Strike 6196
ストライク
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2022-04-28
2022-03-02
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Summary
Strike is an M&A boutique. In terms of client companies, a typical seller is unlisted and has revenue of around JPY1.0bn, and a typical buyer is a listed or unlisted company or investment fund
Capital Markets
Key dates
2018-01-29
Coverage initiation
Executive summary
Overview
Strike Co., Ltd. is a boutique M&A broker. In terms of client companies, a typical seller is unlisted and has revenue of around JPY1bn, and a typical buyer is a listed or unlisted company or investment fund. Strike does not specialize in any industry, and more than 60% of its deals are related to business succession.
Revenue is mostly success fees the company receives from both buyers and sellers. In FY09/21, the company closed 151 deals, generating an average revenue per deal of JPY59.8mn. The number of consultants (average between the beginning and end of the year) was 133, and the average deals closed per consultant was 1.1.
The company is characterized by its use of a website to raise the number of deals it closes per consultant and its high ratio of employees who are certified public accountants, an advantageous qualification that facilitates contract acquisition. It has streamlined the process of searching for buyers by posting information concerning potential deals on its M&A brokerage website. Other companies in the industry also operate M&A brokerage websites, but, according to the company, its website accounts for a higher ratio of the deal closures it facilitates than the websites of its competitors in the industry.
Other boutique M&A brokers include Nihon M&A Center Inc. (TSE1: 2127), M&A Capital Partners Co., Ltd. (TSE1: 6080), and Yamada Consulting Group Co., Ltd. (TSE1: 4792). In 2021, these four companies combined closed 891 deals, more than six times the 2012 level. Shared Research thinks the overall M&A brokerage market is expanding and has room to grow. According to Recof Data’s M&A Retrospective 2020, press reports and other available data sources indicate 2,944 M&A transactions between Japanese companies were closed in 2020. Our calculations suggest that over the decade starting in 2021, the potential market for SME business succession deals alone is 40,000 companies.
Trends and outlook
In FY09/21, revenue was JPY9.0bn (JPY6.9bn in FY08/20), operating profit was JPY3.5bn (JPY3.0bn), recurring profit was JPY3.5bn (JPY3.0bn), and net income was JPY2.4bn (JPY2.2bn). FY09/21 was a 13-month transitional period as the company changed its fiscal year-end.
On a 12-month basis, FY09/21 revenue was JPY8.3bn (+20.6% YoY), operating profit was JPY3.2bn (+6.9% YoY), recurring profit was JPY3.2bn (+7.5% YoY), and net income was JPY2.2bn (+0.4% YoY). Revenue and profit rose on a higher number of deals closed and increased revenue per deal.
For FY09/22, Strike forecasts revenue of JPY11.2bn (+34.4% versus FY09/21 [12-month basis]), operating profit of JPY4.2bn (+32.2%), recurring profit of JPY4.2bn (+31.3%), and net income of JPY2.7bn (+23.4%). The company expects revenue growth mainly on a rise in the number of deals closed (on a 12-month basis), but assumes lower revenue per deal.
When the company announced its full-year FY09/21 results, it announced medium-term targets for the next three years (FY09/22–FY09/24), including revenue, operating profit, and the number of deals closed. In FY09/24, the company plans to achieve revenue of JPY18.8bn (+31.1% versus FY09/21 [12-month basis]) and operating profit of JPY7.3bn (+32.1%), and close 342 deals (+34.9%). The company aims to grow earnings by increasing the number of consultants and deals closed per consultant.
Strengths and weaknesses
Shared Research believes Strike’s strengths are its being trusted as one of the three listed companies specializing in M&A brokerage among numerous M&A brokerage firms; the large number of deal closures per consultant it achieves through the use of its website; and its accumulation of mechanisms that enable it to facilitate deals as an organization, without relying on individuals. We also see Strike as having three weaknesses: it has fewer business partners than industry leaders, putting it at a disadvantage in obtaining information; difficulty differentiating from competitors leading to lower revenue per deal; and lower profitability due to being smaller than industry peers. (See the “Strengths and weaknesses” section.)
Key financial data
Note: The company carried out a 2-for-1 stock split effective June 2018.
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: FY09/21 was an irregular 13-month period due to a change in fiscal year-end.
Recent updates
Capital and business alliance with Light-Right Inc.
On April 6, 2022, Strike Co., Ltd. announced a capital and business alliance with Light-Right Inc.
Alliance objectives
Light-Right operates "Relay," a business succession matching platform that connects operators of small- and medium-sized enterprises who wish to sell their businesses or companies with potential buyers.
The company has encountered difficulty supporting small business operators through its conventional M&A consulting services. Relay features articles for small business operators on a variety of topics, including corporate philosophies and store operating policies. Over the roughly 18-month period since the launch of its beta version in July 2020, Relay has listed over 60 public offerings, generating agreements in the double-digit range.
By combining its nationwide network of offices and partners with the Relay platform, the company will offer a wider range of matching services to small- and medium-sized enterprises and small business operators facing succession-related issues.
Details of capital and business alliance
Decision regarding a share buyback
On January 28, 2022, Strike Co., Ltd. announced a decision regarding a share buyback.
Outline of share buyback
Type of shares to be acquired: Common stock of the company
Total number of shares to be acquired (upper limit): 120,000 (0.6% of outstanding shares [excludes treasury shares])
Total value of shares to be acquired (upper limit): JPY500mn
Acquisition period: February 1, 2022–March 31, 2022
Acquisition method: Market purchase on the Tokyo Stock Exchange
Trends and outlook
Quarterly trends and results
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: FY09/21 was a 13-month transitional period as the company changed its fiscal year-end. YoY figures for 1H FY09/22 (October 2021–March 2022) are percent changes from 1H FY09/21 (September 2020–February 2021) results. YoY changes for Q2 FY09/22 (January–March 2022) are percentage changes from Q2 FY09/21 (December 2020–February 2021) results.
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: The number of deals closed refers to the number of M&A transactions in which Strike provides brokerage or advisory services. The number of contracts for deals closed refers to the number of closed M&A contracts in which Strike provides brokerage or advisory services (i.e. number of companies). In brokerage services, each deal counts as two contracts (one for the seller and one for the buyer), while in advisory services, each deal counts as one contract.
Note: FY09/21 was a 13-month transitional period as the company changed its fiscal year-end. YoY figures for 1H FY09/22 (October 2021–March 2022) are percent changes from 1H FY09/21 (September 2020–February 2021) results. YoY changes for Q2 FY09/22 (January–March 2022) are percentage changes from Q2 FY09/21 (December 2020–February 2021) results.
Note: FY09/21 was a 13-month transitional period as the company changed its fiscal year-end. YoY figures for 1H FY09/22 (October 2021–March 2022) are percent changes from 1H FY09/21 (September 2020–February 2021) results. YoY changes for Q2 FY09/22 (January–March 2022) are percentage changes from Q2 FY09/21 (December 2020–February 2021) results.
Note: FY09/21 was a 13-month transitional period as the company changed its fiscal year-end. YoY figures for 1H FY09/22 (October 2021–March 2022) are percent changes from 1H FY09/21 (September 2020–February 2021) results. YoY changes for Q2 FY09/22 (January–March 2022) are percentage changes from Q2 FY09/21 (December 2020–February 2021) results.
Note: First year is the net increase in consultants YoY. Second year is the previous year’s first year figure. Third year or after is the total number of consultants minus first year and second year figures.
1H FY09/22 results (October 2021–March 2022)
Results overview
The breakdown of key revenue components for 1H FY09/22 was as follows.
The company closed 99 M&A deals (+57.1% YoY). The number of deals increased on the back of higher consultant count. At end-Q2, the number of consultants stood at 174 (+37.0% YoY, +19 versus end-FY09/21).
Revenue per deal was JPY52.7mn (-14.9% YoY). The number of large deals (generating revenue of JPY100mn or more) was eight (versus 10 a year ago).
The number of new contracts, a leading indicator of the number of deals to be closed, totaled 354 (+101.1% YoY).
All profit categories increased YoY driven by revenue growth.
Cost of revenue was JPY1.7bn (+18.5% YoY), reflecting increases in incentives accompanying revenue growth and higher personnel costs as the number of consultants grew. Introduction fees also rose.
SG&A expenses were JPY1.5bn (+56.4% YoY). The increase was attributed to higher personnel expenses, one-time expenses for the relocation of Nagoya and Fukuoka sales offices, higher recruiting expenses, and a rise in data purchasing fees for sales activities.
1H FY09/22 company initiatives
Strike implemented corporate restructuring in October 2021.
The company restructured its organization by project sourcing route with the aim of strengthening its ability to secure more new contracts. Further, it introduced a team system to promote organizational efforts to win projects.
To enter the market for M&A brokerage and advisory involving startups, the company established an Innovation Support Office. It also launched S venture Lab., a new membership service for facilitating partnerships between startups and major corporations.
On the sales front, Strike focused on holding webinars and utilizing web conferencing systems to cultivate new customers and close new deals while taking steps to prevent the spread of COVID-19. It ran industry-specific online ads and proposal-based sales to uncover M&A needs. The company strengthened its service offerings in collaboration with its business partners, including the launch of a joint M&A brokerage service with Zeimu Kenkyukai Inc., and the full-scale development of M&A brokerage services for the medical industry through a business alliance with M3 Inc.
The company took in personnel from partner financial institutions to help groom them as M&A professionals for such institutions and strengthen its own M&A service structure through collaborative efforts.
Full-year company forecast
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: FY09/21 was a 13-month transitional period due to a change in fiscal year-end. Accordingly, the corresponding 2H and full-year company forecasts have not been compared to actual financial results for the previous fiscal year.
Note: Large deals are those with fees of JPY100mn or more.
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Company forecast for FY09/22
For FY09/22, Strike forecasts revenue of JPY11.2bn (+34.4% versus FY09/21 [12-month basis]), operating profit of JPY4.2bn (+32.2%), recurring profit of JPY4.2bn (+31.3%), and net income of JPY2.7bn (+23.4%). FY09/21 was a 13-month transitional period as the company changed its fiscal year-end.
The company expects revenue to grow versus FY09/21 (12-month basis) mainly on a rise in the number of deals closed, but assumes lower revenue per deal.
Strike expects to close 206 deals (151 deals in FY09/21 [13-month basis]). Of these, 18 (17 in FY09/21) will be large deals.
The company expects the number of deals closed to grow along with the increase in the number of consultants. Including those in the Business Promotion Department—which conducts sales activities for partner accounting firms and financial institutions—the company expects the number of consultants to reach 181 (155 at end-FY09/21).
Although the company expects the closing rate for small deals to remain low due to the continuing impact of the pandemic, it plans to increase the number of deals closed compared to FY09/21 (13-month period).
Strike expects revenue per deal of JPY54.4mn (JPY59.8mn in FY09/21 [13--month period]). While the company expects the number of deals closed to rise 36.4% versus FY09/21 (13-month period), it projects the number of large deals to increase by only 5.9%, resulting in a decline in revenue per deal.
Versus FY09/21 (12-month basis), Strike expects profit to rise on higher revenue. However, the company anticipates increases in advertising and system-related expenses to keep the rate of growth in operating profit lower than the rate of growth in revenue. Strike expects JPY370mn in additional expenses (including expenses for upgrades to its sales management systems), as it plans to roll out marketing programs such as online advertising, proposal-based sales, and seminars in anticipation of the end of the COVID-19 pandemic.
Medium-term outlook
Medium-term policy
When the company announced its full-year FY09/21 results, it announced its medium-term policy for the next three years (FY09/22–FY09/24), including revenue, operating profit, and the number of deals closed, new contracts, and consultants.
Strike aims to double its revenue and operating profit in FY09/24 versus FY09/21. It plans to close 342 deals (151 in FY09/21). In addition to hiring consultants (about 30 per year), the company plans to increase the number of deals closed by raising the number of deals closed per consultant through measures described below. In FY09/24, the company aims to have 236 consultants (average between the beginning and end of the year; 133 in FY09/21) and 1.5 deals per consultant (1.1 deals per consultant in FY09/21).
We believe this growth will stem from increasing the number of consultants and the number of deals closed per consultant.
Over the medium term, planning for a 30% annual increase in the number of consultants
Strike had 155 consultants (+39.6% YoY) at end-FY09/21. That figure grew at a CAGR of 41.2% from FY08/16 to FY09/21. Based on past performance, Shared Research believes the company can increase its number of consultants by 30–40% annually over the medium term.
To increase its number of consultants, Strike needs to identify candidates who meet its standards, conduct on-the-job training (OJT), and absorb these costs. The company says the number of candidates has increased since it listed in 2016. It explains that personnel expenses per consultant in the Consulting Department were JPY16.7mn in FY09/21, lower than at industry peers. Strike conducts OJT by pairing new consultants (usually inexperienced) with more experienced consultants, who act as supervisors. When increasing the number of consultants in the past, the company found that despite hiring many new consultants, it did not hinder revenue growth. For this reason, the company believes that it should be possible to increase the number of new consultants by around 30% per year, starting them off from OJT. On average, first-year consultants close less than one deal and second-year consultants close roughly one deal. Considering average revenue per deal was JPY59.8mn in FY09/21 and average personnel costs per consultant were JPY16.7mn, Shared Research understands that consultants detract from profits in their first year and begin contributing to profits in their second year.
In FY09/22, Strike plans to increase consultant headcount by 26. The company will hire more than this if it can find good candidates.
Deals closed per consultant
As of end-FY09/21, the number of deals closed per consultant was 1.1 (1.3 at end-FY08/20). The number of consultants increased by 39.6% versus end-FY08/20, and the percentage of first-year and second-year consultants increased, resulting in fewer number of deals closed per consultant. The company increased its workforce by more than 40% YoY in FY08/18 and FY08/19. This rapid increase in the number of consultants has kept the number of deals closed per consultant below 1.5 since FY08/18. Before FY08/17, the number of deals closed per consultant was generally around two.
The company says the number of deals closed per consultant rises as years with the company increase. As most consultants start without experience in M&A brokerage, the number of deals averages less than one in their first year, but this figure increases to around three in their third year and onward.
Medium-term measures to boost deals closed per consultant
Strike plans to increase the number of deals closed per consultant by strengthening efforts to secure contracts and match companies, as well as through business support from specialists.
Restructuring by sourcing route
In October 2021, the company restructured its organization according to the routes for taking on projects, such as financial institutions and accounting firms. It aims to increase the number of projects it takes on by responding to the differing needs of each sourcing route and strengthening relationships.
Strengthening matching
In parallel with the aforementioned reorganization, the company bolstered its searching capability by increasing the number of departments specializing in buyer searches. Moreover, at regular meetings attended by all of the company's consultants, they give presentations on new projects to help match the seller with potential buyers.
Business support from specialists
Strike will increase the number of personnel in the Business Promotion Department to strengthen its support system. It will also strengthen its business support system to assist basic matters (preparation of proposal materials) as well as specialized issues (handling of complex projects).
Long-term initiatives
As long-term initiatives, Strike cultivates exits of startups and operates M&A Online, an M&A information site. The company also says it aims to increase the liquidity of Japanese companies and businesses. However, Shared Research believes these long-term initiatives will have a negligible impact on medium-term performance.
Initiatives related to startups
In October 2021, the company restructured its organization and created an Innovation Support Office. The Innovation Support Office raises funds and searches for partners for startups, and also acts as an M&A broker at the time of exit. The company expects M&A activity to increase in Japan over the long term as a means for startups to exit the market, and as such it plans to redouble its efforts in this area.
According to the Ministry of Economy, Trade and Industry's "Survey Report on M&A Activities of Large Companies and Startups," in 2019, there were 89 venture capital exits through IPOs (75 in 2018) and 42 exits through M&A (42 in 2018) in Japan.
By contrast, in the US the majority of exits have been via M&A since the IT bubble burst in 2000, although most exits were via IPOs until that time. According to the "Venture Company Survey" released by the Venture Enterprise Center, the reasons for this shift were a downturn in the stock market after the IT bubble burst. Also, the enactment of the Sarbanes-Oxley Act in July 2002 caused IPO costs to rise. A third factor was increasing competition, making it more necessary for startups to be acquired at an early stage. According to the Ministry of Economy, Trade and Industry's "Survey Report on M&A Activities of Large Companies and Startups," in the US there were 82 exits through IPOs in 2019 (89 in 2018) and 836 exits through M&A (933 in 2018).
As in the US, Strike believes that startup exits via M&A will become mainstream in Japan, and is cultivating this market accordingly.
Operation of M&A information website, M&A Online
M&A Online is Strike’s M&A information site available to the general public. The site hosts various content such as M&A-related news and legal information. Major content includes M&A News (M&A-related news articles), M&A Archives (a history of M&A by company), and a database of reports on large shareholders. Strike explains that its objective for the site is to increase general understanding and enhance the image of M&A. Monthly page views for M&A Online stayed at around 3mn during FY09/21.
Aim to increase corporate liquidity
Strike’s long-term goal is to make companies more liquid by encouraging the proliferation of M&A. The company believes that as companies become more liquid, people who have taken up that challenge of starting a new business can more easily decide to sell when the business becomes lackluster, and that better liquidity will make it easier for companies to enter new areas of business.
To boost the ratio of startups, in 1997 the Japanese government introduced a tax credit for the promotion of investment in startups. Also, the Law for Facilitating the Creation of New Business was enacted in 2003, making it possible to establish a company with only JPY1 in capital, but these efforts have not been as successful as hoped. According to the “White Paper on Small and Medium Enterprises in Japan” by the SME Agency, the startup ratio in Japan is lower than in other advanced countries, as is the rate of entry into new areas of business. In 2019, Japan had a startup ratio of 4.2%. By comparison, in 2017, the figure was 13.2% in the UK and 13.1% in France.
Strike thinks this is because after starting a business, owners typically see their only options as being to continue the business or to close it. By increasing corporate liquidity—invigorating the sale/purchase of companies and businesses through M&A—Strike aims to make it easier for entrepreneurs to enter new businesses and lay the groundwork for building startups in Japan.
Business
Business description
A boutique M&A broker leveraging CPAs, uses the web to achieve high introduction rates
Strike is a boutique M&A broker that arranges deals between sellers (unlisted companies) and buyers. Strike differentiates with a high percentage of M&A introductions received via its website and a high percentage of employees who are certified public accountants.
Strike specializes in M&A brokerage. It has only one business segment and no group companies.
The M&A brokerage process
Strike divides its flow of the M&A brokerage business into four phases: searching for leads (target companies and businesses looking to sell), turning leads into contracts (signing M&A brokerage agreements with potential sellers), matching companies (finding a potential buyer), and closing the deal (signing a sales agreement). Most times, the process begins by searching for potential sellers. Potential buyers then select the company or business they wish to acquire from among the potential sellers Strike has found.
At Strike, different departments search for potential sellers and buyers, and match them at regular deal meetings. In some cases, a single consultant is in charge of the entire process, from deal search to closing. The company says this process typically takes six to eight months.
Search for leads
Search for potential sellers among unlisted SMEs (through introductions and independent searches)
Strike’s consultants search for unlisted SMEs that wish to sell. Strike handles two main types of deals: those introduced by business partners and those it finds independently. In FY09/21, introductions from business partners accounted for 49% of new contracts.
Business partners introduce potential sellers
Strike has agreements to receive introductions from business partners, including accounting firms, cooperative societies of certified public tax accountants, cooperative societies of certified public accountants, and financial institutions. These relationships are not exclusive on either side, and most business partners have agreements in place with multiple M&A brokers. Key business partners are the Tokyo Certified Public Tax Accountant Cooperative Society (13,681 members as of March 2021), cooperative societies of certified public accountants, and T&D Holdings Group.
Strike says that in most introductions, owners already have a clear desire to sell, so signing agreements with potential sellers is easier than when the company conducts searches independently. Strike pays business partners introduction fees in line with the size of those partners’ contributions.
Strike conducts independent searches for potential sellers
Strike holds seminars for business owners and uses telephone calls and its website to establish contact with potential sellers. At seminars, the company introduces M&A case studies and responds to questions of individual participants. Through FY08/19, the company had held seminars at assembly halls and other locations but, in FY08/20, switched to online seminars in response to the COVID-19 pandemic. According to the company, hosting seminars online instead of in person enables it to reduce associated costs and eliminate restrictions placed on where and when they can be held. The number of applicants per single online seminar ranges from 900–1,600 individuals, and the company recruits participants through direct-mail and advertising and placed ads.
For independent searches, consultants build relationships with owners who are interested in learning more about M&A but have not yet decided to sell, turning leads into potential deals. These searches require more work but are more profitable than introductions because the company does not need to pay introduction fees.
Acquire contracts (enter contract with the seller)
After obtaining a lead, if a consultant believes there is a strong likelihood of a sale, it signs an agreement for M&A brokerage services with the potential seller, and prepares documents for distribution to potential buyers.
Consider potential for sale
When a search turns up a lead with a clear intention to sell, Strike signs an NDA with the potential seller. Consultants then consider the potential for sale by ascertaining the details of the potential seller’s business, analyzing the company, and looking at the seller’s conditions (such as selling price, number of employees to retain, or geographic area of the buyer). If significant gaps exist between a potential seller’s stated conditions and the prospects of selling based on the consultant’s analysis, the two parties discuss the situation.
Take on project by signing agreement to act as M&A brokerage
After consideration, if one of Strike’s consultants believes a company has a high potential for sale, Strike and the potential seller sign an M&A brokerage agreement. In FY09/21, Strike acquired 518 new contracts.
Since FY08/15, Strike has maintained a policy of not undertaking small projects (see the “Revenue per deal” section for details), and in principle does not accept a project if it assesses that the project would not fulfill its requirements.
Unless the potential seller requests otherwise, the agreement is exclusive, and the potential seller may not enter into other M&A brokerage agreements with industry peers.
Prepare documents for potential buyers
After signing an agreement to act as an M&A brokerage, Strike’s consultants propose a transfer method that satisfies the owner’s conditions and prepares documents for potential buyers.
Matching companies (finding buyers)
In the matching process, Strike searches for potential buyers, interviews sellers and potential buyers, arranges for the two parties to meet, confirms the potential buyer’s intentions, and adjusts the basic conditions.
Strike's consultants look for potential buyers in three ways: by consultants, by matching at deal meetings, and through SMART, Strike's M&A brokerage site.
Finding potential buyers through consultant searches
When searching for potential buyers, Strike’s consultants look to company lists and past acquisitions to compile a shortlist of potential buyers. Consultants then contact them, generally by phone or email, to discern interest. In addition to consultant searches, Strike makes proposals to business partners.
Consultants shortlist potential buyers in one of two ways. Either they choose candidates from a database of over 12,000 potential buyers amassed by the company or first analyze the potential seller’s market and business category and then select companies they believe are likely to be interested based on the business’ attributes.
In addition to consultant searches, Strike makes proposals to business partners using anonymized material, and those business partners introduce to Strike any companies that match the described acquisition needs. If such an introduction leads to a deal closed, Strike pays the business partner an introduction fee in line with the size of the partner’s contribution.
Matching at deal meetings
Starting in September 2019, the company assigned consultants whose main task is to search for potential buyers. Since then, at regular deal meetings, the consultants announce newly acquired contracts and match them with potential buyers followed by all consultants, including those in charge of searching for potential buyers.
The company holds deal meetings to create a forum where all consultants can propose potential buyers for a deal, thereby preventing the monopolization of deal information by any one person.
Finding potential buyers through the SMART M&A brokerage site
SMART (“M&A Market SMART™”, short for Strike M&A Rapid Trading system) lists potential sellers anonymously, stating their business category, location, sales, number of employees, target sale price, and business profile. As of November 2021, SMART listed 141 potential sellers.
SMART helps potential buyers search a large pool of acquisition targets with minimum manpower. The site also allows potential buyers to look for acquisitions in areas consultants may not consider, such as in different locations or industries.
Businesses looking for acquisition targets browse the site for information on potential targets. If they find a company of interest, they can submit an inquiry via the site to contact Strike.
Strike launched SMART in January 1999, two years after establishment, to compensate for a lack of manpower to look for potential buyers. Industry peers also operate M&A introductory sites, but SMART was the first on the scene.
However, in some cases, such as when the management of a potential seller decides that it is necessary to consider the impact on employees and business partners of publishing information, the information of the potential seller may not be published on SMART. According to the company, the number of projects posted on SMART accounts for about 60% of the total number of projects it receives.
Potential buyers consider deals
If a potential buyer shows interest in a potential seller, Strike signs a non-disclosure agreement with the potential buyer. Strike then provides the potential buyer with a second proposal containing more detailed information. If the potential buyer remains interested in the purchase based on the second proposal, Strike signs an agreement with the potential buyer, requesting that Strike act as the M&A brokerage.
After the agreement is signed, the potential buyer may meet with the potential seller. If the potential buyer decides to buy, Strike’s consultant helps draft a letter of intent to purchase, which contains purchase conditions, and shows the document to the potential seller.
Next, the potential seller considers the letter of intent. If several potential buyers exist, the potential seller narrows the field down to a single potential buyer, based on the conditions stated in the letter of intent to purchase, impressions from meeting, and other factors.
Closing the deal
For the closing, Strike assists in the process of signing memorandums of understanding, creating the environment for the potential buyer to conduct due diligence, adjusting final conditions between the potential seller and the potential buyer, and concluding the transfer agreement. In FY09/21, Strike closed 151 M&A deals.
Potential seller selects one potential buyer, signs memorandum of understanding
Strike next adjusts conditions to conclude a memorandum of understanding (MoU) between the potential seller and the potential buyer. The MoU states the two parties’ intent to enter a transfer agreement and prohibits the potential seller from negotiating with other potential buyers. After signing an MoU, Strike receives initiation fees from the potential seller and the potential buyer.
Potential buyer conducts due diligence
After signing an MoU, the potential buyer may ask CPAs or M&A advisors to perform due diligence. Strike may also assist potential sellers in the process. Strike explains that many sellers are small, unlisted companies that have little experience with due diligence. As such, it supports the process, explaining which documents will be required by CPAs.
As the M&A brokerage, Strike does not actually perform the due diligence. Strike explains that due diligence is to protect the interests of the potential buyer, and the brokerage performing due diligence could create a conflict of interest between Strike and the client company.
Adjust final conditions, sign transfer agreement
Based on the results of due diligence, the potential seller and potential buyer adjust the final conditions for the M&A deal. After these adjustments, the two parties sign a transfer agreement and proceed to closing. At closing, Strike receives success fees from both the buyer and the seller based on the transaction amount. These fees are calculated using the Lehman method (see the Client attributes section for a more detailed explanation). Strike receives 1–5% of the sale price from the seller and 1–5% of the market value of total assets from the buyer. (See the “Revenue per deal” section for details.)
Distinguishing characteristics of Strike
Strike’s distinguishing characteristics as an M&A brokerage is that it finds a high percentage of buyers via its website, and that it has a high ratio of employees who are CPAs.
Searching for potential buyers through its website
About the SMART M&A brokerage platform
When it was established, Strike lacked the personnel to conduct extensive searches for potential buyers. To compensate, the company built SMART, Japan’s first M&A brokerage website listing selling and buying information and allowing counterparty searches. This site went online in January 1999.
SMART lists a seller’s business category, geographic area, sales, number of employees, target sale price, and corporate profile. Buyers can browse the site for potential sellers. If they find a company of interest, they submit an online form to contact Strike. Shared Research estimates that the site provides 20% of the company’s successful M&A brokerage deals (FY08/20), a figure that is higher than industry peers.
High percentage of employees are certified public accountants
Strike’s second distinguishing characteristic as a boutique M&A broker is the high percentage of its employees who are certified public accountants (CPAs). In FY08/18, 15% of Strike’s employees held CPA certifications, compared with about 6% (as calculated by Shared Research) for Nihon M&A Center, the industry leader. Shared Research believes this helps Strike build better client relationships.
Business owners interested in share valuation and tax implications
According to the Shoko Research Institute’s “Survey of Business Succession at Small and Medium-Sized Companies,” owners who are considering business succession are most interested in assessing the value of their shares and determining tax implications. Shared Research thinks that because Strike has a high percentage of consultants who are CPAs, it can respond accurately to these questions.
Accounting knowledge to handle company valuations and due diligence
Accounting knowledge is necessary for considering a company’s selling potential and conducting company valuations and due diligence. Shared Research understands that Strike’s consultants need to accurately understand accounting terms and financial statements to discern a seller’s business characteristics and commercial practices. Having a high percentage of consultants who are CPAs means staff can look internally rather than going to external accounting firms for accounting-related questions and support.
Shared Research thinks Strike can leverage its high percentage of CPAs to work with companies using specialized accounting terminology and accounting standards, whereas industry peers might shy away from such sellers.
Client attributes
Sellers
For Strike, a typical seller is an unlisted small or medium-sized enterprise (SME) with sales of around JPY1bn. Strike does not specialize in any industry. More than 60% of the deals Strike handles involve business succession, with the rest involving selling off unprofitable businesses, exiting from subsidiaries acquired for investment purposes, and turnarounds. Strike says demand in the latter category tends to rise during economic downturns.
In FY09/21, Strike closed 151 deals (134 in FY08/20). The top five industries represented by seller companies with which the company closed these deals were manufacturing (14.9% of closed deals versus 11.2% in FY08/20), construction (131.1% versus 20.1%), IT (8.0% versus 9.0%), restaurant and food services (6.8% versus 7.1%), and retail and distribution (6.5% versus 6.8%).
When Strike undertakes a deal, it does not set specific standards for a seller company’s level of sales, profits, or assets, no does it narrow down by business category or financial condition. Instead, individual consultants apply their experience to decide whether to take on a potential seller based on the likelihood of finding a buyer. Potential sellers with low expected selling prices often find it difficult to locate a buyer, but demand depends on the industry, timing, and other factors. Setting hard-and-fast rules, Strike explains, can lead to lost opportunities. For instance, even if the potential seller is a pharmacy that only has minor sales, Strike may take on the deal because it recognizes small pharmacy acquisitions are in high demand from larger companies that want to expand their business area and secure more pharmacists. By contrast, in the construction industry, which features a multiple-subcontractor structure, a subcontractor with minor sales may offer little in the way of technical expertise or personnel, making the likelihood of a sale low.
Strike says a potential seller whose debt exceeds its assets might be salable if a bank is likely to forgive some of the debt.
Buyers
Buyers that the company finds are typically general corporations (listed or unlisted), investment companies, or funds. The buyer is usually larger than the seller, but Strike notices no particular trend in the scale of buyers’ sales, profits, or assets. Reasons for purchasing are to increase the business area within a category, to acquire human resources, and to purchase a company in another industry to diversify the business portfolio.
In FY08/19, Strike located 82% of buyers by consultants creating lists of potential purchases and contacting them based on sellers’ needs, while 18% were a result of inquiries via the SMART M&A advisory site.
Strike says that after acquiring one company, some buyers go on to make other acquisitions, but they do not necessarily use the same brokerage exclusively. Strike explains that this is because buyers base their decisions mainly on price and other details of the seller, and that the M&A broker is not a significant factor when comparing sellers.
Revenue per deal: Success fees calculated using the Lehman method
Note: Market value of total assets is the amount of book value of total assets converted to market value.
Note: Sale price refers to the market value of total assets less liabilities.
For M&A brokerage deals, Strike receives initiation fees and success fees from both buyers and sellers. Strike says success fees account for the majority of its revenue.
Fees received from sellers
From sellers, Strike receives an initiation fee upon signing an M&A brokerage agreement. It receives success fees from both buyers and sellers when a transfer agreement is concluded. Initiation fees from sellers range from JPY1mn to JPY3mn, determined according to the seller’s assets. Success fees are determined according to the sale price* using the Lehman method, with the percentage based on common M&A advisory industry guidelines**.
Fees received from buyers
Strike receives an initiation fee from a buyer when the buyer signs an MoU, and success fees when the seller signs a transfer agreement. The initiation fee from buyers is around JPY1mn to JPY3mn, based on the seller’s assets. Success fees from buyers are calculated according to the market value of total assets*** using a rate based on the Lehman method.
Strike uses different bases for calculating the success fees it receives from sellers and buyers. The amount received from the seller is the basis for calculating its success fee received from the buyer. However, the success fee Strike receives from the buyer is based on the market value of the seller’s total assets.
Shared Research understands this arrangement as being Strike’s way of considering the difference in circumstances between the potential seller and the potential buyer: the buyer generally has more sales, profits, and assets than the seller, and has the chance to generate more earnings following the acquisition, while the seller is often retiring using the money received from the sale.
Earnings structure
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: FY09/21 was a 13-month transitional period as the company changed its fiscal year-end.
Revenue
Revenue mainly from success fees
Strike’s revenue mostly comes from the M&A brokerage business, where it receives initiation fees and success fees from both sellers and buyers. Revenue is calculated as fees per deal times the number of deals. In FY09/21, Strike closed 151 deals, with revenue per deal of JPY59.8mn.
Deals closed
The main variables in the number of deals closed are the number of consultants and their productivity (deals closed per consultant). In FY09/21, Strike closed 151 deals and had 133 consultants (average between the beginning and end of the year), resulting in 1.1 deals per consultant.
Number of consultants (including those in the Business Promotion Department)
As of end-FY09/21, Strike had 155 consultants (111 at end-FY08/20), and the average number of consultants at the beginning and end of FY09/21 was 133 (105 in FY08/20). The company aims to expand by increasing the number of consultants. Over the past five years, this number has grown by an average of 41% per year. Over the medium term, Shared Research understands that Strike plans to hire 25 or more consultants each year. The company says that recruiting is going well; the number of consultant applicants has increased since listing in 2016.
Consultant productivity (including those in the Business Promotion Department)
In FY09/21, the number of deals closed per consultant was 1.1 (1.3 in FY08/20). As of end-FY09/21, the number of consultants increased by 39.6% versus end-FY08/20, and the percentage of first-year and second-year consultants increased, resulting in fewer number of deals closed per consultant. The company increased its workforce by more than 40% YoY in FY08/18 and FY08/19. This rapid increase in the number of consultants has kept the number of deals closed per consultant below 1.5 since FY08/18. Before FY08/17, the number of deals closed per consultant was generally around two.
Strike explains that the number of deals closed per consultant tends to rise along with experience, and that less than one deal is common for a first-year consultant and three for a consultant with three years of experience. The company also notes that the number of deals per consultant tends to fall during business downturns, such those following the global financial crisis and the Great East Japan Earthquake, as buyers grow reluctant to make acquisitions.
To increase the number of deals closed per consultant, Strike is hiring more sales support staff so that consultants can focus on highly specialized work. In addition, the company has hired lawyers and CPAs as support staff, thereby stepping up support for consultants. (See the “Medium-term outlook” section for details.)
Note: Figures for first-year consultants reflect the net increase in consultants compared to the previous fiscal year. Second-year consultant figures are the number of first-year consultants in the previous fiscal year. Consultants in their third year or after are calculated by subtracting the number of first-year and second-year consultants from the total number of consultants.
Revenue per deal
After Strike changed its policy regarding small deals, revenue per deal tends to vary depending on the size of large deals (those with fees of JPY100mn or more). In FY09/21, revenue per deal was JPY59.8mn (JPY51.6mn in FY08/20), rising because the company closed 17 large deals (versus 16 in FY08/20). Revenue per deal increased from FY08/15 to FY08/17 largely because Strike decided in FY08/15 not to handle small deals and began vetting deals more stringently.
Strike is not targeting higher revenue per deal. However, higher name recognition and trustworthiness as a result of its listing in June 2016 has caused an uptick in the number of large deals it has contracted for, along with higher revenue per deal for other deals.
Operating profit
Gross profit
Strike’s main cost of revenue is salaries and allowances, bonuses, and introduction fees. Salaries and allowances include the fixed portion of consultants’ salaries, while bonuses and introduction fees vary in line with revenue.
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: The number of consultants is the average number of consultants in the Consulting Department at the beginning and end of the year. The company’s consultants are members of either the Consulting Department or the Business Promotion Department. Consultants in the Consulting Department perform all M&A brokerage operations, and associated personnel expenses are recorded as cost of revenue. Meanwhile, consultants in the Business Promotion Department perform sales activities targeting accounting firms and other business partners, and associated personnel expenses are booked as SG&A expenses.
Note: FY09/21 was an irregular 13-month period due to a change in fiscal year-end.
Salaries and allowances
Salaries and allowances, a cost of revenue, refer to the fixed portion of salaries paid to consultants belonging to the Consulting Department and are calculated as the number of consultants times salaries and allowances per consultant. In FY09/21, salaries and allowances were JPY873mn, and the number of consultants (average between the beginning and end of the year) was 115. Salaries and allowances per consultant were therefore JPY7.6mn.
The number of consultants in the Consulting Department has grown at a CAGR of 28% over the past five years (as of end-FY09/21).
Shared Research estimates that salaries and allowances per consultant in the Consulting Department are stable at around JPY7mn. Strike remunerates employees in line with performance.
Performance-linked bonuses
Strike pays performance bonuses to consultants. The company says it calculates bonuses based on revenue minus introduction fees. In FY09/21, bonuses amounted to JPY1.2bn. During the year, bonuses accounted for 14.9% of revenue minus introduction fees. Bonuses have been around 14–16% of revenue minus introduction fees since Strike began disclosing detailed cost of revenue data in FY08/15.
Introduction fees linked to revenue
Strike pays an introduction fee to the business partner that introduced the seller or buyer of a successful deal. The introduction fee is in line with the size of the partner’s contribution. In FY09/21, introduction fees totaled JPY841mn. Introduction fees as a percentage of revenue were 9.3%.
Strike says introductions account for around half of deals closed. Introduction fees made up a higher percentage of revenue in FY08/17 because a business partner introduced a large deal generating JPY510mn in fees. Strike notes that although introduction fees lower the gross profit margin, such deals are easier to close than deals located through its own searches, because owners’ selling intentions are clear.
SG&A expenses
The main components of SG&A expenses were salaries and allowances (18.5% of the total in FY09/21), directors' compensations (14.7%), rent expenses on land and buildings (14.5%), and advertising expenses (6.3%). Next in size were bonuses (5.2%) and depreciation and amortization (2.8%). Shared Research understands that Strike’s SG&A expenses are mostly fixed costs, and have little direct connection to revenue trends.
Note: Amounts in the table may differ from company data due to differences in rounding methods.
Note: The number of consultants is average between the beginning and end of the year.
Note: The company’s consultants are members of either the Consulting Department or the Business Promotion Department. Consultants in the Consulting Department perform all M&A brokerage operations, and associated personnel expenses are recorded as cost of revenue. Meanwhile, consultants in the Business Promotion Department perform sales activities targeting accounting firms and other business partners, and associated personnel expenses are booked as SG&A expenses.
Salaries and allowances
Strike pays salaries and allowances to consultants belonging to the Business Promotion Department and personnel in the Business Operation Support Department, Marketing Department, and administrative departments (non-consultants). The company established the Business Promotion, Business Operation Support, and Marketing departments during an organizational change in FY08/18, simultaneously increasing headcount so that it paid salaries and allowances of JPY149mn (+169.3% YoY). Since FY08/19, salaries and allowances have trended up in tandem with a rise in the number of consultants belonging to the Business Promotion Department. Salaries and allowances per employee (sum divided by the average of total number of consultants in the Business Promotion Department and non-consultant personnel between the beginning and end of the year) has hovered around JPY8mn since FY08/18.
Rent expenses on land and buildings
Strike pays rent for its head office and sales offices. Rent expenses on land and buildings has increased in tandem with an expansion in personnel, but rent per employee is holding steady at around JPY2mn. In FY09/21, rent expenses on land and buildings were JPY329mn, of which JPY253mn was for head office rent.
Advertising expenses
In addition to the costs of renting space for seminars targeting company management to search for sellers, advertising expenses include newspaper advertisements and direct mail to reach business owners. From March 2020, the company cancelled in-person seminars and moved to online seminars to prevent the spread of COVID-19. As a result, advertising expenses declined. In FY09/21, advertising expenses picked up again.
Strengths and weaknesses
Strengths
Among numerous M&A brokerage firms, trusted as one of the three listed companies specializing in M&A brokerage: The M&A brokerage industry has no regulatory agencies, regulations, or licensing systems. M&A service providers range from sole proprietors to listed companies, and M&A brokers have no products or significant assets, nor do they receive third-party assessments. Absent these differentiators, Shared Research thinks SME owners tend to choose M&A brokers based on name recognition, track record, and scale (revenue, profits, and assets). Over the 23 years since its establishment, Strike has brokered more than 600 M&A deals, and listed on the TSE First Section in June 2017. Strike explains that since listing, large financial institutions have become business partners and large deals (those with success fees of JPY100mn or more) have increased. Shared Research believes the increased sense of trust from being a listed company will increase the number of deals, and building up a track record will snowball into further deals.
Closes a large number of deals per consultant through the use of its website: The company established SMART, an M&A brokerage website, before its competitors set up their own competitive counterparts. This website enables users to efficiently search for a large and indefinite number of potential buyer companies without expending manpower. According to the company, it closes a larger percentage of the deals with buyers through its website than other companies in the industry. At end-FY09/21, the number of consultants grew by 39.6% versus end-FY08/20, and the percentage of first-year and second-year consultants increased. These factors contributed to the decline in the number of deals closed per consultant annually, which fell to 1.1 in FY09/21 (versus 1.3 in FY08/20). Competitor Nihon M&A Center Inc. closed 1.1 deals per consultant in FY03/21 while M&A Capital Partners Co., Ltd. closed 1.1 per consultant in FY09/21. Despite the impact of a rapid increase in the number of consultants, the company still managed to maintain its per-consultant deal closures at a similar level with its industry peers.
Accumulation of mechanisms that enable the company to facilitate deals as an organization: Since its listing in 2016, the company has employed a trial-and-error method to streamline training for new employees and brokerage operations. In 2017, it established the Business Operation Support Department and established a system through which inexperienced consultants receive support from lawyers, certified public accountants, and other qualified personnel. Later, in 2019, the company decided to begin holding regular meetings regarding deals, which provided a forum through which newly acquired sellers could be matched with buyers secured by all consultants. Accumulating advantageous mechanisms such as these have enabled the company to enhance its business performance as an organization, without relying on specific “star players.”
Weaknesses
Fewer business partners than industry leaders, putting Strike at a disadvantage in obtaining information: Nihon M&A Center was established in 1991, earlier than Strike, and focused on cultivating business partners from the start. As of end-FY03/21, Nihon M&A Center’s business partners in deal searches numbered 969 accounting firms, 96 regional banks, and 212 shinkin banks, or around 20% of accounting firms (Shared Research’s estimate), 90% of regional banks, and 80% of shinkin banks in Japan. Shared Research understands that Strike has fewer business partners than Nihon M&A Center, so is at a disadvantage in locating potential deals.
Difficulty differentiating from competitors leads to lower fees per deal: Strike’s IPO was later than industry peers, and compared to its peers the company has lower name recognition, less of a track record, and a smaller scale of revenue, profit, and assets, the key factors business owners use to choose an M&A broker. Shared Research understands that larger deals are more profitable, as the cost of closing a deal varies little based on size, but to differentiate Strike sets a lower bar on fees and engages in relatively lower-margin deals. As such, Strike’s revenue per deal closed is lower than industry peers, at JPY59.8mn (FY09/21), compared with Nihon M&A Center’s JPY75.1mn (FY03/21) and M&A Capital Partners’ JPY88.1mn (FY09/21).
Proportionally higher fixed costs due to being smaller than industry peers, leading to lower profitability: Strike’s OPM is 38.2% (FY09/21), lower than industry leader Nihon M&A Center’s 45.4% (FY03/21). Shared Research believes the reason is Strike’s higher SG&A expense ratio at 25.2% versus 16.4% for Nihon M&A Center over the same period. Strike is smaller than Nihon M&A Center, and its costs are relatively higher, leading to lower profitability.
Market and value chain
Market overview
The number of deals closed by the four leading boutique M&A advisors has continued to grow since 2010, when data became available, in line with an expanding market for M&A brokerage services for unlisted companies.
According to Recof Data (M&A Retrospective 2020), press reports and other available data sources indicate that 2,944 M&A deals were closed (-1.9% YoY) between Japanese companies in 2020. Shared Research’s calculations suggest the potential market for business succession is 40,000 companies over the next 10 years.
Number of M&A deals rising among unlisted companies in Japan
Strike brokers M&A deals between SMEs*, as well as when SMEs are purchased by listed companies. No formal and accurate data by an industry organization exists on the number of M&A deals involving SMEs. One reason is that deals between SMEs can include transfer agreements between the two parties without mediation by M&A brokers. M&A brokers require no special certifications, and advisors range in size from sole proprietors to listed companies.
According to Recof Data (M&A Retrospective 2020), press reports and other available data sources indicate that the number of M&A deals closed declined to 2,944 (-1.9% YoY) in 2020 due to the spread of COVID-19. Over the medium term, this figure is on a uptrend as business succession needs increase. The number of deals closed fell off temporarily during business slumps following the global financial crisis of 2008 and the Great East Japan Earthquake of 2011, when there was reluctance to buy. The market has since recovered, and the long-term trend is upward. During business downturns, a rise in the number of sellers trying to achieve corporate turnarounds helps offset the general fall in M&A deals.
Four listed boutique M&A advisors disclose operating performance: Strike, Nihon M&A Center Inc. (TSE1:2127), M&A Capital Partners Co., Ltd. (TSE1:6080), and Yamada Consulting Group Co., Ltd. (TSE1: 4792). Shared Research assumes that the overall number of M&A deals closed moves in tandem with deals closed by these four companies.
The overall number of deals closed by the four leading M&A brokers has been growing since 2010. Total deals closed in 2020 numbered 891 (+6.6% YoY), with a CAGR of 22.4% between 2012 and 2021. The rising age of SME business owners and a shortage of business successors have prompted an increase in succession through M&A.
Note: The number of deals in 2021 refers to FY03/21 for Nihon M&A Center, FY09/21 for M&A Capital Partners (consolidated), FY09/21 for Strike, and FY03/21 for Yamada Consulting Group.
Note: For the Yamada Consulting Group, deals closed are in the management consulting business.
Note: M&A Capital Partners adopted consolidated accounting following the merger with the M&A brokerage Recof Corporation in FY09/17. Prior to 2016, its results are on a parent basis.
Succession through M&A increasing, due to aging SME owners and shortage of business successors
According to the Small and Medium Enterprise Agency’s “Business Succession Guidelines,” SME owners are struggling to find successors. The guidelines point to a falling number of childbirths in Japan and the fact that children of business owners are choosing other careers.
According to the guidelines, the percent of companies that saw a change in presidents within the year fell from an average of 5% in the 1970s to 2.46% in 2011. Given a shortage of business successors, the age of SME owners has increased, with most in their late 60s as of 2015. The average age of business owners coincides with the average age when the president of a company typically steps down. Teikoku Databank’s “Analysis of Presidents across Japan (2017)” indicates that the average age at which a company president changed in 2016 was 67.1.