Globalization and Digitization

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1 October 2015
Eiichiro Yanagawa

Globalization at Japan’s leading firms continues unabated.

Various market segments have seen record M&A activity as companies continue to seek strategic means of diversifying their portfolios and global growth opportunities in tandem with boosting corporate value and profitability over the mid to long term. At the same time, the weakening of the yen in the wake of the 2008 collapse of Lehman Brothers has pushed the forex market to a point that makes the price tags of these mergers relatively more expensive, meaning more latent financial risk. Against this backdrop, this post examines recent global M&A trends, related background and risk, and the outlook and possibilities across business segments.

1. Tokio Marine Holdings’ June 2015 announcement of the acquisition of U.S.-based specialty insurance group HCC Insurance Holdings:

It is significant that the nation’s largest non-life insurer is not sitting idly but instead is boldly striving to increase the ratio of its business derived overseas. This merger was valued at 940 billion yen ($7.5 billion). It launches a new chapter in the history of this company. This decision is one that could only have been taken by a company with a wealth of experience and a successful track record.

According to the insurer, this deal will have the following benefits:
・Result in greater scale and profit potential overseas
・Make possible the establishment of a more globally diversified business portfolio
・Enable improved capital efficiency and sustainable profit growth.
This move and the above rationale articulated by the firm only serve to reaffirm that Japanese firms are and will increasingly be looking to expand globally.

These moves have been driven exchange rate and interest rate considerations and more by a desire to enhance the scale, scope, and efficiency of business operations. This, in turn, has been prompted by a rise in the ratio of foreign investors and more vocal “activist” shareholders.” Seen another way, these efforts—the manifestation of the pursuit of M&A activities focused overseas—reflect the grim reality of the difficulty finding good business opportunities in and the rigidity of the domestic market.

The market is anxiously anticipating further deregulation and efforts to bring more market players into the market not only in insurance, but across the entire financial services industry. Furthermore, overseas new business development through outbound M&As is expected to bring synergies to the existing domestic market.

2. Meiji Yasuda Life’s July 2015 announcement of the acquisition of StanCorp Financial Group:

The gravity of this major Japanese life insurer’s decision to acquire StanCorp Financial Group is readily apparent. Meiji Yasuda Life mobilized funds greatly exceeding those that earmarked for M&As under the company’s interim investment plan.
The acquisition transaction totaled around 600 billion yen (about $5 billion), more than double the 250 billion yen (more than $2 billion) outlined in the corporate plan, the Meiji Yasuda Next Challenge Program, formulated in June 2014. The media touted the acquisition as the largest acquisition yet by a Japanese life insurer.

Japan’s life insurance market accounts for a whopping 20% of the global life insurance market, only slightly behind the 22% share made up by the U.S. The market’s compound average growth rate (CAGR) of 3% over the past 10 years and the degree of concentration of profits—the largest five companies account for more than 60 %—indicate the mature nature of the market. At the same time, revision of the company’s Stewardship Code in February 2014 and its Corporate Governance Code in June 2015 have encouraged institutional investors and issuers to seek a greater return on equity (ROE).

With ample capital on hand, the company’s bold strategy of international M&As mandates the diversification of its revenue sources and business portfolio, the establishment of a business foundation in the world’s largest market, and a high level of governance needed to manage differing business portfolios. Given its scale and its current difficulties, there is no doubt that the market will be focused on the moves that Japanese financial institutions make as they seek to pioneer a new avenue toward the future. Japan’s life insurance industry has clearly burst into an age of competition that will place a premium on action and skill when it comes to overseas strategies.

3. Nikkei media group’s July 2015 announcement of the acquisition of the Financial Times Group:

The purchase of the Financial Times by Nikkei media group, publisher of Japan’s leading economic daily the Nihon Keizai Shimbun, is a bid to springboard beyond being Asia’s most formidable economic media outlet and to accelerate its evolution and transformation into a global and comprehensive information company.

Already, digital paid subscribers for both of the publications have reached around 1 million readers, a solid community of readership in the capital market and real economy . With their combined resources of reporters, editors, news-gathering networks, and ability to provide information directly from and between the major capital markets of London and Tokyo, the new entity boasts an unprecedented scale and scope for producing content.

The organization can be expected to serve as a global platform for evolution. An integral part of this process is the Nikkei subsidiary Quick Corp., which provides financial and capital market information services. By further enhancing the machine-readable digital content offerings and distribution platform, Nikkei Group with the FT Group under its umbrella could evolve into a global market data provider unlike any the world has ever seen. Celent expects the new group to combine its steady flow of the latest data, timely information, and broad coverage with features including analytical functions and compatibility with digital devices and robo-advisory services.

If this new entity becomes a new economic media powerhouse, potentially even the top in the world, then it can be expected to help accelerate the globalization of Japan’s capital markets.

4. M&As, globalization, and things digital:

These three acquisitions have commonalities that offer important insights related to the direction of Japan’s financial business and technology.

  • The transformation of top companies:
    No one in Japan believes that the current exchange rates are at advantageous levels for Japanese companies to be acquiring overseas firms. However, a partial list of major M&As excluding the financial sector following the collapse of Lehman Brothers reads as follows: Canon ($2.82 billion), Japan Post ($6.42 billion), Otsuka Pharamceutical ($3.51 billion), Daiichi Sankyo Company ($4.6 billion), Itochu Corporation ($1.04 billion yen), Kintetsu World Express ($1.21 billion yen), Suntory (1.6 billion dollars), Asahi Kasei Corporation ($3.16 billion), and LIXIL Corporation ($3.84 billion). Clearly, leading companies in segments across the economy are boldly looking abroad.
  • Fundamentally changing of outbound M&As:
    These massive deals are clearly indicative of change, namely geopolitical change. Until this sea change , Japanese firms were focused on smaller deals in Southeast Asia to the tune hundreds of millions of dollars; today they have their sights set on mature Western markets and megadeals that on the order of billions of dollars. There is an analog here to innovation in that these firms are tackling something that extends beyond their capacity to measure with their corporate metrics as they look to buy businesses, brands, and customers that involve unknown elements.
  • Nimble, top-down decision-making:
    The leading companies that were able to make these kinds of crucial decisions involving massive sums of money realized—or even surpassed—the commitments outlined in their overseas business strategies and budgets. Clearly, the swift decision-making witnessed here differs from the traditional image associated with Japan’s manufacturing and financial institutions of being painstakingly bottom-up, slow-developing consensus-building organizations. This kind of top-down approach hinges on strong leadership, external resources (advisory firms) well versed in the company’s strategy, and a rock-solid financial foundation.
  • Keys to success will prove governance and digital initiatives:
    The companies in question here have all gone on record saying that new governance is the key to success. Like technology, it is hard to quantify or put a figure on the value of high-caliber management teams that can be entrusted to skillfully run businesses in areas spanning diverse geopolitical situations. In addition, both technology and management are highly dependent on human resources, which tend to fade with time. This prompts the question of whether these firms will, in their forays into “unknown new lands,” be able to manage their new enterprises well. In the device industry, business and IT are two sides of the same coin and governance that does not take into account both is ultimately not viable. This is an area that has both risk and poses challenges for major global firms.

In addition, technology has become a synonym for digital. In its comments (summarized below) on announcing the acquisition of the FT, NIKKEI noted that the move was part of a larger trend that extends beyond the media industry and into the financial information arena. Replacing the word “media” with “ financial services” and you the comments are essentially a strategy for global financial service players. Digital has drastically shortened the distance between these.

  • Business development that leverages the digital merits of being able to deliver information anywhere in the world instantly will be critical. The conventional relationship between paper and digital media has already been turned on its head.
  • Mergers and acquisitions are spilling beyond borders and regions. In turn, this has increased the significance of forging complementary relationships and increased the meaning of strategically mutually beneficial alliances for the media. The partnering of these major media firms with distinct regional strengths in the West and in Asia opens the door to genuine realignment and innovation.


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