So far the focus for most foreign buyers has been on distressed assets or troubled companies. But with Japan's decade-long recession slowly coming to an end and the Tokyo stock market back at levels not seen since 1997, the M&A landscape in Japan is changing rapidly. Increasingly, the focus is shifting from distressed companies to the strategic consolidation of entire industry sectors and the unbundling of Japanese conglomerates.

This wholesale restructuring of Japan, Inc., provides great opportunities for acquisitive foreign companies, but also new challenges. Identifying and evaluating attractive targets within the vast network of companies that typically make up conglomerates such as Hitachi, Mitsubishi Electric or Toshiba will be much more challenging than picking off the "sick list" in distressed industries such as financial services or real estate.

Yet the rewards may be greater. Gaining control over key businesses from such groups could instantly transform a company into a top player in one of the world's largest markets. In some cases, such acquisitions could also contribute to the consolidation of global industries. The complex partnering deals struck between Carrier and Toshiba, and Goodyear and Sumitomo Rubber, are driven as much by global strategy as by Japanese market opportunity.

For shareholders, unbundling of Japanese conglomerates could release high levels of market value similar to those achieved through the restructuring of American conglomerates in the 1980s. But the gaijin are not the only players around. In this game, Japanese competitors have several important advantages: in-depth knowledge of competitors and channels that comes with years of serving the same customers, the preference of most managers and employees to "sell out" to a Japanese company, and the desire of most Japanese corporate groups to avoid an auction process and change ownership on a quiet and friendly basis.

In addition, Japanese conglomerates are large, complex and intertwined organizations with little published performance data on particular businesses. This makes it difficult for a foreign company to evaluate the fit with its own operations and to assess the underlying health of the target. Restructuring still remains a highly sensitive topic and while many Japanese companies echo the mantra of focusing on their core, it is often not obvious what is "core" and what isn't, given the tendency to declare as core any business that makes money.

Furthermore, while there may be management consensus within the conglomerate on the need to restructure, there is unlikely to be agreement on what should really be sold off. Having successfully identified and valued a potential target business, the foreign company may face the challenge of convincing a divided management of the value of selling out. This will require significant senior management relationship-building and great tenacity. The winning formula, quite often, will not be an outright acquisition but a face-saving joint venture run and controlled by the foreign partner. Thus Renault only took a 39% stake in Nissan, but essentially is in control of the Japanese auto manufacturer. Carrier and Goodyear formed a series of joint ventures with their partners Toshiba and Sumitomo Rubber rather than directly buying into these companies.

Over the next few years, the best deals will fall to those foreign companies who are able to find the hidden diamonds within Japanese conglomerates and who are able to convince conservative Japanese executives at the group and operating company level of the strategic and financial benefit for both parties of a partnership or even outright sale.

What are the keys to success in the new Japanese M&A environment? The experiences of foreign companies over the last 12 months point out the pitfalls to avoid and the keys to success in taking advantage of the new opportunities in Japan:

— Strategy as the touchstone. A clear-cut strategy for Japan and for how Japan fits with the global strategy is a requisite — for picking the right partner, convincing the owners to sell, valuing the targeted business and driving the integration after takeover.

— Honest self-assessment. An assessment of the gaijin company's capabilities vs. Japanese customer and market requirements is the basis for determining what complementary skills to look for. In some cases, buying a supplier, distributor or system integrator may make more sense than buying an outright competitor.

— Strategic screening. Effective screening of potential partners and detailed profiling of promising targets will then yield a set of options and a short list of acquisitions or partnerships to pursue. Investment bankers play a less important role in this process since the truly interesting partnering opportunities are unlikely to be already "in play."

— A compelling and shared logic. A strong business case centered on the benefits for both parties will need to be developed for each shortlisted candidate. Having a well thought-out rationale for the senior management of the target can make all the difference since, contrary perhaps to their Western counterparts, Japanese senior executives spend little time thinking about how M&A can maximize shareholder value.

— Tenacity and tailored tactics. Substantial amounts of senior management resources and time will be required to engage the target company, to develop a compelling, shared logic, to assess and value the business based on the targeted strategy and complementary skills desired, and, finally, to close the deal. There is no single pathway to success here. Some foreign companies have had success approaching targets directly; others have used former executives or advisers. Such intermediaries can provide invaluable feedback and guidance to both parties in overcoming hurdles in the negotiation process.

— Strategy-driven integration. Where the challenge for foreign acquirers in the first wave of M&A has been restructuring, the challenge for the new, "strategic" acquirers will be to set out a compelling shared vision and to integrate businesses operating across a vast cultural divide. The lessons from successful acquirers in Japan over the last two years are not dissimilar from other markets: speed, decisiveness, good process management and extensive communication are critical also in Japan. Yet foreign companies need to add to that Japan sensitivity and people with cross-cultural experiences.

So is it worth it?

For many multinationals the prize can be substantial and the opportunity unique: an acquisition brings a base of Japanese customers, an established name and reputation, a sales and service network and manufacturing operations capable of meeting the high quality standards of Japanese customers. Additionally, the Japanese target may bring valuable assets in other Asian markets or allow the rationalization of a global industry. Carrier (Toshiba Air Conditioning), Cable & Wireless (IDC) and Schering (Mitsui Pharmaceuticals) are among the first foreign companies that are pursuing such strategically driven deals.

For many long-suffering foreign companies, M&A may well be an attractive option. Given the pace of change and the consolidation underway in Japan, it may also be the last hope for foreign companies to realize their ambitions in Japan.

Mr. Vestring is vice president of Bain & Company Japan, Inc.