Tokyo, Japan. Photo: Shutterstock.com

The usually quiet Japanese lateral market has seen a flurry of moves in the past two years – fuelled by the rise of mergers and acquisitions work.

Global firms have been busy hiring and relocating M&A lawyers as Japanese companies have been making a record number of acquisitions abroad and more Japanese assets have become available to foreign investors.

"Several U.S. and U.K. firms in Tokyo are currently seeking to recruit lateral bilingual M&A partners to take advantage of a continuing strong cross-border deal market," said Laurie Lebrun, a Tokyo-based partner at legal recruiting firm Major, Lindsey & Africa.

Earlier this year, Latham & Watkins landed a three-partner team from Morrison & Foerster, doubling the firm's partner count. "With the addition of this formidable team, Latham stands poised to capitalise on the strong and growing outbound M&A market in Japan," the firm said in a statement at the time. This year, K&L Gates also hired Dale Araki from Morrison & Foerster.

And last year, Davis Polk & Wardwell recruited Kenneth Lebrun from Shearman & Sterling. (Lebrun is married to Major Lindsey's Laurie Lebrun.) Also in 2018, DLA Piper recruited Dan Matsuda from Jones Day and Paul Hastings recruited Eiji Kobayashi from Norton Rose Fulbright.

The movement of M&A partners comes as Japanese M&A activity is at its busiest for both outbound and inbound deals in decades.

For outbound M&A, the past five years has been the busiest for Simpson Thacher & Bartlett's Tokyo office in the 25 years that office head David Sneider has been in the Japanese capital. "Our activity levels are driven by large transactions," he said.

Sneider recently advised Japanese parts manufacturer Calsonic Kansei Corp., owned by U.S. private equity firm and regular Simpson Thacher client KKR, on a $6.9 billion acquisition of Fiat Chrysler Automobiles N.V.'s car components business, Magneti Marelli S.p.A., which was completed in May this year.

Japanese outbound M&A has been rising since the global financial crisis, but it reached new heights in the past five years. Since 2015, there have been more than 700 deals every year, including this year, according to data from Refinitiv. And total deal value reached a new high last year, largely due to Takeda Pharmaceutical Co.'s takeover of London-listed drugmaker Shire Plc. for $62 billion – the largest deal globally in 2018 and the biggest Japanese outbound deal ever.

The trend is driven by the lack of growth at home, said Sneider. The Japanese economy has been stagnant for most of the past three decades, held down by the 2011 Tohoku earthquake and tsunami disaster and by a rapidly ageing population. Japanese companies, meanwhile, have saved up a lot of cash over the years and have access to cheap funding, Sneider added.

Japanese Prime Minister Shinzo Abe has been trying to boost the economy with monetary and fiscal stimuli. The Bank of Japan has adopted negative interest rates since 2016 as part of this effort.

And Sneider expects the trend to continue, even in a global slowdown. "Japanese companies may be more conservative and less ambitious [in a slowdown] but long term, the market is such that they still have to acquire companies abroad," he said.

It's the same story for inbound M&A.

Nick Wall, who leads Allen & Overy's corporate practice in Tokyo with partner Osamu Ito, said he is seeing a great deal of interest in Japan from investors – more than he has seen in his 20 years in Tokyo.

As of October 23, there have been 108 inbound deals worth a combined $10.8 billion so far this year, according to Refinitiv data – a lot less than outbound levels but almost double last year's inbound deal value total.

And 2017 saw one of the biggest private equity-led buyouts since the end of the financial crisis: a Bain Capital-led consortium's $18 billion acquisition of Toshiba Corp.'s memory chip unit. The deal raised the total value of inbound M&A in 2017 to $27.7 billion – the highest in the past 10 years. Also in 2017, KKR, represented by Sneider, acquired Calsonic Kansei for $4.5 billion.

"Other markets are slowing," said Wall, noting that people are reassessing the attractiveness of China because of the protracted trade war with the U.S.

It also helps that Japanese conglomerates are becoming more open to divesting non-core assets. "The view of selling a business as a failure is changing and instead seen more as an appropriate strategic corporate decision," Wall said.

Global competitors have been divesting non-core assets for years to improve overall profitability, noted Takeshi Nakao, managing partner of Freshfields Bruckhaus Deringer's Tokyo office. Nakao points to Germany's Siemens – one of Europe's largest conglomerates – which has been streamlining its businesses since 2013.

With so many deals going on in Japan, global firms want to expand their M&A teams, including at the partner level. But hiring laterally is difficult as lawyers with a book of business are hard to come by in Tokyo, lawyers say.

Despite being the world's third-largest economy and a place where most of the leading international firms have offices, the pool of junior and mid-career M&A partners in Tokyo is relatively small. The increasingly and arguably prohibitively high book of business requirements facing young lawyers hoping to become partners in their firms keep that pool small, said Major, Lindsey & Africa's Lebrun.

It also doesn't help that the leading local firms and the more localised global firms charge relatively low fees, making it difficult for young lawyers to compete and build successful books of business at the top international firms in Tokyo, she added.

Indeed, the difference in fees between top international firms and the four leading Japanese firms – Nishimura & Asahi, Mori Hamada & Matsumoto, Nagashima Ohno & Tsunematsu and Anderson Mori & Tomotsune – can be 30% to 50%.

"The fee expectations of Japanese clients are diverse," said Takeshi Komatsu, an M&A partner and co-representative of Mori Hamada's Singapore office. "If you want to build a relationship with Japanese clients, some flexibility will be needed."

Mori Hamada advised KKR on Japanese law on the Calsonic Kansei acquisition.

In addition, there is a language barrier, said Tony Grundy, a Singapore-based counsel at Mori Hamada who previously launched and then managed Linklaters' Tokyo office until 2007.

"These days, you need to be fluent in Japanese," said Grundy, who was a Tokyo partner at Morrison & Foerster before joining Mori Hamada in 2013. "That limits the pool of people who are available."

So instead of relying exclusively on lateral hires, global firms in Japan are also looking inward.

"We will promote a bunch of people this year," said Ken Siegel, managing partner of Morrison & Foerster's Tokyo office – one of the largest of the global firms in Japan.

Siegel advised Toshiba on the $18 billion acquisition of the company's memory chip unit in 2017.

Much of the M&A talent appears to be at Morrison & Foerster. Latham, Norton Rose and K&L Gates all hired from Morrison & Foerster this year. Even with the departures, Morrison & Foerster is big enough to not have to depend on lateral hires, said Siegel. The firm has about 100 lawyers in Tokyo, half of whom focus on cross-border M&A. "We've got to a point where we can recruit from law schools," he said.

And the firm, which has often been praised for its success blending into Japan's corporate culture, is also expanding its team of 50 bengoshi, or Japanese-qualified lawyers. "We're adding more bengoshi than we ever had," said Siegel.

The firm is also relocating U.S. and Japan-qualified M&A partner Yasuhide Watanabe to Tokyo from New York as part of a broader effort to expand its inbound capabilities, Siegel said. Watanabe joined Morrison & Foerster in 2017 from Nagashima Ohno, where he was the managing partner of the Japanese firm's New York office.

Allen & Overy and Freshfields also have been looking internally for Japanese M&A expertise. Allen & Overy promoted U.S. and Japan-qualified Tokutaka Ito to partner this year, while Freshfields is relocating M&A lawyer Jochen Ellrott from Hamburg, Germany, to Tokyo in January. Ellrott has been a Freshfields partner since 2008.

"If there are great candidates, we are open to meeting them, for sure," said Freshfields' Nakao. "But the requirement to be a Freshfields partner is high."

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