As of today, the corporate landscape in Japan could start to take on a decidedly different look. Laws come into effect that, for the first time, will allow foreign companies to acquire Japanese firms by using their shares.

For Christian Thun-Hohenstein, managing director and head of European investment banking for Nomura, the Japanese bank, the news could not have come soon enough. Although there has been plenty of activity the other way around – Japan Tobacco acquired Gallaher for £7.5 billion this year and last year Nippon Sheet Glass bought Pilkington for £2.2 billion – by most measures inbound mergers and acquisitions (M&A) activity has been slow.

Last year, for example, foreign companies spent $11.3 billion (£5.6 billion) buying Japanese firms, which accounted for just 0.3 per cent of global M&A. Activity has been muted for a number of reasons. In the past, a foreign company had to set up a Japanese subsidiary, list it on the Tokyo stock exchange and pay for an acquisition by using the shares of the newly listed company.

The procedure was complicated and, although it did not block overseas investors from buying Japanese corporates, it made the process cumbersome. “Now you can just forget about all that and pay for the company with your own shares,” Mr Thun-Hohenstein said.

Historically, most of the deals in the region have involved the acquisition of large stakes and, particularly in recent years, many of them have been driven by hedge funds and private equity groups that pay for their targets upfront and in cash.

Steel Partners, the American activist fund, has been aggressive in taking stakes in Japanese companies, including its recent unsolicited attempt to acquire Sapporo Industries, one of the leading brewers in Japan. However, corporates have also been busy, if more quietly so. This year, for example, Citigroup pulled off the biggest Japanese deal in history with the acquisition of Nikko Cordial, the investment bank, for $7.9 billion.

That deal has helped to put 2007 on track to be the biggest year of Japanese M&A transactions, with $27.5 billion already put to work so far, although that is still only about 1.5 per cent of global activity. Of that, $6.14 billion is from private equity firms such as Kohlberg Kravis Roberts, which offered to acquire Orient Corp this year for $2.45 billion.

Size is key, Mr Thun-Hohenstein said. If you look at a sales comparison between a Japanese company – Hitachi, for example – and its American or European rival, the difference in revenue is not that striking, but if you compare market capitalisations, the Japanese company will be far smaller. That is starting to change, as the Japanese stock market continues to rise and corporate earnings grow, but there is still a long way to go, Mr Thun-Hohenstein said, which means that Japanese corporates will remain vulnerable in the medium term.

The prospect of hungry suitors knocking down the door has sent Japanese companies, such as Sapporo, scurrying to protect themselves, putting in place so-called poison pills to fend off would-be buyers. Two years ago about 25 of the top Japanese corporations had defence advisers on standby in case of an unwanted approach. Today that number stands at about 250, Mr Thun-Hohenstein said.

“But that won’t stop people trying,” he said, pointing to the steady increase of interest in Japanese M&A by many large European corporates. “They are actively now looking,” he said. “They’ve identified targets and, in some cases, they have even approached them.”

The rapid introduction of poison pills has caused an uprising among Japanese shareholders, in particular the Japanese Pension Fund Association, which told the corporate community this month that it intended to become much more vigorous about protecting shareholder value in the face of friendly or hostile bid approaches.

It was, in part, a kneejerk reaction to the continuing domestic takeover tussle between Oji Paper, the largest Japanese paper manufacturer, which offered to buy the rival Hokuetsu Paper Mills for $1.4 billion. That bid was rejected, and Oji, advised by Nomura, took its bid hostile – the first such move between two Japanese companies.

However, that bid also was rejected and the deal has failed.

Still, Mr Thun-Hohenstein said that foreigners should learn a lesson from Oji and get the “soft factors” right first before diving in with hostile bids. He said: “They all want friendly deals. This is going to be the beginning of a trend, but it will take time.”

Private affairs

Leading private equity buyouts of Japanese firms since 2003

August 2003 Japan Telecom (fixed-line business) by Ripplewood Holdings, Goldman Sachs Capital Partners, Newbridge Capital, TVG, PPM Capital, $2.2 billion

September 2004 Aplus Co (67.74%) by Shinsei Bank (owned by MidOcean Partners, Ripplewood Holdings, JC Flowers), $5.5 billion

June 2006 Skylark Co Ltd by Nomura Principal Finance and CVC, $3.1 billion

February 2007: Nissan Diesel Motor Co (80.99%) by Volvo and Cevian Capital, $2.1 billion

March 2007 (pending): Orient Corp (first series Class J preferred shares) by KKR, $2.5 billion

Source: Dealogic

Top ten deals since 1996

March 1996 Honshu Paper by New Oji Paper, $5.11 billion

January 1999 Japan Leasing by General Electric, $6.89 billion

March Nissan (36.8%) by Renault, $5.38 billion

April 2001 Japan Telecom; J-Phone Group (20% each) by Vodafone, $7.57 billion

December 2001 Chugai Pharmaceutical (50.1%) by Roche Holding, $2.98 billion

November 2004 UFJ Holdings (9.83%) by Capital Research & Management, $3.04 billion

September 2005 Seiyu (19.3%) by Wal-Mart, $3.85 billion

March 2007 Nikko Cordial (56.15%) by Citigroup, $7.94 billion

March Sanyo Electric Credit by General Electric, $3.824 billion (deal pending)

April Resona Holdings by Merrill Lynch $2.95 billion (deal pending)

Source: Dealogic

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive