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Interview on Japanese M&A Environment with Mr. Kiyoshi Goto, Director-General, Department of Business Development, Development Bank of Japan

By Keith W. Rabin

Mr. Kiyoshi Goto joined the Development Bank of Japan (DBJ) in 1978. His overseas experience and successful assignments in internationally related work are extensive, totaling fifteen of his 25-year experience at DBJ. He received his MBA from the Amos Tuck School at Dartmouth College in 1984. In 1987 he was dispatched to the International Energy Agency in Paris, the energy forum of the OECD, and worked as an energy economics analyst for three years. From 1995 to 1997 he was in DBJ’s International Department, in charge of extending loans to foreign companies investing in Japan. Then Mr. Goto was named Chief Representative of DBJ's Washington D.C. office, where he worked hard to provide a better understanding of DBJ's activities as well as the Japanese economy and society through thirty plus presentations and lectures in three years. Last April he was given a new mission, to lead a team providing M&A advisory service, a new business for DBJ.

Hello Goto-san, it is a pleasure to speak with you again. Can you tell our readers something about the Development Bank of Japan, its role and mission, as well as your own background and activities there?

The Development Bank of Japan (DBJ) is a governmental financial institution established in 1951. DBJ's mission is to contribute to the development of the Japanese economy and society via the provision of “quality” financial services that usually cannot be accommodated by private financial institutions. DBJ's contribution to Japan's wealth, I believe, has been widely acclaimed. Since readers of this newsletter mostly work outside Japan, I should emphasize that DBJ has made strenuous efforts to assist foreign firms wanting to enter the Japanese market. In 1984, DBJ crafted loan programs specifically designed for foreign companies investing in Japan, and those programs have been well received. In fact, the 1996 Economic Report of the President noted our efforts in this area. I have never heard of any Japanese institution other than DBJ being named in the Report.

I have devoted more than half of my career at DBJ to international-related business. After having assisted foreign companies for two years through the loan programs I mentioned, I went to Washington, D.C. and worked as a public relations officer for DBJ—and even for the Government of Japan—giving talks on a wide variety of issues including DBJ's loan programs and the state of the Japanese economy. You may recall that in the Business Opportunities in Japan symposium organized by the Japan External Trade Organization (JETRO) in November 1997, I gave a presentation titled, “Investing in Japan: A New Trend”, which pointed out the growing importance of M&A in Japan. Last April I was assigned to lead the newly established department in charge of M&A advisory services.

The development of M&A deals is a new area for DBJ. Can you tell us why DBJ is moving in this direction and how the "culture" of the institution is changing as you move to initiate this type of activity?

Yes, we are a Johnny-come-lately in this field. But we already realized how important M&A was for the Japanese economy a decade ago and carefully studied how DBJ, as a policy-implementing body, could supplement the market. We started this new service mainly for two reasons. First, M&A, once regarded in Japan as a malicious business conduct, is gradually becoming accepted as a useful business tool, but some distaste for M&A remains. We thought that an advisor whose mindset differed from that of private advisors was needed in order for M&A to become rooted in Japan, that is, an advisor who seeks a triple equilibrium. You may have heard talk of “win-win” deals, deals in which both the sellers and the buyers get fair shares of the value from the transactions. That, however, is easier said than done. The reality is that one side usually wins more than the other, sometimes unjustly. Being a governmental institution, we thought we should aim to assure that nobody goes overboard in an M&A transaction, and we do this by taking into account not only the benefits to the sellers and to the buyers, but also to the economy as a whole. I call this the “triple-win” approach. The second reason we started an M&A advisory service is that even though M&A has gradually become a business tool in Japan, only blue-chip companies have had the luxury to use it. Many small-to-medium-sized firms are ignored in this market because the deal size cannot generally justify the costs for professional services. We thought that we should give a helping hand to such companies to support the healthy development of the M&A market. Thus, we decided to jump into this new area.

This movement, adding M&A advisory services to DBJ's menu, meets the diversifying needs of corporate clients and increases the value of DBJ's financial services. This move also has a positive impact internally at DBJ in the sense that a solution-oriented approach is setting in; we should provide not only funds but also knowledge. Also this service offers DBJ a new avenue to a fee-based business.

Can you give us some specific examples of M&A deals you have completed or been working on and the type of deals you are targeting in the future?

Because we are a latecomer in this field, we do not yet have many completed deals to prove the effectiveness of DBJ's “triple-win” approach to M&A advisory services. However, a deal we completed last November may illustrate DBJ's approach. We served as an advisor for Meidensha Corporation, a heavy electric machinery manufacturer, on a deal between its affiliate, Meiden Hoist System, and KCI Konecranes, a world leader in the crane market. Meiden Hoist System had been struggling in the depressed and over-crowded market, and KCI Konecranes, though long aspiring to enter Japan, had not found a suitable arrangement. This strategic alliance not only benefited Meidensha and KCI Konecranes, both of whom received a fair share of the value, but also achieved national policy objectives, namely, business restructuring and promotion of foreign direct investment, thus significantly contributing to the Japanese economy. KCI Konecranes included DBJ's name in its press release on this alliance, which, I believe, is quite remarkable since an advisor is not usually mentioned in this kind of release and furthermore we served as an advisor for Meidensha -- not for KCI Konecranes. This deal clearly demonstrates that our aim is truly for “win-win” transactions. Perhaps one might wonder if KCI’s praise was earned at Meidensha’s expense—that is, some might think that Meidensha was underrepresented and the notion of triple equilibrium is a joke. One thing is evident: Meidensha could have terminated the contract with us anytime they wanted and would have done so if they had not been satisfied with our services.

seatedLet me tell you how I understand M&A. M&A is an economic transaction that really does create value that did not formerly exist. The seller provides a platform for value creation and the buyer offers managerial, technical and other expertise. Unless the buyer and seller get fair shares of value created, the deal won’t close and nobody will gain. Yes, an advisor works for a client, either the buyer or the seller, and gets fees. However, if you regard M&A as a game of win or lose, you are quite likely to lose fees you could otherwise have earned. The fact that more than half of M&A deals end up as failures, according to various surveys and studies, may back up my notion. We at DBJ have a mindset to make a project as feasible as possible in the long run, which we have done through our financings since the bank’s establishment. As part of our implementing policy, we have to make sure that the projects we finance will have positive impacts on the Japanese economy and society. This approach is also the backbone of our M&A activities. On the other hand, take an example whereby a client comes to us and says that it is looking for an M&A opportunity simply to boost its earnings per share by acquiring a company with a low price-earnings ratio. We do not provide advisory service for such clients. I hope this will help explain our M&A advisory policy. We are targeting deals that will contribute to corporate/business restructuring, revitalization of local economies, and promotion of foreign direct investment.

Substantial wealth has been created in the U.S. by investor groups who assume possession of distressed or underperforming assets and then move to reduce costs and introduce other "re-engineering" techniques to restore profitability. One might imagine there are many opportunities of this kind in Japan given the depressed economic environment it has experienced over the past decade, yet we have yet to see this become a defining trend. Can you give us some of the reasons why and whether this might change in the future? Additionally, what is the likelihood that virtually bankrupt corporates or financial institutions will be allowed to fail?

An active market for distressed assets in Japan cannot be created overnight. But one is developing. Evidence is that the number of MBOs increased significantly in Japan, from thirteen transactions in 2000 to forty-two in 2002. Recently, UK-based 3i withdrew from the market. However, major foreign funds are still in Japan and Japanese players are becoming active in the distressed-asset market. Unison Capital, Advantage Partners and MKS Partners have been quite visible. DBJ also plays an important role in this regard. DBJ put equity into Nippon Mirai Capital, a new entrant in this field and we have been investors in several corporate restructuring and turnaround funds. Our loan function also supports the activities of turnaround private equity. For example, Unison Capital made equity investment in ASCII, a publisher of PC-related magazines and books, which had been in serious trouble for so many years despite twice changing management. DBJ appreciated Unison’s turnaround scheme and, together with other commercial banks, provided funds necessary for its smooth turnaround. ASCII made a surprisingly speedy and dramatic comeback. In Japan I expect those “hands-on” style investors—in your words, those introducing “re-engineering” techniques—to be the key for Japan’s recovery.

About the George Romero question, by that I mean the question about “zombie” companies, I would like to respond with a quote from Charles Darwin’s The Origin of Species: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” This is the philosophy behind Unison Capital, which I heard from its founder, Ehara-san. According to Darwin’s law, the answer is crystal clear.

With the Nikkei at twenty year lows, many investors have been ignoring Japan in favor of China and other Asian markets that they believe offer more dramatic growth and potential. Can you tell us why they should devote more attention to Japan and about some of the opportunities they may be missing?

China is regarded as the country of the future by many. China’s entry into the WTO indicates that an immense market is finally opening. But I think there is still a rocky road ahead. Risks in China’s financial sector alone could ruin the economic potential. Since the stakes for prosperity coming from China are so huge, every multilateral and bilateral effort should be made to ensure her healthy growth. Still you should keep in mind that your love for China might sometimes blind you to her faults. Talking about Japan, it is, no doubt, saddled with numerous problems. However, according to World Economic Forum's Global Competitiveness Report 2002, Japan's position improved considerably, from 21st in 2001 to 13th in 2002. Technology represents the key driver for this improvement. The report points out that the country’s innovative power has remained very strong, which compensates for drops in the macroeconomic index and public institutions index. This implies that once the macroeconomic situation improves and the governance problems can be addressed properly, which admittedly are not easy tasks, “the sun should also rise.” Investors should follow Japan carefully, that’s for sure; I see no reason to ignore Japan.

Many analysts view the primary economic problem in Japan as being the need to deal with non-performing loans, and they maintain that little can be done until this problem is addressed in a definitive manner. Furthermore there is also a common perception that there is little or no demand for commercial loans among borrowers. Do you share the view that no progress can be achieved in Japan without resolving the NPL issue? Furthermore do you believe that there is little or no demand for new commercial loans?

Oh, boy! This has been extensively discussed among high-profile economists and I may not be the right person to answer this. My opinion is that the NPL problem should be properly addressed. However, I think we should distinguish between two types of NPLs: NPLs stemming from the burst of the bubble and NPLs stemming from the deepening deflation. The former had long been left disregarded partly because banks thought they could be disposed anytime as unrealized gains on securities but most of them have been written off. The latter is a new pile of bad loans springing up like mushrooms due to worsening deflation. Since the problem we now face is the latter, what is most needed, I think, is comprehensive counter-deflationary measures. I will leave what the measures should be to policy-makers and economists, though. A lot should be done to address the NPL problem properly.

Regarding the demand for commercial loans, if you look at some macro statistics on liquidity or free cash flow of non-financial firms, you see that in aggregate firms have excess cash. Demand for commercial bank loans has been weak because of the slack economy. Banks themselves have changed their lending policies, leaning toward charging premiums applicable to the risks involved, which I think is the right direction. These two factors have caused the decrease in commercial bank loans.


When talking about direct investment in Japan, much of the emphasis has been on greenfield rather than M&A projects. Part of the problem has been the dichotomy between, one, domestic constituencies and management who want to maximize valuations and/or are resistant to change and, two, foreign investors who seek to introduce efficiencies and achieve maximum gain. This adversarial relationship is standard practice in the U.S., but is often perceived to cause excessive tension in a consensus-driven Japan. Is it simply a matter of time before Japan takes more fully to U.S.-style M&A as a corporate finance tool?

I do not fully share your view. First, even the Japanese government (the Japan Investment Council headed by the prime minister) a long time ago realized the importance of promoting foreign direct investment via M&A and in 1996 made an official statement “On the Preparation of an M&A Environment in Japan.” It was so epoch-making that the media bashed it, claiming the government was selling off Japanese firms. Secondly, although Japanese have been highly allergic to M&As because of negative aspects such as greenmailers and hostile takeovers in the U.S. in the 1980's, their attitude has been changing. Carlos Ghosn of the French company Renault successfully revived Nissan Motor and French coach Philippe Troussier energized the Japanese soccer team. Is Mr. Ghosn still a public enemy in Japan? Definitely, not. We all know that we need foreign management know-how to rejuvenate the Japanese economy. When I was studying at Amos Tuck in 1982–1984, the U.S. was eager to learn from Japan, and you guys did it right. You benchmarked Japan and adjusted the Japanese model to meet the U.S. context. It’s our turn, isn’t it? M&A has become recognized in Japan as a common corporate finance tool; there is no doubt about it. Looking from North America, it may seem a snail's pace. But our team has been working hard to assist Japanese firms to benefit from M&A, especially cross-border M&A, and hope to change that perception.

In the U.S., many business owners and entrepreneurs look to sell all or part of their companies for the right price, even when they are doing well, for either strategic reasons or to realize some of the underlying equity, and these transactions when properly executed are perceived as positive achievements. In Japan, however, they are often viewed as failure. For that reason, it has been rare to see healthy Japanese firms turn to M&A as a means to realize value or to enhance their competitiveness. Do you think this is a fair statement, and, if so, what can be done to change this perception in Japan?

Well, since corporate/business restructuring has been the single most important issue in Corporate Japan recently and M&A has been used as a restructuring tool, you might have such an impression. But Japanese blue-chip companies have become focused on corporate value creation and have used M&A to increase the value-based metric, best known as “economic profit” or “economic value added.” In short, we are too busy restructuring. But you should note that restructuring also increases corporate value and that, usually, the more ambitious the restructuring the more the growth. You may have in mind something like Jack Welch's 1987 swap of GE's consumer electronics business for the medical systems interests of Thomson of France. If that's the case, I admit it may take a decade for Japanese to see such a deal. But didn’t the GE-Thomson deal frighten even the U.S. people to death?

Even though one can make a good argument as to why Japan offers an attractive investment opportunity, many companies and investors we deal with find it extremely difficult to identify attractive companies that possess a sufficient understanding and appreciation of the investment process -- despite a professed desire to attract foreign investment. Furthermore, business practices and sensibilities can be very different. As an ivy-league MBA graduate, can you give any advice to foreign investors on how they might identify specific investment opportunities in Japan and not only go about facilitating transactions but also to maintain good relations with their Japanese counterparts after they are consummated?

To expedite successful M&A in Japan, I would advise them to choose an advisor who has expertise in cross-border transactions as well as a good understanding of Japanese corporate culture. Marriage between two different parts of the world can never be easy and there are a lot of difficulties to overcome. An advisor who is well-versed in cultural differences could successfully build a bridge between the two. Our team has strong competence in cross-border deals since DBJ has for almost twenty years accumulated vast know-how in cross-border transactions through its financial assistance to foreign firms entering the Japanese market. The Meidensha–KCI Konecranes deal I introduced earlier demonstrates our capabilities.

Part of the problem in initiating M&A deals is the complexity of, and large amount of time that must be devoted to, individual transactions. Many people point to the scarcity of qualified service professionals in Japan, even in large-scale transactions. This can be even more problematic within the smaller scale transactions you are focusing on as they lack the scale needed to amortize the costs needed to allow successful closure. Can you comment on this problem and how if might be addressed?

Japan’s M&A market is very young, relative to that in the U.S., and an overemphasis on lending activities by Japanese banks accounts for the lack of qualified M&A advisors here. However, competence in this business is quite different from the one in the derivatives house. You do not have to know the Black and Scholes model to be a good advisor. The weapons you should have are basic tools in valuation and some of the buzzwords in this world. What makes you an excellent advisor are an analytical capability to formulate corporate strategy and communication skills, which can be cultivated through work experience. Therefore, Japanese advisors could sooner or later be parallel to their U.S. counterparts. Regarding the cost recovery issue in smaller deals, a clear-cut answer cannot be expected. The amount of work required for an M&A transaction, unfortunately, hardly changes with deal size. Therefore, an institution like us should contribute for the time being, subsidizing smaller deals. Since DBJ alone cannot support smaller M&A deals, a more comprehensive approach should be devised: by giving technical assistance to the M&A sections of local banks, for example.

waveWhen foreign investors talk about investing in Japan, they are largely talking about Tokyo and perhaps Osaka. Can you talk a little about other geographic areas of Japan and the potential that they offer?

Yes, the only city in Japan that many foreign investors can name may be Tokyo—outside of, perhaps, Osaka, because of its international airport and Universal Studios Japan—so, it’s no wonder that most foreign direct investment and M&A has focused there. However, this should not be construed to mean there is a lack of opportunities in other parts of Japan. It is just difficult for foreign investors to find the hidden jewels in areas other than Tokyo. I can name some of the areas which may appeal to foreign investors: Sapporo City in Hokkaido, where high technology companies cluster together; the northern Kyushu area, as a gateway to East Asian countries; and the Nagano area, where Japan’s manufacturing prowess can be found. As for how to mine these mother lodes, DBJ can assist in many ways. As I mentioned, DBJ has assisted foreign companies investing in Japan for more than twenty years using our network all around Japan: our branch offices, local governments and other related institutions, such as JETRO and the Japan Industrial Location Center. In terms of M&A, we have a network with forty local banks and regularly exchange information. We think it would be prudent for your readers to keep us in mind.

Thank you Goto-san for sharing your thoughts with our readers. Do you have any closing thoughts or comments you would like to leave with us?

Let me close by borrowing from the final scene of the 1985 movie Rambo: First Blood II:

“Kiyoshi, non-performing loans, deflation, everything that happened here may have been wrong. But, damn it, Kiyoshi, you can't hate your country for it.”

“Hate? I'll die for it.”

Yes, our team will serve the country via M&A to death.


Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco and Robert Windorf, Sr. Consultants

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

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