Are Japan’s dealmakers heading back to Pebble Beach?

Japanese companies are on an overseas shopping binge, swooping on foreign assets beaten down by the global credit crisis and economic slowdown, reports Bloomberg. Takeovers by companies including TDK and Daiichi Sankyo are putting Japan on course for its biggest buying spree since the 1980s bubble.

But such evocations of the kind of bubble-driven M&A frenzy that saw Japanese buyers overpaying for assets such as New York City’s Rockefeller Center and California’s Pebble Beach Golf Links stand in contrast to the pace of Japanese M&A at home. Deals by volume and value are lagging last year’s levels. According to Thomson Reuters’ weekly deals round-up, Japan’s overall M&A volume so far this year (Jan-Aug was down 1.7 per cent from the same period a year ago.

Overall, Japan M&A stood at US$449.7bn from 8,227 deals so far 2008, down 1.7 per cent from the same period last year. Second quarter M&A volume reached $213.5bn, which enabled M&A activity to rebound from a decrease in M&A volume in the first quarter of 2008. So far, third quarter volume amounts to $65.5bn, says Thomson Reuters.

Within this, Japan-related private equity activity amounted to $30.2bn, down 12.7 per cent from $34.6bn of announced transactions in the same period last year.

On the overseas front, in terms of value, though, foreign acquisitions by Japanese companies this year have already topped 2007′s total by 91 per cent, reckons Bloomberg, amounting to the biggest gain among the world’s 10 largest markets and contrasting with the fall-off in deals in the US and UK.

Japanese companies have cash equal to 11 per cent of their assets, the second-highest amount after China among the world’s 10 biggest equity markets.

Foreign purchases climbed to $48.6bn so far this year from $25.4bn for all of 2007. In contrast, the value of deals in the US is down 67 per cent from 2007 and UK acquisitions are off 66 per cent as debt financing costs climb.

As for “bubble mania”: the new Japanese dealmaker is more discerning, notes the report: “Pebble Beach and those kinds of trophy assets, it’s clear those were crazy deals, but now they’re buying things that are earnings enhancing and using cash that’s been generating no income to do it,” Scott McGlashan, who manages Japanese stocks as part of JO Hambro Capital Management’s $4.7bn in assets, told Bloomberg. “It’s a very opportune time for Japanese companies looking to make acquisitions overseas.”

And don’t give up on Japanese private equity, which, as the figures show, is still in its infancy.

But the country’s nascent private equity market is set to expand its share of the domestic M&A market fivefold to about a quarter, Richard Folsom, representative partner at Advantage Partners, the country’s largest domestic private equity firm, told the FT in July.

Although slightly in the “he-would-say-that” category, Folsom has a point: the base for Japanese private equity is so low. “The scale of the market . . . the range of sectors and technologies that are here, [suggest Japan] has the potential to become a solid private equity buy-out market,” said Folsom.

Although the private equity share of Japanese M&A was currently only about 4 to 5 per cent, it would grow to the US level of about 25 per cent and reach US levels “over the long term”, he predicted.