KOBE
UNIVERSITY
Graduate SchoolofBusiness
Administration

MAREC
Small and Medium Sized M&A
Research and Education Center

2024-01
Mergers and Acquisitions in Japan: An explorationof Conglomerate Deals
Lingfeng Zhou

2024.4.9 0001

Working Paper Series

Mergers and Acquisitions in Japan: An exploration ofConglomerate Deals

Lingfeng Zhou
Graduate School of Business Administration, Kobe University
lzhou369@outlook.com

Abstract
This essay delves into the evolving landscape of mergers and acquisitions(M&As) in Japan, with a particular focus on conglomerate deals. Despite thetraditional preference for internal growth among Japanese firms, there has been anoverall increase in M&A activities since late 1990s, including a noteworthy rise inconglomerate M&As post-2011. This study leverages the RECOF M&A Database
to analyze market trends, deal characteristics, and sector-level patterns from 2000
to 2021. The analysis highlights a significant increase in conglomerate M&As postGlobal Financial Crisis, suggesting a strategic pivot towards diversification and risk
mitigation amidst economic uncertainties. Moreover, the study reveals a distinct
preference of conglomerate M&As for smaller-scale deals, particularly relevant forsmall and medium-sized enterprises (SMEs) navigating succession challenges.
Sector synergy analysis further identifies specific sector pairs that demonstrate aproclivity for conglomerate deals. The findings open new avenues for future
research in exploring the strategic rationales behind conglomerate M&As, theirimpact on economic resilience, and their potential in facilitating corporatetransformations in Japan.

Keywords: Mergers and Acquisitions, Conglomerate M&A, M&A in Japan, Business Succession,
Economic Uncertainty

1. Introduction
Japan has witnessed significant growth in mergers and acquisitions (M&As) over the past few
decades. Traditionally, Japanese managers have shown a preference for internal growth over
M&As (Odagiri & Hase, 1989), yet the landscape of M&As in Japan has expanded considerably
since the late 1990s (Arikawa & Miyajima, 2007), with the number of deals hitting an all-timehigh in 2022.1 Remarkably, this growth occurred not just in the deal numbers (extensive margin)
but also in the deal value (intensive margin). Despite a global downturn in M&A activities in 2023,
Japan bucked the trend with a 23% year-on-year increase in deal value, according to a recent reportby Bain & Company.2
Amidst the growing attention on M&A activities in Japan, a notably underexplored area is thatof conglomerate M&As. These transactions differ from vertical and horizontal integrations, which
create economic value by lowering transaction costs and spreading fixed costs (Gibbons & Roberts,2013). Instead, the value of conglomerate deals primarily lies in their diversification effect,
mitigating the risks of the merged entities, particularly under imperfect market conditions (Levy& Sarnat, 1970; Scott, 1977). This aspect of conglomerate M&As, offering a cushion against thegrowing global economic uncertainties, is increasingly pertinent yet remains sparsely studied in
the context of Japanese market.
This essay aims to explore the fundamental features of conglomerate M&As in Japan,
examining market trends, deal characteristics, and identifying sector-level patterns. The goal is to1 https://asia.nikkei.com/Business/Business-trends/Japan-domestic-M-A-spending-at-18-year-high-as-buyout-deals-surge
2 https://www.bain.com/insights/japan-m-and-a-report-2024/

shed light on literature of M&As in Japan through explorative data analyses on conglomerate
M&A deals of Japanese firms and discussion on future research in this field. Accordingly, thisessay is intended to stimulate further inquiry and discussion rather than provide conclusive answers,
potentially raising more questions about conglomerate M&As in Japan than it resolves.
2. Data
To analyze conglomerate M&As in Japan, this study utilizes the RECOF M&A Database.
Renowned as the most comprehensive and reliable database for M&As in Japan, this databasemarks a unique resource for our analysis, providing insights into the Japanese M&A landscape.3
To mitigate the potential overlaps in business activities between the entities involved in deals, thisstudy concentrates on transactions across different sectors. This distinction enables a precise
investigation into conglomerate M&As, setting them apart from M&A deals that merely spandifferent industries within the same sector. Table 1 displays the classification of 40 industries into
11 sectors, serving as the basis for assigning sector labels to each entity within the deals analyzed.
Table 1. Industry to Sector Classification
Sector Sector Name
業種 (Industry Name in Japanese)
Communication
COMS
通信・放送, 出版・印刷
Services
サービス, 外食, スーパー・コンビニ, 百貨店, アミューズメント, 家電量
CDIS
Consumer Discretionary
販店・HC, その他販売・卸, その他小売
CSTP
Consumer Staples
食品, 食品卸, 農林水産
ENGY Energy
石炭・石油
FINA
Financials
証券, 銀行, 生保・損保, 信金・信組, その他金融
HLTH Health Care
医薬品, 医薬品卸
INDS
Industrials
総合商社, 輸送用機器, 機械, 運輸・倉庫, 精密, 電機, 建設, その他製造
INFO
Information Technology ソフト・情報
MATL Materials
化学, 窯業, 鉄鋼, 非鉄・金属製品, 鉱業, ゴム, 繊維, 紙・パルプ
REAL Real Estate
不動産・ホテル
UTIL
Utilities電力・ガス
Note: The RECOF M&A Database specifies industries of entities involved in deals, without providing sector details.
3 https://b.kobe-u.ac.jp/marec/research.html

To analyze the recent growth in M&As in Japan, this study focuses on deals after 2000. Notably,
this timeframe encapsulates the Global Financial Crisis (GFC) of 2007-2008, capturing thepotential strategic shifts in Japan's M&A landscape pre- and post-crisis. Moreover, to enhance theanalytical rigor and validity, this study selects M&A deals with explicitly recorded monetaryvalues. The final dataset includes 28,242 deals from 2000 to 2021.
3. Trends and Trajectories: Japan's M&A Market Post-GFC
In examining the trends in the Japanese M&A market, particularly in the context of GFC thatcommenced in 2007, we observe distinct patterns of activity as depicted in Figure 1. The Japanese
M&A market experienced a significant surge in number of deals from the year 2000 but
encountered a downturn as GFC started in 2007. The deal number then plummeted to the bottomof approximately 900 in 2011, reaching the levels observed in 2000. Subsequently, the market
exhibited resilience, embarking on a steady recovery trajectory, and demonstrating sustained
growth in the years following.

Figure 1. Number of M&A Deals in Japan and Percentage of Conglomerate M&As

The observed downturn in M&A activities during and after the GFC aligns with literature
highlighting the negative impact of crises on M&A activities (e.g., Rao & Reddy, 2015; Cotei etal., 2022). A notable development in Japan's post-GFC M&A scene is the changing mix of dealtypes, especially between conglomerate and intra-sector deals. Before the GFC, conglomeratedeals consistently represented about 50% of all transactions. After the GFC, their proportion begana steady rise, with their market share approaching 70% by 2021.
The shift towards a greater share of conglomerate M&As post-GFC may indicate a potential
strategic evolution in the Japanese M&A landscape. The diversification benefits associated withconglomerate deals—where firms acquire entities with minimal business overlap—may havebecome more appealing. Firms may prefer these types of transactions as a hedge against market
uncertainties, favoring them over traditional horizontal integrations and vertical expansions. Thistrend towards conglomerate deals underscores a potential recalibration of M&A strategies in Japan,emphasizing risk mitigation through diversification in an uncertain economic landscape.
The increasing predominance of conglomerate M&As in Japan post-GFC presents a compellingcase for academic inquiry, particularly concerning the strategic recalibrations prompted byeconomic uncertainty. The apparent shift towards conglomerate deals in the face of fluctuating
market conditions raises several research questions of significance to both scholars andpractitioners in the fields of strategic management and corporate finance.
First, a critical examination of the strategic underpinnings driving the preference forconglomerate M&As post-GFC would enrich the literature corporate responses to financial crises.
Future research could explore the extent to which these deals are motivated by a desire for risk
diversification versus other strategic objectives, such as acquisition of new technologies orbusiness transformation. This inquiry would benefit from a comparative analysis with sectors less

impacted by the crisis, to delineate the unique attributes and outcomes of conglomerate M&As in
more volatile economic environments.
Second, the resilience and recovery patterns of the Japanese M&A market post -2007 invite
further examination of the mechanisms and strategies that enabled this rebound. Future research
could focus on the role of government policies and institutional environments in facilitating thisrecovery, shed light on crisis management and economic resilience.
Lastly, considering the market's evolving preference for conglomerate deals in response to
economic uncertainties, future research could investigate the potential of integrating thisrelationship into predictive models of M&A success rates.
4. Conglomerate M&A Deal Size: Strategic Implications for SMEs in Japan
Figure 2 illustrates the annual average size (i.e., monetary value) of M&A deals in the selected
sample period, covering both conglomerate and intra-sector deals for comparison. The size ofconglomerate deals has remained modest over time when contrasted with the average size of intrasector deals, which has notably increased post-2011. Remarkably, the difference in deal sizes
between conglomerate and intra-sector deals widened significantly in recent years. Such adifference peaked in 2018, where the intra-sector deals were, on average, four times larger thanconglomerate deals.
Moreover, the volatility in the size of conglomerate deals in Japan is relatively low, indicating
a consistent preference for smaller-scale deals in the market. Despite an increase in the numberand market share of conglomerate M&As, the deal sizes have mostly remained within the 2.5 to10 billion JPY range, unaffected by the GFC. Even as the market showed a stronger preference forconglomerate deals over intra-sector deals post-2011, the typical size of these conglomerate deals
remained stable.

Figure 2. M&A Deal Size in JapanThe observed size attributes of conglomerate M&A deals relate to an emerging question
concerning the advantages of M&As: Are M&As capable of offering resolutions to the succession
challenges faced by small and medium-sized enterprises (SMEs) in Japan? According to theMinistry of Economy, Trade and Industry (METI), over 3,000 M&A deals involving SMEs occur
yearly in Japan, with many deals driven by corporate succession purpose.4 For SMEs, the smallerscale deals are financially accessible and operationally manageable, enabling them to accesscomplementary assets for diversification or business transformation, without the complexities andchallenges associated with larger-scale mergers. Given the difference in deal size between
conglomerate and intra-sector deals, conglomerate M&As may stand as a preferred candidate forstrategic choice in SME succession planning.

4 https://japannews.yomiuri.co.jp/editorial/yomiuri-editorial/20210910-35550/

Future studies might investigate if conglomerate M&As serve as a more effective strategy foraddressing corporate succession issues in Japanese SMEs compared to other M&A types,
contributing to the literature on corporate strategy concerning SMEs and family business . Inaddition, recognizing corporate succession as a societal issue, could evaluate whether a targeted
policy favoring conglomerate M&As offers a superior solution over a generalized policy approachwithin Japan's M&A landscape.
5. Sector Synergies: Sector Pairs of Conglomerate M&As in Japan
As conglomerate deals flourish in Japan’s M&A market, firms across various sectors may showa tendency to favor specific sector pairs for these transactions. This preference would result incertain sectors demonstrating a stronger inclination towards conglomerate deals. Figure 3
illustrates the distribution of M&A deals across 121 sector pairings throughout the sample period,
with darker cells corresponding to larger deal number.
The analysis reveals several sectoral level characteristics of conglomerate M&A in Japan. First,
the sector-specific numbers of deals suggest a less pronounced concentration in conglomerate
M&As compared to intra-sector M&As. Specifically, the heatmap diagonal—which represents
intra-sector transactions—demonstrates larger deal numbers, exemplified by the Consumer
Discretionary (CDIS-CDIS) and Industrials (INDS-INDS) pairings. Second, some sectors like
Financials (FINA), Industrials (INDS), and Information Technology (INFO) are more frequently
involved in conglomerate M&As. Future research could delve into the unique contexts of thesesectors to explore the sector-specific determinants behind such transactions.

Figure 3. M&A Deal Numbers in Sector Pairs

Lastly, unlike other sectors, where most M&A deals occur within the same sector, transactions
with the Financials (FINA) sector are broadly distributed across various sectors, with the largest
number of deals observed with the Information Technology sector (FINA-INFO). This pattern
could be attributed to the financial sector's emphasis on investment-driven strategies, which
inherently require diversification.
6. Concluding Remarks
The evolution of M&A activity in Japan, especially the rise in conglomerate deals, marks asignificant shift in the strategic landscape of Japanese business. This study explores a uniquedataset and provides an overview of the market trends, strategic underpinnings, and sectoralpatterns of conglomerate M&As in Japan. Amidst global economic uncertainties, conglomerate
M&As may have emerged as a pivotal strategy for Japanese firms, aiming to diversify risks andleverage synergies across diverse sectors. The findings open new avenues for future research in
exploring the strategic rationales behind conglomerate M&As, their impact on economic resilience,and their potential in facilitating corporate transformations in Japan.

Disclaimer
All tables and figures presented in this paper are created by the author based on data from theRECOF M&A Database. The content within this paper is provided for research and informational
purposes only. The author disclaims all liability for any loss or damage incurred as a direct orindirect result of the use of the information provided herein. Readers are authorized to cite thispaper in their own work.

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