'Friendly' activist wins Japan's trust as hostile funds struggle

Fri May 16, 2014 8:16am EDT

* Taiyo aims to be a long-term investor in portfolio companies

* Invested in Roland for 7 years before joint deal

* Few foreign activist investors succeed with aggressive moves

By Ritsuko Ando

TOKYO, May 16 (Reuters) - When activist investor Brian Heywood first met the newly appointed CEO of Japanese musical instruments maker Roland Corp over a year ago, he launched into a passionate discussion about music rather than the company's weak finances.

That friendly approach led to a series of conversations on how to improve its business and culminated in an announcement this week of a joint 42.6 billion yen ($419.4 million) management buyout (MBO) by CEO Junichi Miki and Heywood's Taiyo Pacific Partners, a fund based in the United States but focused on Japan.

The move takes the company private and is aimed at helping it push through drastic and potentially volatile restructuring.

It also marks the rise of a new and friendly style of shareholder activism in Japan, where funds such as Steel Partners have grappled with a conservative corporate culture criticised for prioritising long-standing business ties over shareholder returns.

"Our intention is never to run the company," Heywood told Reuters in an interview. Taiyo limits its investments to companies that take a cooperative stance. "We want to work with smart management that can do the right thing."

In a major endorsement of such an approach, it was chosen last month as one of the asset managers for Japan's Government Pension Investment Fund, the world's largest public pension fund which is undergoing reforms to cope with the country's ageing population.

Heywood, a former missionary who is fluent in Japanese, said Taiyo aimed to be a long-term investor in the companies in its portfolio and wasn't anxious for a hasty exit.

In fact, Taiyo had already invested in Roland, which makes instruments such as synthesizers, digital pianos, and guitar amps, for seven years before the MBO deal. It is currently invested in 45 companies in Japan and manages over $2 billion.

Heywood acknowledged that kind of investment timeframe isn't for everyone. It's also not clear whether and how long it will take for the deal to turn a profit for Roland.

"Obviously, we're a fund and I have to make money for our investors. So there will be some exit for us some time," he said. "But we were investors in them for seven years before this. So seven years is not a long time for us."

BITTER DISPUTE

Few foreign activist investors, who have tried more aggressive moves, have succeeded.

U.S. private equity company Cerberus was locked in a bitter dispute last year with railway and property conglomerate Seibu Holdings last year, when Cerberus tried and failed to take control of the company's board.

The two sides appeared to set aside differences earlier this year to prepare for an IPO, but Cerberus pulled out of the recent offering due to what sources said was dissatisfaction with pricing.

Steel Partners forced the removal of management at Japanese wig maker Aderans in 2008, but the company's shares have since fallen. The fund tried and failed to replace directors at brewer Sapporo Holdings in 2010.

While the relationship between Sony Corp and billionaire Daniel Loeb's Third Point has been more civil, the electronics giant has still rebuffed the hedge fund's suggestion to spin off its entertainment arm.

Roland's Miki said the company had known for years that it needed to restructure but had moved slowly - too slowly, he realised after seeing rivals at trade shows earlier this year launching new products and reshaping themselves through restructuring and M&A.

Looking back on their first meeting, the former sound engineer said he was struck by Heywood's enthusiasm.

"He started talking about instruments right away, so the impression wasn't really that of a normal American. I got the sense he was very passionate," he said. ($1 = 101.5750 Japanese Yen) (Additional reporting by Chikafumi Hodo and Susan Thomas)

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