Creating Partnerships that Change the World

In March 2024, the Nikkei 225 roared past the 40,000 mark, crowning a record-breaking year for Japan’s financial markets, which also saw increased IPO activity and a surge in M&A deal making. What were the core reasons for the extraordinary performance of Japan’s financial markets?

The most significant catalyst for Japan's bullish investment and the M&A market has been the recent corporate governance reforms enacted by the TSE and the introduction of the stewardship and corporate governance codes, both of which were enacted by the Japanese government a decade ago. These measures have been instrumental in promoting greater profitability and accountability among companies. Additionally, in the M&A market, a critical factor is the issue of business succession, particularly among small and medium-sized enterprises (SMEs), where many company president CEO’s lack a successor. To overcome this challenge, M&A is seen as an attractive solution, thereby  increasing deal flow.

On the macroeconomic front, Japan’s low interest rate environment has created fertile ground for investments. With the return of inflation however, the Bank of Japan is gradually rising interest rates. How do you expect this to evolve moving forward?

Japan has maintained a low-interest rate environment for an extended period, including years of negative interest rate policies. While this has kept borrowing costs low, it has also contributed to sluggish corporate behavior, with companies often lacking the urgency to pursue improvements or enhance profitability. Even now, interest rates remain relatively low, and there is still room for rates to rise to a level that could incentivize companies to achieve greater efficiencies and benefits.

Reflecting on my career, when I graduated from university and entered the workforce 30 years ago, Japan's interest rates were around 8%. Today, they have declined to approximately 1%. This comparison highlights that Japan once thrived even under significantly higher interest rates, suggesting room for adaptation in a changing macroeconomic environment.

Historically, Japanese companies were reluctant to divest or to sell their businesses, as such moves were often seen as a failure of management. However, this mindset among Japanese CEOs has undergone a profound transformation. Corporate governance reforms have become deeply ingrained in business practices, while issues surrounding leadership succession have become more present. What long-term impacts will this change of mindset have on the M&A space?

Japanese society is evolving in a very positive direction, and a notable example of this shift is the acquisition of 7-Eleven. In the past, such a transaction would likely have faced significant resistance, with various economic stakeholders rallying to pressure the government to block the merger. This kind of intervention would have effectively hindered M&A activity. However, in today’s society, we no longer see such movements, which clearly indicates that M&As are becoming more widely accepted and recognized as a legitimate tool for growth and transformation.

In 2023, Japan recorded a 23% year-over-year increase in deal value, amounting to approximately $123 billion. This surge was driven in part by private equity investors, with Japan becoming the largest PE market in the Asia Pacific region. Despite this growth, Japan’s private market remains small relative to other large economies, such as the US and the UK, which are estimated to be more than three times bigger. Do you believe that Japan can continue to close the gap with other large economies in the upcoming years?

While it is difficult to predict the growth trajectory of the M&A markets in the US or UK, the Japanese M&A market is poised for significant growth in the near future. This is driven by structural factors, including Japan's declining population challenges and the growing issue of succession within small and medium-sized enterprises (SMEs). With fewer successors available to take over businesses, M&A has become an inevitable solution for many companies. Furthermore, Japan's ongoing population decline is projected to create a shortfall of approximately 11 million workers across industries by 2040, further emphasizing the necessity for consolidation and restructuring through M&A activity.

One unique aspect of Japan’s M&A market is that consultants like STRIKE often act as brokers for both the buy side and the sell side, which differs from markets where separate consultants handle each side. Could you explain this approach and how it helps STRIKE optimize its fee structure and revenue streams?

This structure is similar to Japan’s real estate industry, where fees are collected from both the buy side and sell sides, as permitted under Japanese law. The M&A industry in Japan has evolved in the same way, with both parties paying fees to the mediatorintermediary advisory firm. This allows us to generate receive fee income from both sides, effectively doubling our revenue potential from a single transaction.

Strike was founded in 1997, and you specialize in M&A brokerage services with a particular focus on SMEs. What do you believe are your company’s core strengths?

We have a strong track record, having facilitated over 1,4001,300 successful deals. A key differentiator for us is our innovative 'SMART' platform, Japan's first M&A online marketplace, along with our extensive database of over 17,000 acquisition needs, which gives us a competitive edge.

Additionally, many company president CEO’s in that provide the M&A services sector come from sales backgrounds. However, as a trained accountant, I place a strong emphasis on the consulting aspect of our business. This focus on providing comprehensive, advisory-driven solutions sets us apart in the market and different M&A advisory firms.

What are the unique challenges you face when tailoring M&A solutions to SMEs when compared to larger enterprises?

The primary difference between M&A for large companies and SMEs lies in ownership and management structures. In large companies, ownership and management are typically separate, which can create conflicting interests between shareholders and executives. In contrast, SMEs are often family-run businesses where the owner and management are the same, aligning their interests more closely.

Additionally, SME leaders tend to prioritize more than just the deal transaction value. They place significant importance on the future growth and sustainability of their business after transferring ownership.

What are the main challenges in obtaining accurate valuations for SMEs during M&A transactions, and how do you overcome those challenges?

SME valuations are typically based on standard methods, such as discounted cash flow (DCF) analysis and multi-comparison (MCM). However, a unique challenge arises because many SMEs allocate a significant portion of their profits to human compensation in order to minimize corporate taxes. As a result, management or owners often take disproportionately large salaries.

To address this, we recalculate profitability using industry-standard benchmarks for wages. This adjustment allows us to determine a more accurate market valuation that reflects the true earning potential of the business.

STRIKE has been actively supporting start-upStartup creation through initiatives like S Venture Lab. and the Kyoto Innovation CenterOffice, established in 2024, to foster innovation by connecting entrepreneurs with business opportunities. What drove your decision to focus on start-upStartups, and what economic value do you aim to unlock through these efforts?

As for S venture Lab., wWe chose to focus towards Open-Innovation and Startups this direction because we recognize that the Succession M&A market needs will eventually reach a saturation point. To ensure sustainable growth, it is essential for us to focus on emerging opportunities, such as start-upStartups, as a new pillar of our business.

One of the key challenges for Japanese start-upStartups is the limited size of the exit market, which discourages significant efforts in creating new businesses. By contributing to the expansion of the venture and start-upStartup exit market, we aim to foster a more dynamic ecosystem in Japan. This, in turn, would encourage more individuals to embrace the challenges of entrepreneurship and innovation.

As for the Kyoto Innovation Center Office, we strategically chose Kyoto because it is home to approximately 1.4 million people, with students making up 10% of the population. The city hosts around 30 universities, including Kyoto University, one of Japan’s leading institutions. Despite this abundance of academic and entrepreneurial potential, the start-upStartup scene in Kyoto has yet to experience a substantial surge. We believe there is immense opportunity to unlock these untapped 'seeds' of innovation and transform them into thriving businesses.

It is also worth noting that Kyoto University has more Nobel laureates in scienceChemistry, biology Physiology or Medicine and physics than Tokyo University.

Start-upStartup exits in Japan have, historically, heavily relied on IPOs. In part, this has been due to the Growth Section of the TSE, whose guidelines are more accommodating to early-stage IPOs. Some analysts argue it has lowered the amount of unicorns, as public companies face market pressure to improve profitability and efficiency, sometimes to the detriment of mid-to-long-term prospects. How do you explain this peculiarity, and how do you expect it to evolve?

IPOs are prioritized in Japan primarily because venture capitalists (VCs) favor them over M&A exits. Through IPOs, VCs can potentially achieve returns of up to 100 times their initial investment, making it a highly attractive option. VCs often encourage companies to pursue IPOs for this reason. Additionally, the Japanese mindset is that being listed on a stock exchange provides companies with significant credibility, enhancing their reputation and building trust within their industry. The Tokyo Stock Exchange also offers established infrastructure that makes it relatively accessible for start-upStartups to list.

Looking ahead, there has been a notable shift in mindset recently. More start-upStartups and investors are beginning to explore M&A as a viable alternative to IPOs. There is now a growing recognition that listing a company too early, while still small, may not be the best strategy, with many start-upStartup owners wanting to reach a certain scale before pursuing an IPO. With this in mind, a growing number of entrepreneurs see M&A as a way to sell off their company relatively early, after which they can leave and enjoy the rewards of their hard work without dealing with the struggles of going through an IPO.

However, companies like ours are working to expand the M&A market, encouraging more active and diverse transaction opportunities. By doing so, we hope to create an ecosystem where M&A becomes a more attractive and accessible exit strategy for start-upStartups.

Fiscal Year 2024 was a strong year for STRIKE, with a 30% increase in both revenue and operating profit, surpassing JPY 6.7 billion. Despite these impressive results, your stock price has remained flat throughout the year. What do you believe is causing this disconnect between the market and your financial performance?

One possible reason could be the increased media coverage of M&A-related fraud untrustworthy cases, which has created some negative sentiment around the industry. As the M&A market grows, it is inevitable that certain challenges emerge, but these incidents can sometimes cast a shadow over the sector as a whole. This broader perception may be contributing to the stagnation in our share price.

What economic sectors do you see most potential in for M&As?

There are significant M&A opportunities in Japan, particularly among companies facing succession challenges. At STRIKE, we have notable strengths in sectors such as healthcare and IT, where we see substantial potential for growth. Additionally, while we are expanding our presence in the start-upStartup sector, the number of companies in this space remains relatively limited at present.

STRIKE highlights its capabilities in driving cross-border deals, supported by a database of 17,000 global firms and 200 international consultants. How do you plan to further expand the cross-border segment of your business in the future?

Cross-border M&A is a new and exciting business opportunity for us. In Japan, 80% of M&A activity consists of domestic deals, while 20% involve international transactions—7% inbound and 13% outbound. The United States is our largest cross-border counterpart.

Having around 400 staff members, STRIKE recognizes the need to strategically allocate resources to strengthen our cross-border M&A capabilities, particularly focusing on transactions between Japan and the US.

Looking ahead, we aim to stimulate Ccross-border M&A activity. On the inbound side, foreign investors often acquire traditional Japanese assets such as inns or sake breweries. On the outbound side, despite the depreciation of the yen, outbound acquisitions have been increasing as Japanese investors look abroad for growth opportunities in response to Japan's declining population. It is worth noting that this type of business differs from domestic M&A, as we can only charge fees from one side, making it a more one-sided acquisition model.

2027 will mark the 30th anniversary of STRIKE. What objectives would you like to have achieved by then?

Our current focus is on fostering the creation of new industries, which remains a work in progress. While we began as an M&A consulting firm, our ultimate vision is to evolve into a company that drives Japan's progress and makes a meaningful social impact. As such, we do not compare ourselves to our competitors in the same industry, but rather adopt a wider vision. In Japan, large companies such as Mitsui & Co or Mitsubishi Estate have the power to shape and to advance society. While it will take a lot of time, my ultimate goal is to be a part of that club by becoming a company that fosters the creation of new industries. As such, by 2027, I hope that we will have made some strides toward achieving this goal.

For more information, visit: https://www.strike.co.jp/en/