A Asset Assembler model is structured to produce synergies for growth at both existing businesses and newly acquired companies, which are different from the Western-style cost-cutting synergies model. This has resulted in accelerated earnings growth at these companies than prior to joinng our Group.

Generally speaking, not a few overseas M&A deals by Japanese companies result in impairment losses a few years after the acquisition. However, all our acquisitions after FY2019, when we started to conduct M&A in a more aggressive manner, have delivered better-than-expected results. This is due to the successful leverage of the five strengths underpinning Asset Assembler model.

Let me explain the key points of our M&A. The paint and coatings industry is characterized by sustained growth potential and very stable cash flow generation. In addition, companies can procure funds at lower interest rates in the current financial market in Japan compared to prior years. As a result, the market environment for M&A is very favorable.

The decorative paints market, which accounts for more than 50% of the total paint market, is characterized by local production for local consumption. As a result, the optimal business model for the decorative paints business differs significantly from country to country and market to market in terms of the procurement of raw materials, consumer preferences, distribution networks and environmental regulations.

Paint and coatings, and particularly decorative paints, have a very low threat of alternative products and strong local features. Due to these characteristics, the keys to success in the paint and coatings business are: ①strong brands, ②an extensive distribution network, and ③operations by management well versed in local markets. If we acquire the No.1 market share based on those strengths, competitors cannot easily turn the tables. Then, the No.1 player can create a virtuous cycle of further increasing its market share and earnings.

Strengths of Nippon Paint Group’s M&A based on the characteristics of the paint and coatings market are as shown in the diagram below. I cannot talk about specific target companies and regions. What I can tell you is this: the key criteria are that acquisition targets, regardless of business category and region, must contribute to MSV. In particular, acquisitions must contribute to EPS starting in the first year and have an attractive risk-return profile.

Key points of the M&A strategy

*1 Return on invested capital (after one-off expenses)
*2 Weighted average cost of capital

Our business model is not based on the Western-style global standardization and cost cutting program. Rather, we bring in excellent companies that have good prospects for a sustained contribution to EPS. We allow these companies to pursue autonomous growth while promoting collaboration with our partner companies worldwide and providing financial support. We believe this is the right business model for creating value over the medium and long term in the paint and adjacencies businesses, which are characterized by local production for local consumption. An overview of the successful Betek Boya acquisition is below.

We have received questions from investors about how we examine and make decisions about potential M&A deals. What is the secret to our “ability to tell good from bad?” So, let me dig a little deeper into this. The only basis of judgment about a potential deal is whether it will contribute to MSV. For instance, we never consider an acquisition merely to make us bigger, to become the company with the largest revenue in the world, or based on an egoistic agenda of management to build a big track record. Even if we become No.1 in terms of revenue, it would be meaningless if our shareholder value is impaired in the process of reaching that point.

When we examine a specific acquisition, we make a judgment after holding multifaceted discussions on the degree of PMI and other risks involved with sound vigilance at all times. This is regardless of how attractive the target company may be. For Betek Boya, for instance, we thoroughly examined opportunities for potential post-acquisition growth led by excellent management, excluding from consideration geopolitical risks including inflation risk and the financial cost. As a result, we decided that the acquisition involved risk but that the expected returns would be greater in the medium and long term. Betek Boya’s operating performance is impacted by the recent inflation and the weak Turkish lira, but its market share is nevertheless increasing. So, we are confident that the company has ample potential to deliver strong growth. Another key point is that one of our financial disciplines requires an acquired company to deliver EPS accretion starting in the first year. We never use optimistic assumptions that would rationalize acquisition synergies, hoping that the company can achieve EPS accretion three years after the acquisition.

Now, let me turn to the question about the pros and cons of delegating the management of operations to local management. As mentioned in “Letter to Investors about the Integrated Report 2022,” the Co-Presidents delegate authority to local management, which is accompanied by responsibility for delivering outcomes. Before delegating authority, we perform a study to confirm that we can Trust them based on their track records and aspirations for growth through constant communication. Sending management teams from headquarters can easily create a gap with the local staff. Replacing the local senior management with Japanese senior management could undermine the motivation of the talented local management team.

In addition to using a simple and quick decision-making approach of relying on local management, Nippon Paint Group as a whole has established a platform for supporting the local management by providing fund procurement, economies of scale, sharing of know-how, and a relationship where the local management can directly consult with the Co-Presidents. This platform enables the growth-oriented local management to fully utilize their managerial skills. In terms of governance, the local management are responsible for supervising their own companies based on our risk management framework.

The performance of the major companies we have acquired since FY2014 has been strong both in high-growth and mature markets. We have closed the acquisitions of Cromology and JUB in Europe, which are expected to contribute to our performance from FY2022 onwards.

By continuing to accumulate a track record of successful M&A deals, we will demonstrate the benefits of becoming a part of Nippon Paint Group to our M&A target companies, while fostering expectations in the stock market that Nippon Paint Group can consistently deliver high growth.

M&A best practice: Betek Boya

Achieved revenue growth and OP margin improvement under Nippon Paint Group

Betek Boya
Acquired in July 2019

	Pre-acquisition	Post-acquisition
CAGR	0.8%*1	61.0%*2
OP margin	11.6% (2019)	13.4% (2021)

Synergies generated
based on our
autonomous and
decentralized management

• Betek Boya utilized NPHD’s low-cost fund-procurement capability to repay its entire high interest rate borrowings and allocated cash generated to aggressive investment in marketing activities, achieving market share gains (FY2019: 27%→FY2021: 34%^*3)
• The acquisition enabled Betek Boya to share business growth know-how and best practice in developing countries as a member of NIPSEA Group and vice versa, achieving growth that significantly outperforms its pre-acquisition CAGR and the market growth
• Significantly reduced raw material cost in the first year following acquisition by sharing NIPSEA Group’s raw material procurement sources
• Stepped up its multi-brand strategy through successful launch of new brand for its premium line by using high-profile NIPPON PAINT brand
• Shared Betek Boya’s know-how in the ETICS business in the adjacency area within Nippon Paint Group, which led to faster growth of the ETICS business in our operating regions

*1 CAGR is for FY2017 to FY2019
*2 CAGR is for FY2019 to FY2021
*3 NPHD’s estimates