Japan M&A Methods

Japan M&A scheme has its own characteristics, advantages and disadvantages. It is essential to know what M&A methods for you to have more understanding of your possible options.

Japan M&A can be broadly classified into mergers, in which multiple companies are combined into one, and acquisitions, in which a controlling interest (management right) or business of a company is acquired.
“Alliances,” which establish a cooperative relationship, that do not involve the integration or acquisition of a company or business in M&A, but can be also considered as one method of M&A.

Acquisition

An acquisition is a form of M&A in which a company acquires either the “management rights (= shares)” or “business (assets)” of another company.

Acquisition of a business is an M&A scheme in which some or all of the business assets or know-how are directly purchased or sold, rather than shares, which are the management rights of the company.

 

Methods of acquiring shares (voting rights) include share transfer, third-party allotment of shares, and share exchange/transfer.

Business (asset) acquisition methods include business transfers and corporate divestitures.

 

Statistics show that business and stock transfers account for 80% of all M&A between small and medium-sized companies, and M&A by acquisition is particularly widespread.

Merger

A merger is an M&A scheme that takes the form of merging several companies into a single company.
Under the Companies Act, there are two types of mergers: mergers by absorption and mergers by incorporation.

In comparison to an acquisition, in a merger, the absorbed company (merged company) is legally dissolved and integrated into the surviving company.
In an acquisition, on the other hand, the company involved does not cease to exist before or after the M&A, but continues to exist, and only the voting rights and control of the business assets of the company are transferred.

Japan most common merger type is the first type which the other company will be absorbed by the buyer company.

Acquisition Methods

Transfer Of Stocks

A stock transfer is the acquisition of management control of a target company by purchasing its shares for cash.
Along with business transfers, this method is often used in Japan M&A.

Since this is a transfer of management rights through the transfer of shares (management rights), it is characterized by the fact that only the shareholders (≒management team) are changed and there is no change in the assets or organizational structure of the company.

This method is used in cases where the entire company is bought and sold.

Advantages

Relatively smooth transaction procedures because only stock transfer transactions are involved.
Relatively simple corporate law procedures, such as eliminating the need for creditor protection procedures (seller)
Easier to maintain the acquired company’s independence after the acquisition (seller)
The disadvantages are

Because the entire company is acquired, there is a risk of taking over unnecessary assets and off-balance-sheet liabilities (buyer)
Money to be paid as consideration (buyer)
Synergies from the acquisition may take time to realize because the acquired company will continue to exist after the acquisition (buyer)

Disadvantages

For crossborder M&A process, it may be required to use a escrow and will take time to process.

Third party Allocation

The third-party capital increase is a method to develop a new company for a specific third party.
The latter is a part of the capital contribution and is used in the context of building cooperative relationships.
The purpose of acquiring the right to dominate is to make use of it.

In addition,the aim to improve the financial status of our business through capital infusion and financial soundness, such as the defense policy for enemy purchases and the business regeneration of new companies.

Advantages

It enhance the influence of the target companies in their management and strengthen the relationship with them (buying hands).
The new company will be able to offer favorable prices, and it will be easy to implement the procedures in accordance with the resolution of the Board of Directors (sales).
The development side will maintain the right to maintain the funds for the return of funds (sales)

Disadvantages

100% of the existing owners’ rights are acquired (purchase)
The company transfer and comparison are necessary to obtain a certain amount of capital for a certain number of companies (purchase)

Share exchange/transfer

A share exchange is a method of exchanging shares of a company that will become a wholly owned subsidiary (wholly owned subsidiary) for shares of its wholly owning parent company.
It is used as a means of making a company a wholly owned subsidiary without spending acquisition capital.

Share exchange and share transfer are similar methods, but the difference is whether the parent company is an existing company or a newly established company.

Advantages

No need to prepare funds for the acquisition because new shares are issued as consideration for the acquisition (buyer)
Since the acquiring company is a separate legal entity, the business integration can proceed without difficulty (buyer)

Disadvantages

Because the company’s own shares are newly issued, the shareholder composition (ratio of voting rights) will change (buyer).

If the parent company is an unlisted company, the shares acquired by the subsidiary’s shareholders will be difficult to convert to cash through sales (seller)

Transfer Of Business

A business transfer is a method of transferring assets and liabilities used for a specific business as a single entity, rather than the entire company.

Assets to be transferred include not only tangible assets such as inventory and real estate that are tied to a specific business, but also intangible assets such as software, know-how, specific personnel, technology, and contracts.
In recent years, only intangible assets such as websites, media, and online services have become the subject of transfers.

This method is often used in M&A, especially in comparison with stock transfers, when only certain assets are to be acquired, or when there is a risk that the acquired company may have off-balance-sheet liabilities.

Advantages

Lower acquisition costs because only necessary assets can be acquired (buyer)
No risk of taking over unnecessary assets or off-balance-sheet liabilities (buyer)
In cases where the number of assets to be transferred is small, the procedures under the Companies Act are simplified (seller).


Disadvantages

In cases involving the transfer of a large number of assets, ownership transfer procedures are required (buyer)
In addition, when succeeding to employees or business partners, the transfer of contracts is required, which is time-consuming and labor-intensive

When real estate is transferred, real estate acquisition tax and registration tax are incurred (buyer)
Money to be paid as consideration (buyer)

Corporate Divestiture​

There are two types of corporate divestitures: absorption-type divestitures and incorporation-type divestitures.

In an absorption-type split, a company splits all or part of its business rights and obligations and transfers them to another company.


Incorporation-type split, a company splits all or part of its business rights and obligations, and a newly established company succeeds to them.

In both absorption-type and incorporation-type company splits, it is possible for multiple companies to carve out their respective businesses.

Since an absorption-type demerger allows only a portion of a business to be carved out, it is often used in phases of selection and concentration of management resources.
It is also used within a corporate group to reorganize businesses or develop a group structure.

A divestiture is used in situations where multiple companies establish a new joint venture by carving out a portion of their business, or in a business turnaround, such as the take-out of a portion of a business.

Advantages

No need to prepare funds for the acquisition, as new shares can be issued as consideration (buyer).
Easy to obtain synergies from the integration because the business can be incorporated into the company (buyer of absorption-type demerger)
Only certain businesses, such as unprofitable businesses, can be detached (seller)
Comprehensive succession in a split contract, so individual transfer procedures of the contract are not required in comparison with business transfers

Disadvantages

Because the entire business is taken over, there is a risk of taking over off-balance-sheet liabilities tied to the business (buyer)
May require more effort to integrate systems and other aspects of the business (buyer) in order to bring the outside business into the company
When shares are delivered to the seller, the shareholder composition changes (buyer)
A demerger is also classified as a spin-off or a demerger-type demerger.
There are four classifications of divestiture methods, each of which is a combination of an absorption-type divestiture and an incorporation-type divestiture.

A spin-off is also called a “vertical spin-off,” which is similar to the establishment of a subsidiary company, and a split-off is called a “horizontal spin-off,” which is similar to the establishment of a sibling company.

Specific Methods of Merger

A merger is an M&A scheme that merges several companies into a single company.
Mergers are classified as “mergers by absorption” or “mergers by incorporation.

Mergers are used to improve the management efficiency of multiple companies, to achieve synergies, and to strengthen internal controls, as well as for intra-group business reorganization.

Merger

In an absorption-type merger, one of the merging companies survives, and all rights and obligations held by the other companies are absorbed by the surviving company, which is then dissolved.
The surviving company is called the “surviving company” and the dissolving company is called the “dissolving company.

Advantages

Faster speed to business integration and early realization of synergies such as market share expansion and cost reduction.
By using stock as consideration for the merger, there is no need to prepare funds for the acquisition.

Disadvantages

Since an outside company is brought into the company, systems and other integration work may require a lot of effort.
The shareholder composition of the surviving company will change as shares are delivered to shareholders of the dissolving company.

Consolidation-type merger

In a merger of incorporation, all merging companies are dissolved and all rights and obligations are absorbed by the newly established company.
In the case of a merger by incorporation, the procedures are more complicated, as the licenses and permits held by the dissolving company are extinguished, etc. In practice, this  merger type is often used.

There are also methods such as triangular mergers and reverse triangular mergers, which are used in cross-border M&As.

Specific Methods of Alliance

Alliance

A business alliance is a method of establishing a cooperative business relationship between companies through contractual relationships that do not involve the transfer of capital.

This method is used in various aspects, including production alliances (to improve production efficiency through outsourcing, etc.), sales alliances (to strengthen sales capabilities by sharing sales channels, etc.), and technical alliances (to share know-how in product development technology, etc.).

Advantages

No transfer of shares is required, and no funds are needed to form an alliance.
Synergies can be expected in a short time by leveraging each other’s know-how and strengths.

Disadvantages 

There is a risk of leakage of confidential information, such as the company’s know-how, from the partner company.
Since there is no capital relationship, it is easy to dissolve the alliance, and there are cases where the intended effects cannot be realized.

Capital Alliance

In a capital tie-up, two companies may acquire each other’s shares to the extent that they do not control each other, or through a third-party allocation of new shares by one company, in order to further strengthen their business alliance, etc. In a capital tie-up, the two companies may acquire each other’s shares without controlling interest.
It is also used to establish a strong partner relationship without M&A or for business restructuring.

Advantages

Without losing management rights, the partner companies can build strong partnerships with each other to acquire technology, human resources, know-how, etc.
The party receiving the investment can efficiently expand its business by absorbing the know-how of the partner while improving its financial base and efficiently investing in the business.
The disadvantages are

Disadvantages

Possibility of management intervention due to capital relationship
Dissolving the relationship may not be easy, such as having to buy back shares when dissolving the partnership.

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