To put this binge into perspective, not only is this the highest year on record, but it is on a pace that's three times the acquisition rate that had everybody quaking in their boots 30 years ago. I think that's very telling on a couple of levels.
First, Japan's economy is faced with a triple disaster. When you add up private, corporate and government debt, it's nearly 500% of GDP according to numbers from Goldman Sachs earlier this year, which makes the Greeks look positively miserly. Even our own fiscal cliff pales in comparison.
Second, fully 25% of their population is going to die off by 2050, according to the Japanese Health Ministry, further exacerbating the near-complete shutdown in domestic demand that repeatedly plagues any attempt to jump-start the Japanese industrial machine.
Japan's economy is not growing at 7% a year; instead it's fighting to maintain any kind of positive momentum whatsoever. Its executives are struggling to cope with highly competitive markets that move faster and more decisively than they are prepared to accept. According to McKinsey, productivity per worker is one of the lowest of any developed country.
In short, the Japanese economy is vulnerable rather than in a position of strength. This changes the game significantly and gives the Japanese a new sense of urgency. Japanese companies literally have no alternative. Almost every market they've dominated for years is failing. Case in point, Japan is well known for its electronics prowess. In 1990 Japanese products represented nearly 30% of the world's total export value. Now that figure is closer to 14%.
They aren't as interested in any one geographic area, either, as they were in the 1980s when the majority of Japanese companies engaged in overseas expansion focused mainly on the United States. Now, they're on the hunt for growth anywhere they can find it and in any sector that appears promising.
The big banks, trading houses and pharma companies are particularly aggressive, and with good reason - they've got everything to lose. Generally speaking, they're the only companies with any sort of growth momentum left and, more importantly, the cash to exploit it. In that sense, Japanese companies are positioned like Germany is in the EU. They've got to move or risk having the very life sucked out of them by ineffective debt-plagued competitors and a government that's determined to "help."
Take Takeda Pharmaceutical, for instance. Their recent buying spree includes:
$13.7 billion for Swiss drug maker Nycomed
$800 million in cash for Philly-based URL Pharma Inc.
$248 million to gobble up Brazilian company Multilab Industria e Comercio de Productos Farmaceuticos Ltda.
And $60 million paid in a lump sum up front to purchase Montana based LigoCyte Pharmaceuticals
All of them allow Takeda to pursue global vaccines while offering the kind of diversification and cash flow not possible in Japan itself.
On Monday Softbank, a leading Japanese mobile carrier, announced that it will purchase a 70% interest in Sprint Nextel in a transaction that is the single-most expensive yet this year at $20 billion.
Mitsubishi UFJ Lease and Finance Co, LTD is purchasing Jackson Square Aviation for $1.3 billion and change. According to S&P Capital IQ, that's the largest acquisition of a U.S. financial services provider this year and second only to that of Tokio Marine & Nichido Fire Insurance Co. Ltd's purchase of Delphi Financial Group last year for $2.7 billion.
And the list goes on, getting bigger and more valuable by the day. According to S&P Capital IQ, the average purchase this year falls into a range that defies belief at 20-25 times trailing 12 month earnings before interest, taxes, depreciation, and amortization -- or EBITDA for short. Here's another change from the 1980s that's also worth considering.
This is a radical departure from what happened last time around when Japanese companies couldn't swap out local management fast enough. If you recall, movies like Michael Keaton's Gung Ho and Sean Connery's Rising Sun hit the theaters in 1986 and 1993 respectively in response to the rise in social angst that accompanied the flood of Japanese capital.
At the time, business schools were falling all over themselves to offer courses in Japanese management and "textbooks" like the Book of Five Rings written by Miyamoto Musashi, a legendary samurai, became instant best-sellers. I remember that almost every Japanese acquisition I worked on at the time came with a flood of "interns" ostensibly there to learn, but in reality were there to report nightly to the home office.
Takeda, for instance, not only plans to leave senior managers in place at these companies, but is taking its cues from global experts like Rajeeve Venkayya, a former White House Special Assistant for Biodefence, who was hired specifically for the purpose of guiding international expansion as reported by the Wall Street Journal.
As for what's driving this, it's the Yen. Since 2008, the Yen has appreciated 28.8% against the dollar. This year it's backed off a bit after repeated Bank of Japan intervention.
Nonetheless, at 78.44 to the dollar, it's still super strong even if it remains below the postwar record of 75.35 per dollar hit a year ago October. Next to the Swiss Franc, the Yen is undeniably one of the strongest currencies on the planet. Practically speaking, "it's as if everything we Japanese have ever wanted to buy overseas got put on sale at a huge discount" noted a colleague of mine who wishes to remain anonymous from Tokyo who works in the M&A department of a top tier bank.
People who are focused on Europe's debt crisis or slowing Chinese growth don't realize that this can continue for some time to come. Japanese companies have more than $2 trillion in cash on their balance sheets and some very powerful motivation. And they'll be all too happy to quietly build key competitive positions worldwide at a time when the rest of the world is looking the other way. Whether or not they can keep them moving forward remains unknown.
(Keith Fitz-Gerald, Chief Investment Strategist for MoneyMorning)