Unconventional approach to capitalize on “succession M&A surge” in Japan
For tables/charts, please refer to the link below.
I have given considerable thought to the proposition I am about to present. While it may seem particularly unconventional to some investors, it may indeed stimulate your intellectual curiosity. Please read on.
Consider a company that solves societal issues through its solutions. Such a company often experiences growth in sales profitability, and subsequently, its stock price follows suit. I am currently examining a company that has the potential to expand its revenue by indirectly addressing one of Japan’s most pressing issues – an aging population. This approach to succession M&As in Japan may be unorthodox, but it holds value.
Japan is getting ever greyer (no new news)
In 2021, people aged 65 years and older accounted for 29.8% of the population. According to World Economic Forum’s 9/28/23 article, more than 1 in 10 people in the county are now aged 80 and older. Japan’s aging population has been reshaping the country. Here are some key points summarized by the above article.
- Economic Impact: The aging and shrinking population will strain Japan’s public finances, as age-related spending – such as on healthcare and pensions – rises while the tax base shrinks.
- Workforce and Productivity: Japan is already facing a labor shortage, and by 2040 it could be short of 11 million workers. This led it to introduce the Guideline of Measures for Ageing Society in 2018, to encourage older people to continue in the workforce.
- Future Projections: Statista estimated that the number of people in Japan within the age group 65 and over is projected to increase until 2040 and then decline to less than 20 million by 21153
In reference to the second bullet point mentioned earlier, the absence of successors for aging business proprietors is a substantial concern in Japan. To elaborate:
- Scale of the Problem: A government report from 2019 projected that approximately 1.27 million small business proprietors would be 70 years or older by 2025 without any identified successors. This trend could potentially result in the loss of up to 6.5 million jobs and shrink the Japanese economy by JPY 22 trillion (source: THE STRAITSTIMES 7/25/23 article “Era of mass closures: The Japan businesses without successors)”
- Effect on Family-Owned Businesses: Family-owned businesses in Japan are grappling with a shortage of successors within the family. In 1990, nearly 70% of SME successors were family members, but this figure dropped to only 40% in 2016 (source: FFI Practitioner 8/2016). The situation has likely deteriorated further since then.
- Nationwide Survey: A nationwide survey involving 276,000 companies revealed that 66.4% of them do not have a successor, jeopardizing the future of numerous small and medium-sized enterprises (source: Two in three Japanese companies lack a successor dated 12/10/18, published by Nippon.com
- Economic Threat: While the world’s third-largest economy was built on craftsmanship and family enterprise, more than 40,000 small firms a year are in need of a successor, government data shows (source: Financial Times 4/13/2022 article)
The Role of M&A
Mergers and Acquisitions (M&A) can play a crucial role in addressing the negative impacts of the absence of successors on workforce, economy, and society . Companies like Nihon M&A Center, which specializes in finding buyers for valuable small- and medium-size enterprises, are stepping up to help these businesses find successors. By facilitating the transfer of ownership, M&A can help ensure the continuity of these businesses, thereby contributing to the stability of Japan’s economy.
Government Initiatives
Recognizing the potential economic impact, Japanese authorities have sprung into action in hopes of averting a catastrophe Government offices have embarked on public relations campaigns to educate aging owners about options for continuing their businesses beyond their retirements and have set up service centers to help them find buyers. To sweeten the pot, the authorities have introduced large subsidies and tax breaks for new owners.
An uncommon Approach to Identifying High-Potential Stocks Benefiting from These Trends
I have examined several stocks in Japan that are focused on succession and M&A. The performance of these stocks as of December 1, 2023, is summarized in the table below.
(source: Buffet-code.com)
The observations:
- The performance among players can vary significantly. The impressive performance of M&A Research can be attributed to the robust expected operating growth (45% from FY23 to FY24), driven by their AI-based buyer and seller matching system. Conversely, Nihon M&A has been negatively impacted by scandals, which have affected their stock price. M&A related stocks’ performance mirrors the fluctuations in the number of deals year over year.
- Pure M&A plays tend to trade at higher multiples, fueled by high operating margins.
The proposition I am about to present may be controversial or may not seem logical at first glance.
I propose to leverage the growth of the succession M&A industry via Yamae Holding, which is essentially a regional grocery chain based in Kyushu, the western part of Japan. One of their core growth strategies is to physically expand and offer more items, and grow through acquiring other players. These are typically smaller companies that may need to find partners or buyers since they can’t find successors.
Granted, Yamae is not a direct M&A play. However, consider their growth via M&A numbers.
(source: company)
Yamae is currently trading at a PE ratio of 9x, yet its operating profits are projected to grow by 38% from FY23 to FY24. Could Yamae present an intriguing opportunity to capitalize on the nation’s need for successors via M&A, without the burden of high multiples and inherent fluctuations in deal flow?
Please share your thoughts. I would welcome a comment such as “Are you out of your mind to even draw a comparison between Yamae and M&A Research?”
P.S. A report on Yamae will follow this note.
[Disclaimer]
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