The $15.3bn buyout bid by Japan Industrial Partners rides the rising public-to-private wave amid shift in corporate governance as reforms take shape
The $15.3bn buyout bid by Japan Industrial Partners rides the rising public-to-private wave amid shift in corporate governance as reforms take shape
A consortium led by Japan Industrial Partners to acquire Toshiba for $15.3bn (JPY 2tn), if accepted, will be the largest take-private deal in the country's history, over doubling the previous record of such deals in 2021 (Fig. 1).
The buyout deal, if completed, will mark an end to a prolonged period of upheaval at the embattled conglomerate, which has been a target of growing activist pressure. Last summer, Nabeel Bhanji, portfolio manager at Elliott Investment Management and Eijiro Imai, Managing Director at Farallon Capital Management, both activist hedge funds, were added as new board members at Toshiba. The hedge funds between them own about one-tenth of Toshiba's shares, contributing to the overall activist ownership, estimated to be a quarter of the company. The growing presence of activists in Toshiba adds pressure for the company to re-examine their operations to improve capital efficiency.
Japanese companies have historically been known for their conservative management style and their focus on maintaining stability rather than maximizing profits. This has led to a tendency for many to hold on to excess cash and assets, which can lead to underutilization of resources and lower returns for shareholders.
Activist investors may push Japanese companies to use their excess cash and assets more efficiently and invest in growth opportunities. They can also push for changes in corporate governance practices in an attempt to improve the overall effectiveness of a company's management and decision-making processes with the aim of unlocking overlooked value.
The pool of active Japan-focused activist hedge funds has steadily risen, doubling from a decade ago to 233 today. However, the number of activist hedge fund launches and liquidations has been cooling since 2022, despite a recent surge in advisory requests. Nevertheless, shareholder activism has remained high given the government's efforts to reduce cross-shareholdings which are seen as hindering performance by prioritizing business relationships over profitability. This has encouraged more diverse and independent boards, including activists.
The rise of take-private deals
The momentum for private equity-backed take-private deals in Japan has gained traction since 2020. Last year, a record high of 12 public companies went private (Fig. 2). Still, the aggregate deal value fell by 18% to $7.62bn compared to the previous year, partly due to smaller average deal sizes. The average PTP deal size in Japan shrunk by 45% to $635mn in 2022 from a year ago. Still, it should be noted that the fall came off the back of a 211% increase in 2021, as the average deal size hit a record high of $1.16bn.
In recent years, private equity investors have shown a growing interest in privatizing publicly traded companies on a global scale. 2022 saw an unprecedented surge in the aggregate deal value, reaching $254.24bn (Fig. 3). The US was the main driving force behind the record global activity in PTP deals, contributing to 81% of the total deal value across 46 of such deals. The largest PTP deal in the US in 2022 was Twitter's acquisition by Elon Musk for $44bn in October, in one of the largest leveraged buyouts in history.
Japan followed suit in the number of PTP deals with 12, but its aggregate deal value was a mere $7.63bn, accounting for only 3% of the global proportion.
PTP deals in Japan in 2023
So far this year, Japan saw four PTP deals, with Iwasaki Electric, Wow World Group, and Kanematsu Electronics, besides Toshiba. In February 2023, private equity major Carlyle Group offered JPY 32.8bn to acquire the Japanese lighting solutions provider Iwasaki Electric at JPY 4,460 per share. In March 2023, the bid was successfully completed, with Carlyle Group acquiring 88.18% of Iwasaki Electric for JPY 28.9bn.
Since 2021, Carlyle has been active in taking public companies private in Japan since 2021, investing a record $1.97bn last year through two tech firms, Totoku Electric ($1.52bn) and Uzabase ($403.3mn).
While PTP deal volume has increased in Japan, they represented only 5% of all private equity deal types in 2022, up from 2% in 2018. Buyout deals remain the most favored private equity deal type, consistently accounting for over half of the deal volume over the past decade.
However, when looking through the deal value lens, PTP transactions took the largest share of all deal types in 2020 and 2021, making up 41% of the aggregate proportion, while buyouts hovered around 33%. However, the situation was reversed last year, with buyouts accounting for 41% and PTP deals accounting for 30%.
The outlook for PTP deals in Japan remains positive, supported by low-interest rates and ample liquidity have increased the demand for investment opportunities. After all, Japan's government has been pushing for reforms to promote corporate governance, which has led to an increase in companies adopting measures such as shareholder returns and improving profitability, making them more attractive targets for PTP deals.
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