Introduction

The year 2024 has been strong for technology M&A in Japan. According to RECOFDATA, an M&A research firm, the number of M&A deals involving Japanese IT companies exceeded 1,100 between January and October. This represents an increase of over 10% compared to the same period last year and more than a threefold increase from a decade ago.

Several factors have contributed to this increase. Japan-specific issues, such as the engineer shortage due to the so-called 2025 cliff (discussed below), have played a significant role. Global trends like the rise of generative AI and the rapid increase in electric vehicles (EVs) aimed at achieving carbon neutrality have also had a substantial impact.

Additionally, M&A transactions related to semiconductors and data centres were significantly driven by the USA-China confrontation, economic security demands, and geopolitical risks. These factors have triggered many technology-related deals in Japan, a country that possesses mature technology and markets and is positioned between the USA and China.

In the following sections, we will outline technology M&A cases involving Japanese companies in 2024, categorised by sector, and discuss their backgrounds, trends, and legal issues.

AI and Semiconductors: Navigating Between the AI Era and Geopolitical Risks

The advent of the AI era has provided a significant tailwind for investments and M&A activities in Japan’s semiconductor and data centre sectors. Globally, the demand for AI semiconductors is rapidly increasing, leading to supply shortages. Amid the USA-China confrontation and geopolitical risks, there is a push to build supply chains with national security in mind. This shift has heightened international expectations for Japan, known for its geographical stability, concentration of semiconductor component manufacturers, and advanced manufacturing technologies.

Major investments and joint ventures in semiconductor industry

In February 2024, the Kumamoto factory of Japan Advanced Semiconductor Manufacturing (JASM) – a joint venture between Taiwan Semiconductor Manufacturing Company (TSMC), Sony Semiconductor Solutions, DENSO CORPORATION, and TOYOTA MOTOR CORPORATION (“Toyota”) – was officially launched. Construction of a second plant is expected to begin in 2024, with a projected monthly production capacity of over 100,000 semiconductor chips. These chips will be used in automotive, industrial, consumer, and high-performance computing applications.

Conversely, also following the pattern of a joint venture between a Taiwanese semiconductor company and its Japanese counterparty, SBI Securities (SBI), a major Japanese securities company, and Powerchip Semiconductor Manufacturing Corporation (PSMC), a major Taiwanese semiconductor foundry, signed an LOI in October 2023 to establish a semiconductor manufacturing joint venture in Japan but they announced the dissolution of their partnership in September 2024. The two companies have conflicting views on the reasons for the split, highlighting that cross-border joint ventures in the semiconductor industry in Japan can still sometimes be challenging and are not always positive.

Technological advancements and energy efficiency in AI semiconductors

As power consumption by AI semiconductors increases, there is a growing demand for high-performance and energy-efficient AI semiconductors. NVIDIA announced plans to establish a research and development centre in Japan by the end of 2023. In September 2024, NVIDIA invested in Sakana AI, a Japanese startup developing energy-efficient AI technologies. This investment elevated Sakana AI to unicorn status, with a valuation exceeding USD1 billion within a year of its founding.

Surge in data centre investments and M&A

Large-scale data centres are indispensable for AI training and the secure management of domestic data. This has led to a surge in investments and M&A in the data centre sector in Japan. In June 2024, SoftBank announced it would acquire part of Sharp’s factory and land to build a large-scale AI-focused data centre. Additionally, major US tech companies such as Amazon, Microsoft, Google, and Oracle have successively announced investments totalling tens of billions of dollars in Japan’s cloud sector.

Government support and challenges amid geopolitical risks

These active developments are backed by strong support measures from the Japanese government. In recent years, the government has enacted the Economic Security Promotion Act and the 5G Promotion Act, providing subsidies reaching several billion dollars per project. In November 2024, it further announced support exceeding JPY10 trillion by fiscal year 2030 for the AI and semiconductor industries.

However, the purpose of this government support is to achieve policy objectives such as stabilising supply chains and promoting regional economies, which may not always align with the business objectives of companies receiving the subsidies. Companies, especially foreign entities, need to seriously consider and negotiate what commitments they should make in exchange for such subsidies. For example, in the dissolution of the SBI and PSMC joint venture, PSMC cited that the Japanese government required a commitment to the long-term operation of the new factory as a condition for subsidy allocation. PSMC stated that this could potentially violate Taiwan’s Securities and Exchange Act, leading to its decision to dissolve the partnership.

Furthermore, while establishing semiconductor-related joint ventures (JVs) in Japan serves as a form of risk diversification for Taiwanese companies, if the risk materialises – specifically, in the event of a “Taiwan contingency” – questions arise about how the JV will continue to operate and how the Taiwanese partner’s shares in the JV will be managed. Addressing these concerns may require introducing mechanisms that have not been previously included in M&A contracts, as traditional change of control or force majeure clauses might not suffice. Perhaps the fundamental question is whether Japanese companies – known for their politeness but also for their cautiousness to risk – can even raise these sensitive and touchy issues with their Taiwanese counterparts, with whom they are about to form a partnership?

Additionally, derivative issues such as how the Japanese government – which provides substantial subsidies – might intervene also come into consideration. This issue could become a crucial point not only in the contracts between JV parties but also in negotiations with authorities regarding subsidies.

IT Systems and Software: The “2025 Cliff”, Activists, and Tender Offer

In 2024, Japan’s IT systems and software industry experienced a series of large-scale M&A transactions. SCSK Corporation, an IT company under the Sumitomo Group, fully acquired Net One Systems, a listed communication systems construction company, through a tender offer valued at approximately JPY360 billion. Similarly, NEC Corporation, a multinational information technology and electronics corporation, made NEC Networks & System Integration Corporation, a listed system construction and network communication company, its wholly owned subsidiary via a tender offer worth approximately JPY240billion. Additionally, US-based PE funds Kohlberg Kravis Roberts (KKR) and Bain Capital (“Bain”) engaged in a competitive bid process to acquire FUJISOFT INCORPORATED (“Fuji Soft”), a listed software developer and system integrator, a deal valued at approximately JPY640 billion.

The engineer shortage and the “2025 cliff”

One driving force behind this surge is the severe shortage of engineers in Japan. Alongside the high demand for AI and cloud migration, existing systems used by Japanese companies have aged due to prolonged use. A significant overhaul is required by 2025 – a challenge the Japanese government refers to as the “2025 cliff”. Consequently, Japanese IT companies urgently need to secure engineers with high-level system development skills, prompting them to pursue M&A as a strategic solution.

Activist investors and PE funds driving M&A activities

Activist investors have also played a role in reshaping the industry’s landscape. Traditionally, the technology sector was considered less susceptible to activist targeting due to high price-to-earnings ratios driven by growth expectations and the justification of significant cash investments for ongoing innovation. However, activists have recently started focusing on specific company situations to make shareholder proposals.

In the case of Fuji Soft, the company held substantial real estate assets, such as its own offices, leading to a lower return on equity compared to its peers. This resulted in a prolonged conflict with activist shareholder 3D Investment Partners (3DIP), which sought to improve capital efficiency. The situation escalated when 3DIP, holding over 30% of Fuji Soft’s shares, attempted to sell its stake to KKR, triggering the acquisition process. With agreement to the tender offer from 3DIP as well as approval of KKR’s bid from Fuji Soft’s board, including a recommendation for shareholders to tender their shares in the KKR bid, it seemed KKR would proceed to take the company private. However, in September, Bain announced a counter-tender offer; and in October, Bain announced that it would offer a purchase price of JPY9,450 per share, 7% higher than KKR’s (JPY8,800 per share), subject to obtaining approval from Fuji Soft’s board.

KKR initially set the minimum acceptance threshold for its tender offer at 53.22%. However, in response to Bain’s counteroffer and a subsequent rise in Fuji Soft’s stock price above KKR’s tender offer price, KKR removed the minimum threshold and switched to a two-stage tender offer strategy. By 5 November 2024, KKR had acquired 34.01% of Fuji Soft’s outstanding shares, exceeding one-third ownership, through its first-stage tender offer, and starting from 20 November, KKR announced it would proceed with the second-stage tender offer after increasing the purchase price from the first tender offer. Bain, which initially planned to commence its tender offer in early November, announced that it would postpone the launch of the offer, drawing significant attention to future developments. At the time of writing, how these competitive tender offers will end remains unresolved.

Implications for Japan’s tender offer practices

The acquisition battle between KKR and Bain over Fuji Soft presents intriguing issues concerning Japan’s tender offer practices. In August 2023, Japan’s Ministry of Economy, Trade and Industry (METI) published the “Guidelines for Corporate Takeovers”. According to these guidelines, when a board receives a “sincere acquisition proposal”, it is required to conduct a “sincere examination”, and once the board decides to reach agreement on an acquisition, it should negotiate diligently with the acquiring party to achieve the “best available transaction terms for shareholders”, specifically, each director and the board should “make all reasonable efforts not only to enhance corporate value but also to secure interests of shareholders”. That means, when faced with a competing acquisition proposal, management has to carefully consider which option would better serve the shareholders' interests and provide persuasive reasons to the shareholders for supporting one proposal over the other.

In Fuji Soft’s case, despite Bain’s higher offer, Fuji Soft’s board initially issued a press release stating that it maintained its approval of KKR’s tender offer but added that it also considered Bain’s offer to be a “sincere proposal” and would continue to evaluate it. In response to Bain’s counteroffer, KKR removed the minimum acceptance threshold of its initial tender offer, proceeding with its two-stage approach, and initially keeping the purchase price the same in both stages. In previous practices in Japan, two-stage tender offers often involve purchasing shares from major shareholders at a lower price in the first stage and purchasing shares from minority shareholders at a higher price in the second stage. KKR’s initial decision not to increase the purchase price in the second stage was interpreted as a strategic move, as by acquiring over one-third of the shares – including those from 3DIP – in the first tender offer, Bain would find it difficult under Japanese corporate law to secure control over Fuji Soft, potentially leading Bain to abandon its tender offer. However, on 15 November, KKR proposed increasing the purchase price for the second stage of its tender offer, raising it from JPY8,800 per share in the first stage to JPY9,451 per share – 1 yen higher than Bain’s announced offer. In response, Fuji Soft’s board this time announced its approval and recommendation of KKR’s new proposal as well as its formal opposition to Bain’s offer.

Revisions to tender offer regulations

All the aforementioned transactions involve acquisitions of listed companies, necessitating tender offers. In May 2024, Japan significantly revised its Financial Instruments and Exchange Act, introducing major changes to the tender offer system which are set to take effect within two years from May 2025, although the exact implementation date has not yet been announced.

The most significant change is the removal of the general exemption for on-market transactions from tender offer regulations. Under the revised law, acquirers exceeding certain shareholding thresholds are required to conduct tender offers regardless of whether the transaction is made on or off market. This change addresses concerns about acquirers attempting to gain control of target companies without conducting tender offers by gradually accumulating shares on the market, which could coerce minority shareholders.

Additionally, the threshold triggering the requirement for a tender offer has been lowered from one-third to 30%, aligning with thresholds in many other countries.

The Automotive Industry: Seismic Changes Due to the “EV Shift”

Japan has traditionally been known as an automotive powerhouse, but it is lagging behind in the global “EV shift” – the transition from gasoline vehicles to electric vehicles (EVs). This delay is significantly impacting automakers and manufacturers within their supply chains, serving as a driving force for M&A transactions.

Formation of new alliances

In August 2024, an alliance was announced among three major Japanese automobile manufacturers, HONDA MOTOR (“Honda”), NISSAN MOTOR (“Nissan”), and MITSUBISHI MOTORS CORPORATION (“Mitsubishi Motors”). The three companies aim to standardise key components for EVs, including in-vehicle software, motors, and batteries. With the formation of this alliance, Japan’s automotive industry has been reorganised into two major groups: the Toyota group – which includes Suzuki, Mazda, Daihatsu, and SUBARU – and the three-company alliance of Honda, Nissan, and Mitsubishi. In the global EV market, US manufacturers like Tesla and Chinese companies such as BYD are making massive investments all over the world. Japanese automakers are attempting to counter this by forming strategic alliances with foreign EV makers in Japan and elsewhere.

Reasons for Japan’s delay in EV adoption

One reason cited for Japanese automakers falling behind in EVs is the lack of strong governmental commitment to promote EVs, unlike other countries that have enacted laws to boost EV manufacturing and sales. In 2021, the Japanese government declared its goal of making all new car sales “electrified vehicles” by 2035 to achieve carbon neutrality by 2050. However, “electrified vehicles” in this context include hybrid vehicles (HVs), which differ from pure EVs. As a result, Japanese automakers were slower to transition to EVs compared to their international competitors, with an EV penetration rate of only about 3% in 2024. This is extremely low compared to China’s 38%, Europe’s 21%, and even the United States’ 7%.

Global EV policies and their impact on Japanese automakers

Europe has declared that it will ban the sale of new gasoline and diesel vehicles, including plug-in hybrids (PHVs) and HVs, by 2035, moving entirely to EVs. In the United States, the Biden administration issued an executive order aiming for an EV adoption rate of over 50% by 2030. China refers to EVs, PHVs, and fuel cell vehicles (FCVs) collectively as New Energy Vehicles (NEVs) and has set a goal of achieving a NEV penetration rate of over 50% by 2035.

Therefore, Japanese automakers’ slow EV shift may lead to a decline in their global market presence. Poor sales in the Chinese market, where NEV adoption is rapidly increasing, are particularly concerning. Many automakers are re-evaluating their strategies in China. In October 2023, Mitsubishi Motors announced its withdrawal from production in China, selling its shares in its Chinese joint venture at a low price to its partner, Guangzhou Automobile Group. Other Japanese automakers are also halting gasoline vehicle production lines and reducing personnel in China. As a result, there may be future M&A activity by Japanese automakers to divest their Chinese operations. Conversely, some are seeking to enhance competitiveness by partnering with major local Chinese companies. In May 2024, Toyota announced a strategic partnership with Tencent, a major Chinese technology company, to collaborate in AI, cloud computing, and big data. Nissan also announced a partnership with Baidu, another major Chinese technology company, on AI technology. Whether traditional automakers in Japan will consider taking a more aggressive approach (via new investments, joint venture or otherwise) to get into the EV markets in China and elsewhere is yet to be seen.

Impact on auto parts manufacturers

The EV shift is also affecting mergers and acquisitions among auto parts manufacturers that supply Japanese automakers. In July 2023, Honda announced it would sell Yachiyo Industry – a long-time key supplier and subsidiary specialising in fuel tanks and other components – to India’s Motherson Group, a major parts supplier. This move sent shockwaves through the automotive industry. Japanese automakers have long been known for valuing their parts manufacturers in their supply chains, and through capital ties and collaboration such as joint development, they have built up close business relationship known as “keiretsu”. However, the components required for gasoline-powered vehicles and EVs differ significantly, leading to inevitable changes within these keiretsu networks. Moving forward, it will be worth watching to see whether M&A transactions involving the addition of new keiretsu companies or the separation of existing ones will occur.

Chinese companies’ global expansion

Chinese companies with advantages in AI and in-vehicle battery technologies view the EV shift as an opportunity to seize leadership in the next-generation market and are accelerating their global expansion. In January 2024, BYD’s EVs were sold in the Japanese market for the first time, with plans to expand to over 100 dealerships by 2025. Attention is also focused on potential inbound M&A by Chinese automakers and parts manufacturers. However, for Chinese companies to conduct M&A in Japan, they must navigate the Foreign Direct Investment (FDI) regulations under the Foreign Exchange and Foreign Trade Act, which are becoming increasingly stringent in recent years.

Conclusion

The robust activity in Japan’s technology M&A landscape in 2024 is the result of both domestic challenges and global trends. Industries such as AI, semiconductors, IT systems, software, and automotive manufacturing are undergoing significant transformations. Companies are leveraging M&A to secure valuable human resources, adapt to technological demands, and reposition themselves in a rapidly changing market.

Regulatory developments, including revisions to tender offer regulations and government support measures, are also influencing M&A strategies and practices. Stakeholders must stay informed of these changes to navigate the complexities effectively.

As Japan continues to address its unique challenges and capitalise on global trends, technology M&A is expected to remain a critical tool for corporate growth and adaptation in the coming years.