“MBOs are the perfect solutions to all those problems,” he added. “They just tend to squeeze out the minorities too cheaply.”