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The Idea in Brief

Japan has long been an inhospitable place for foreign companies. Yes, a few outsiders have built successful businesses in the country—McDonald’s, IBM, and Microsoft spring to mind—but they’re the exceptions. Most multinational corporations have had to settle for relatively small, low-profit businesses in the market.

But the climate is changing. After a decade of economic weakness, which has led to record levels of bankruptcies, the doors of Japan Inc. are opening for outsiders. Japanese managers and workers, traditionally fearful of incursions by foreign companies, are now beginning to recognize that their economy needs an influx of new ideas and ways of working if it is to rebound. In response, some aggressive U.S. and European companies are moving in to acquire struggling Japanese businesses. From 1998 through the first half of 2001, foreign acquisitions in Japan totaled $58 billion, up sharply from $7 billion in the eight years prior to 1998. Foreign purchases now account for 19% of all M&A activity in the country, up from 7%.

Our analysis of recent acquisitions provides some important guidelines for companies looking to buy in Japan. We’ve found that foreign acquirers now have considerable advantages over domestic acquirers. Seizing these advantages, though, requires thoughtful yet bold action.

Forget “Merger of Equals”

Japanese mergers are traditionally approached as mergers of equals. They rely heavily on consensus building, which slows down decision making and prevents decisive action. Take the 1999 merger of three of Japan’s leading banks—Industrial Bank of Japan, Dai- Ichi Kangyo Bank, and Fuji Bank—into the Mizuho Group. Two years later, the banks continue to operate separately, with three co-CEOs overseeing the holding company. Integration efforts have slowed to a crawl.

In the meantime, foreign competitors have begun to grab hold of top spots in high-margin financial services businesses. Citigroup, for example, drove a hard bargain with Nikko Securities, a leading Japanese brokerage. Knowing that Nikko desperately needed capital,

Citigroup agreed in 1998 to buy a relatively modest 20% of Nikko in return for control over its investment banking business. Citigroup left no doubt about who had the upper hand in the transaction. Although once considered culturally offensive, taking control in this way actually provides much-needed clarity to the management teams, employees, and customers of acquired companies.

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