Mergers and acquisitions involving Japanese firms hit a high of 4,280 in 2021 as companies moved to invest in growth areas in hopes of overcoming changes in the business environment caused by global warming and the COVID-19 pandemic, according to preliminary data.

The trend underlines efforts among corporations to streamline their operations due to the global health crisis, along with an overall shift to decarbonization, according to Recof Corp., a leading M&A advisory company, which collated M&A data from publicly available information.

The figure for M&As in 2021 was up 550, or 14.7 percent, from the previous year and exceeded the previous record set in 2019.

Though the pace of deal-making initially started off sporadically, the yearly total turned out to be highest ever due to a spike in companies seeking to reduce their carbon footprint. Restaurant operators and travel agency operators, which both were especially hard hit by the pandemic, also resorted to M&As.

While many large corporations sold off subsidiaries to offset shrinking domestic customer demand, businesses that excel in state-of-the-art technologies to promote digital transformation were purchased.

Companies also moved to improve their organizational structures to respond to new listing standards for the Tokyo Stock Exchange that are scheduled to take effect from April, the start of the new fiscal year.

“Management is increasingly pressed to adopt tactics that are more appealing to shareholders,” noted Yuko Yoshitomi, president of Recof Data Corp., a Recof group company responsible for data analysis. “The tendency for firms to rely on M&As to sell off unprofitable sectors and for other reasons seems destined to continue.”

DECARBONIZATION, HEALTH CRISIS

According to Recof, M&A transactions totaled 16.484 trillion yen ($142.24 billion) in 2021.

The highest-valued trade saw the Mitsubishi UFJ Financial Group Inc. (MUFG) sell U.S. local bank MUFG Union Bank for 1.9 trillion yen.

The second and third most expensive cases involved Hitachi Ltd., which is in the midst of massive restructuring. The company acquired GlobalLogic Inc., an information technology company in the United States, for 1 trillion yen. This allowed ownership of Hitachi Metals Ltd., a core affiliated business of Hitachi, to be transferred to an alliance of Japanese and U.S. investment funds for 800 billion yen.

A driving factor behind the M&A surge is decarbonization.

Eneos Holdings Inc., the largest oil vendor in Japan, is to sell major road paver Nippo Corp., an Eneos subsidiary, for 190 billion yen to render its shares unlisted. Eneos regards the huge carbon footprint associated with asphalt mixture production as a pressing business challenge.

Eneos is also expected to relinquish JX Nippon Exploration and Production (U.K.) Ltd., a London-based affiliated company involved in crude oil production in North Sea oilfields, for 190 billion yen.

Eneos likewise has it sights set on acquiring Japan Renewable Energy Corp. for 200 billion yen, as the latter plays a leading role in providing electricity generated from solar power and other kinds of renewable energy.

Eneos is urgently shedding its oil-related businesses because it expects domestic oil demand to halve by no later than 2040 as electric vehicles by then are expected to replace those powered by gasoline engines.

Japan Petroleum Exploration Co. (JAPEX) has also exited from its shale gas and oil sand business in Canada by selling its subsidiary that oversaw the operations, resulting in a loss of 130 billion yen. Oil sand is the mixture of sand and oil, which produces a huge amount of carbon dioxide during the oil recovery procedure.

In the same vein, large trading houses are withdrawing from coal fired power generation and mine development by selling off relevant companies.

New modes of doing business also are proving popular among restaurant operators and travel agencies, which are still reeling from the impact of the pandemic.

Food & Life Companies Ltd., operator of leading conveyor-belt sushi chain Akindo Sushiro Co., bought out takeout sushi shop operator Kyotaru Co.

FUTURE PROSPECTS

A number of corporations not covered by the 2021 data are gearing up to revamp their operations via mergers and acquisitions.

Mitsubishi Chemical Holdings Corp., the nation’s largest chemical company, announced in December it will separate its petroleum chemistry and carbon divisions by as early as fiscal 2023.

The petrochemistry department deals in ethylene and other plastic materials whereas the carbon section mainly manufactures coke for use in steel production. Both sectors handle important base materials and play key roles in Mitsubishi Chemical.

The company’s domestic petrochemistry department, which is based in the Mizushima district of Okayama Prefecture and Ibaraki Prefecture’s Kashima region, produces 733,000 tons of ethylene annually, one of the highest outputs among all such enterprises in Japan.

Although Mitsubishi Chemical has long underpinned Japan’s heavy and chemical industry, it is no longer price-competitive in the international market.

Major capital investments will become unavoidable amid global moves toward decarbonization, given the huge volume of carbon dioxide generated in production processes, say experts who note that the carbon business faces the same challenges as the petrochemistry sector.

For that reason, Mitsubishi Chemical is planning to concentrate its resources on high-growth businesses.

For example, it decided to expand its acrylic resin division. Although acrylic resin uses petroleum as an ingredient, the material has applications in things like liquid crystal screens.

Mitsubishi Chemical boasts an exclusive production technique for acrylic, and holds a 40-percent share in the global market.

Jean-Marc Gilson, president of Mitsubishi Chemical, told a news conference in December that business integration and reorganization in Japan’s petrochemistry and carbon communities will be inevitable.

As the industry leader, he promised Mitsubishi Chemical will take the initiative in such reform.

(This article was written by Satoshi Shinden and Takuro Chiba.)