Japan's fashion industry is enjoying a mergers and acquisitions frenzy that has changed the retail and apparel makers' landscape considerably. By Michael Fitzpatrick.

Japan was in turmoil when a recent financial scandal appeared to have stopped a long heralded economic recovery in its tracks.

At the centre of the scandal was entrepreneur Takafumi Horie's preference for mergers and acquisitions. Half the country came out against Horie, founder of high-flying Internet start-up Livedoor Co, and his aggressive takeover tactics, which were seen by many to be non-Japanese.

In Japan's business world, management once preferred to place priority on employees, and mergers and acquisitions for the sake of shareholders were almost taboo.

But many have missed the fact that Japan's fashion industry had already been enjoying a mergers and acquisitions frenzy that has changed the retail and apparel makers' landscape considerably.

Japan Consuming, a retail and fashion specialist based in Japan, says many of the mergers are actually a result of government-led policies aimed at getting Japan's economy moving again.

"Mergers and acquisitions was always an uncomfortable subject in Japan. But just as in the tech sector, Japanese apparel, cosmetics and related fashion markets have seen an upsurge in takeover activity," says January's Japan Consuming report.

"Originally triggered by economics ministry guidance to sort out actual and potential bankrupt firms, M&A is now regarded as a legitimate strategy for growth. Another 'un-Japanese' concept turns out to be very Japanese indeed."

Fashion industry M&As
Notable fashion industry M&As started early in 2002 when Tokyo-based ladies' apparel maker PAL acquired the unlikely named Nice Claup label.

With over 37 such takeovers in 2004 and 2005 alone, the trickle towards what was unthinkable only a decade ago is now becoming a torrent in Japan.

As the frequency of M&As followed, some Japanese companies became brave enough to go after foreign prey. Onward Kashiyama Co acquired the Joseph group, led by British fashion brand Joseph Ltd, for JPY17bn in May last year.

A month later, the Japanese firm obtained the management rights of Italian shoemaker Iris Srl, which sells popular brands such as Chloe and Marc Jacobs, paying JPY630m for 60% of the Italian firm's shares.

M&As from outside of Japan, too, have now become less rare, though the government is still wary of large foreign conglomerates muscling in on the apparel trade and has restricted access so far.

Fashion retailers and apparel makers in Japan have been deemed hot acquisition prospects because they have enough cash to more than offset their price tags, according to rankings by The Nikkei Financial Daily.

"The amount of M&A money sloshing around the market is unbelievable, and we're aware of a number of 'roll-ups' and reverse mergers currently taking place which are being funded by speculative investment houses backing ballsy entrepreneurs," says Terrie Lloyd who writes on business in Japan in his weekly newsletter Terrie's Take.

"Given that the financial health of Japan is more and more dependent on foreign investment…Prime Minister Koizumi is going to announce a doubling of FDI by
allowing foreigners to M&A Japanese targets."

Synergic spin-offs
The government is basically pursuing a policy of encouraging some M&As because it wants to see companies take over other entities because of the synergic spin-offs of such integration.

It also views M&As as a strategic way of getting some companies out of a very Japanese hole that is peculiar to many small size businesses in Japan - the winding down of a company owing to a lack of successors to run the businesses.

Japan's rapidly falling birth rate means there simply aren't enough people to run existing businesses such as the country's myriad of small and middle-sized apparel concerns.

M&As are one of the few options open to them for survival says the Organization for Small & Medium Enterprises and Regional Innovation, Japan (SMRJ), an independent administrative corporation.

It says more than 80% of medium- and small-size enterprises with fewer than 20 employees are forced to discontinue business or liquidate themselves when their managers retire.

Judging that M&As are a powerful means for survival when no successors step forward, the SMRJ has decided to inaugurate a 'business successor fund' this spring. Together with government initiatives, it will mean M&As will truly have come to Japan to stay.

Some analysts say the result of all these new, small M&As can only spell good for the industry.

Says Japan Consuming: "The effect of all this activity on the apparel market has so far been beneficial: consolidation has created clear leaders in each category, and by mopping up smaller, and ailing firms and cutting deadwood, cleared the forest floor, giving new firms a chance to breathe.

"The demand from investment funds for decent managers to run their new acquisitions has also led to much more movement of talent between firms, leading to pollination of ideas, increasing the pace of modernisation."

By Michael Fitzpatrick.