Global shareholder activism surged in the first half of 2024, reaching a record high according to Barclays' latest Shareholder Activism Review. Barclays tracked 147 activist campaigns globally in the H1 2024, surpassing the previous record of 143 set in the same period of 2018. Japan reported 38 campaigns, almost triple the 14 seen in the first half of 2023, making it the second-biggest market for shareholder activists behind the US, according to Barclays and Lazard.
This trend was evident in 2023, with a notable surge in shareholder activism during the June annual meeting season. Shareholders submitted a record 385 proposals to 90 Japanese publicly listed companies, underscoring the growing influence of investor activism in the country.
All eyes on Japan
The Bank of Japan's (BOJ) interest rate hike in July, the second in 17 years, to 0.25 percent sparked global market volatility. The move revealed the deep interconnectedness between US and other equity markets with Japan's policies, particularly its "carry trade,” which has enabled investors for years to borrow in yen and invest in currencies with higher interest rates. Hedge funds tied to carry trades saw margins squeezed, forcing them to sell off stocks to meet risk requirements.
As the BOJ raises rates, the economic environment that has largely remained stable for decades may further pressure Japanese companies to improve profitability to compete for domestic capital. This could lead to increased support for shareholder activism as investors demand higher returns.
Activist drivers
Many Japanese companies are undervalued and cash-rich with low price-to-book ratios, and these have traditionally been the lion’s share of activist targets in Japan, particularly in the small cap space. Recent market volatility may put some listed companies under renewed pressure to focus on cost of capital and stock prices—factors that support activist activity.
Meanwhile, corporate governance reforms such as Japan’s Corporate Governance Code—last revised in 2021—the Tokyo Stock Exchange’s “name and shame” actions for low price-to-book ratio companies, and other changes have provided campaigns with increased successes, both public and private. All these factors have contributed to increased activity from international and domestic activist investors. Several new, emerging managers are anticipated to commence activities in 2025 in Japan, as well.
Activist-led M&A
When it comes to activist-led M&A, opportunities may arise as deal count increases. While deal value has declined, volume remains strong, demonstrating resilience and sustained interest. The market's shift toward smaller deals may signal a new phase of growth, with opportunities emerging across a wider range of sectors and company sizes.
Private equity funds’ acquisition of small- to mid-sized Japan-based companies facing ownership succession challenges has long been a cornerstone of their buyout deal-sourcing strategies. However, larger Japanese companies are also increasingly open to private equity investment. This signifies a growing acceptance among Japanese business owners of private equity as a strategic partner. While succession-related deals remain consistent, there are signs take-private transactions are becoming more accepted, particularly as an alternative when faced with activist pressure.
For example, in early August, US private equity firm KKR offered US$3.8 billion to take IT specialist Fuji Soft private. This move comes roughly a year after activist investor 3D Investment Partners initiated a sales process. Despite a strengthening yen and recent market fluctuations, KKR's bid underscores the enduring potential for value creation within listed Japanese companies.
While outright company sales have been the most popular M&A demand, a stronger yen could incentivize Japanese companies to seek overseas acquisitions, potentially shaping future activist campaigns in the region. In addition, some may face calls to list assets that activists have called non-core.
Operational activism
Alongside M&A as a potential driver for, or outcome of, investor activism, a relatively newer trend to make operational changes a centerpiece of a campaign is emerging in Japan. This approach involves demands for operational improvements to enhance growth and shareholder value.
For larger, higher-liquidity targets with more rationalized balance sheets, there can remain significant opportunities to create value through operational improvements. PE firms have often taken the lead in achieving these outcomes historically, but in recent years more global activist and engagement funds have found success pursuing these outcomes while the target remains listed.
Capital returns remain a key driver in the Asia-Pacific region—which Japan dominates as a percentage of overall campaigns—as the focus of 45 percent of Q1 campaigns, compared to 16 percent during the same period last year. Institutional and retail investors alike are reaping the benefits of such campaigns in the form of rising stock prices, share buybacks and dividends, spin-offs, corporate strategy and leadership changes.
Outlook
A confluence of cash-rich undervalued stocks and real estate, rising interest rates, continued low board representation of women, investor demand for robust dividends, and the unwinding of yen-funded carry trades is setting the stage for heightened shareholder activism in Japan over 2025.
M&A may also be a driver for increased shareholder activism, and activism is expected to continue to be a key source of deal flow for PE funds. Deal flow had already started an upward trajectory at the end of H1. Japanese companies, following lengthy activist engagement, started to sell off non-core assets and acquire overseas assets to take advantage of growth and capital return to investors.
Management should prepare for activist engagements over longer periods while simultaneously devising robust defensive strategies. This could entail quarterly board-led reviews to identify market scenarios that could lead to the company becoming an activist target. Those that do not engage risk increased challenges and infighting as shareholder activism becomes a mainstream part of Japanese corporate life.
