Acquisition of a company which is already established in your target sector in Japan with existing offices, distribution network and contacts etc. can be an effective route to market. However, this market entry strategy tends to suit larger SMEs or corporations. However, there are a number of considerations to keep in mind such as suitable target companies, organisational and technical due diligence and the costs the Acquisition transaction negotiations including the cost of interpreters/translators, solicitors etc.
For some UK firms, the acquisition of another company in Japan could represent a deal breaker option to quickly penetrate and prosper in the Japanese market compared to an organic expansion.
However, buying another business can be risky. CEO advisor Robert Sher points out that approximately 50% of merger and acquisition deals do fail. And Forbes contributor Frank Vermeulen suggests that the percentage may be more like 70%.
Statistics like these mean that you need to carefully consider the benefits and drawbacks of an acquisition deal compared to other Japan market entry techniques.
Advantages of Acquisitions
There are many good reasons for growing your business through an acquisition. These include:
- Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business;
- Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity;
- Your business underperforming. For example, if you are struggling with regional or national growth it may well be less expensive to buy an existing business than to expand internally;
- Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers;
- Diversification of the products, services and long-term prospects of your business. A target business may be able to offer you products or services which you can sell through your own distribution channels;
- Reducing your costs and overheads through shared marketing budgets, increased purchasing power and lower costs;
- Reducing the competition. Buying up new intellectual property, products or services may be cheaper than developing these by yourself.
Read more about the various business acquisition strategies in this article by McKinsey & Co.
What Can Go Wrong with an Acquisition
The extent and quality of the planning and research you do before an acquisition deal will largely determine the outcome. Sometimes situations outside your control will arise and you may find it useful to consider and prepare for these risks.
- An acquisition could become expensive if you end up in a bidding war where other parties are equally determined to buy the target business;
- A merger could become expensive if you cannot agree terms such as who will run the combined business or how long the other owner will remain involved in the business;
- Acquisitions can damage your own business performance because of time spent on the deal and a mood of uncertainty.
You may also face pitfalls following a deal such as:
- The target business does not do as well as expected;
- The costs you expected to save do not materialise;
- Key people leave;
- Incompatible business cultures;
- Resources being diverted from your business' main aims.
What to Consider Before Acquiring another Company
Acquisitions can be either friendly or hostile. Friendly acquisitions occur when a firm expresses its agreement to be acquired (target company), whereas hostile acquisitions are not based on any agreements. The later mostly occurs when the acquiring firm buys large stakes of the target company in order to have a majority stake.
There are important legal issues to consider before completing an acquisition:
1. Deal Structure
Deal structure options include:
- Stock purchase. The buyer purchases the target company’s stock from its stockholders. The target company remains intact, but with new ownership.
- Asset sale/purchase. The buyer purchases only assets and assumes liabilities (such as payables) that are specifically indicated in the purchase agreement.
- Merger. Two companies combine to form one legal entity, and the target company’s stockholders receive cash and/or buyer company stock.
2. Escrows and Earn-Outs
An “escrow” account is a special account set up by lawyers to hold transaction funds until the date that the transaction actually closes.
It generally protects the buyer company in the event there are breaches of contract by the target company.
Earn-out is a pricing structure in which the target company must “earn” part of the purchase price based on achieving certain business performance goals after the acquisition. This part of the purchase price is paid by the target company after closing.
3. Representations and Warranties
“Representations and warranties” are just another way of saying that, in advance of the transaction, the two companies must share vital information about the transaction and about themselves, such as their financial and legal standing.
The buyer company typically wants the target company to agree to provide detailed information on issues such as:
- Intellectual property;
- Financial statements;
- Compliance with law;
- Material contracts
4. Non-Compete and Non-Solicit Clauses
These clauses prohibit both the buyer and target company from:
- Engaging in a business activity that is competitive with either company’s business activities (non-compete).
- Trying to lure/hire away each other’s customers or employees (non-solicit).
For more information
We encourage you to seek expert advice from professionals, such as management accountants and solicitors, with experience in similar deals to help forecast potential pitfalls and to address any that arise.