Why don’t you shift to IFRS (that goodwill amortization expense is restrained)?

In conclusion, to prioritize the speed of M&A.

Our company, along with SHIFT, became “the company with the most M&A deals in Japan in 2023 (10 deals)”. We went public in July 2023, and we executed those 10 deals (and 15 others combined) in the 5 months following our listing. You can see that we are currently executing M&A projects most speedily in Japan.

On the other hand, all of the subject companies in our past projects have adopted Japanese GAAP, and we believe that this trend is likely to continue. If we adopt IFRS, we will need to recalculate prior year financial statements for the companies we M&A (even if they are small) as if they had adopted IFRS. We understand that this would fall far short of the speed of M&A at the beginning of this section.

In light of the above, when weighing the nominal profit-increasing benefits of IFRS adoption against the speed of our M&A activities, and considering M&A as our biggest growth driver, our final decision was to prioritize the speed of M&A and return the fruits of discontinuous growth to our shareholders, even if we had to forego the adoption of IFRS.

On top of that, in order to compensate for the disadvantages of not adopting IFRS as an M&A company, we are in a situation where we repeatedly emphasize the explanation of EBITDA and income before amortization of goodwill from the perspective of informing investors of the actual situation.

There are many M&A companies (commonly known as Serial Acquirors) in Europe and the United States, and the concept is common in Western capital markets. In addition, IFRS and U.S. GAAP, which do not amortize goodwill, are common for both the M&A company and the acquiror.

In the Japanese market, where the above concept has not been widely accepted, I believe that it will take time for it to spread. Conversely, however, we believe that until the above ideas become widespread, there are still opportunities for further investment by our company. This is because, if GENDA were to switch to IFRS, operating income and net income would suddenly rise significantly, and P/E ratios would suddenly drop significantly, making the company look cheap, even though there would be no substantive difference as a company.

When our company, which aims to be the world’s largest entertainment company by 2040 in terms of market capitalization and EBITDA, is five to ten times larger than it is today, we will reach a point where the overall importance of repeating a number of small M&A transactions will decrease, or the organization will be large enough to handle them adequately. At that time, we will be in a position to make the change to IFRS. At that point, I think it is possible that the benefits of the change to IFRS will prevail at some point.

Tag: 2024/3/25