Japan's Dim Economy Fuels Global M&A Spree

Flush with cash and bolstered by a strong currency, Japanese companies are in the midst of the biggest boom in overseas investment the country has ever seen.

But while previous Japanese M&A booms were driven by greed, this one is powered by fear, bankers and corporate executives say, as a shrinking home market and stagnant economy threaten earnings. Companies also were forced to look outside Japan to remain competitive after the March 11 earthquake and tsunami disrupted supply chains and caused power shortages.

This year, economists see economic growth at around 1%, an anemic level that may last for a while. A strong yen and high costs of labor and electricity in Japan have eroded the international competitiveness of manufacturers like Sony Corp. (SNE, 6758.TO) and Honda Motor Co. (HMC, 7267.TO). Japanese companies are boosting acquisitions of gas, oil and mining projects overseas, amid an intensifying struggle over resources as well as a sudden appetite for fossil fuels following last year's nuclear accident and the subsequent shutdown of the country's reactors. At home, Japan's aging and dwindling population means less demand for everything from shrimp crackers to new cars.

Toy maker Tomy is shopping abroad for acquisitions for the first time, after decades as a domestic player.

Like other companies in Japan, Tomy, the world's No. 5 ranked toy maker with $2 billion in revenue, is facing a shrinking domestic market. Market research firm Yano Research Institute estimates the Japanese toy market shrank around 11% for the fiscal year ended in March compared with a decade ago.

Mr. Tomiyama says a few years ago he decided Tomy would have to go global, in a big way. 'In order to survive global competition, we need to at least become the world's third-largest,' he says.

On March 11 last year, the day of the devastating earthquake and tsunami, Mr. Tomiyama announced the purchase of U.S. toy maker RC2, the Thomas railroad set maker, its first-ever foreign acquisition. Tomy funded the acquisition with Y50 billion in bank loans, more than tripling its interest-bearing debt.

The purchase of RC2 has boosted Tomy's sales to $2.3 billion. But it is still No. 5, and about $1 billion short of the revenue of the current No. 3--Denmark's Lego Group. So Mr. Tomiyama says Tomy has to keep looking for more M&A opportunities.