Like much of the world, as the pandemic-induced lockdowns prohibited travel, mergers and acquisitions (M&As) in the Japan-India corridor also stalled. Following the pause, on the back of changing geo-political developments and continuing growth in India, cross-border M&A between the two countries is expected to rebound. The contraction during covid notwithstanding, the World Bank predicts economic growth in India to be in excess of 7% in the coming year. We are also seeing continued bonhomie between the governments, as Japanese Prime Minister Fumio Kishida recently announced a $42- billion investment into India over the next five years. Moreover, there is ample capital available and ready to be deployed by Japanese investors as the deal pipelines expand.
Paths for Japanese Investors
The objectives for Japanese investors remain the same: large Indian marketplace and a stable, strategic sourcing base, the latter being further strengthened in view of the shift away from China-dependence. These objectives could be met by one of the following: greenfield investments, minority stake M&As and majority stake M&As.
Greenfield investment remains time-consuming and has serious execution challenges so it may be followed only by Japanese companies with a long history and experience of operating in India, while minority M&A deals come with the baggage of complications for being dependent on an Indian partner.
As things open up, we expect to see more Japanese interest in controlling or majority stake transactions, wherein the companies can be smoothly integrated into the buyers’ global supply chains.
Recent M&A, though few, has shown an increasing appetite of Japanese investors to make large bets on India, case in point being the recent acquisition of Escorts by their erstwhile partner, Kubota of Japan. We expect to continue seeing more majority stake M&A transactions for Japanese investors looking to deploy capital in India.
Though there are a number of sectors which are witnessing Japanese interest, it is especially true for the industrials and chemicals, clean energy, technology-IT services, NBFCs (non-banking financial companies) and infrastructure sectors. These are segments where Japanese companies have strong technology back-ends and experience.
Moreover, these sectors also require large sums of capital to be deployed over longer tenures. We still do not see enough Japanese activity (Softbank aside) in the newer-age, high-growth, consumer-centric technology businesses, where western capital and more aggressive fund managers and investment committees have been able to outbid and outmaneuver traditional investors. Accordingly, we will continue to see Japanese companies as strong and credible buyers for traditional businesses which need long-term, and not-so-expensive and risky capital.
Maneuvering deals in India
Despite a shared larger alignment on the macro environment and long history of Japanese investment in India, Japanese buyers would have to continue building flexibility as they approach M&A in India, which is still dominated by family-owned businesses, while Japanese companies tend to be driven by an organizational structure.
This can make execution of a deal in a timely manner challenging, especially for prime sectors like IT and energy, where competition with global private equity firms is becoming fiercer. We continue to advocate an ‘early start’ to prospective Japanese buyers, build relationships with Indian families who may potentially be sellers, and try and create a transaction rather than just respond to ‘Western-style’ auction processes.
We see a lot of ‘fence-sitters’ among the second generation of family-owned businesses, and a sensible push from a serious Japanese buyer is usually the catalyst to a bilateral transaction—a situation much more suited to buyers from the East.
Japanese strategists looking for opportunities to participate in the Indian marketplace and build alternatives to their supply chains, as well as Indian business owners developing an exit strategy, should consider these key insights to spur M&A in this very important business corridor.
Preet Singh is managing director, mergers and acquisitions-industrials, Mumbai, Lincoln International.