By Tim Kelly
TOKYO May 22 Few foreign activist investors
have made much headway in forcing change in Japan, where a
conservative corporate culture favours long-standing ties with
banks, business partners and workers rather than shareholders
Struggling electronics giant Sony Corp, though,
with more foreign and fewer bank shareholders, may prove
something of an exception. That's the hope, at least, of
Californian billionaire Daniel Loeb, whose Third Point hedge
fund has built up a more than 6 percent stake in Sony, making it
the group's biggest stockholder.
Loeb wants CEO Kazuo Hirai to sell as much as a fifth of the
group's money-making entertainment arm - movies, TV and music -
to free up cash to revive an electronics business that has been
battered by competition from Apple Inc and Samsung
Electronics. He reckons the shake-up could increase
Sony's market value by 60 percent.
The target and timing of his polite hand-delivered overture
are not accidental.
Sony earns two-thirds of its revenue overseas and, for
corporate Japan, appears more westernized. Hirai, who spent most
of his childhood in the United States, was picked by former CEO
Howard Stringer, a Welshman, in part for his ability to be both
a Japanese boss in Sony's domestic electronics hub and a western
CEO in the U.S.-centred entertainment business.
Also, investors are clamouring to get back into the world's
third-biggest economy where Prime Minister Shinzo Abe's promise
of deflation-busting policies has triggered a share bonanza.
"He (Hirai) is very accessible to a western person," Loeb
told Reuters in Tokyo the day after announcing that his hedge
fund had built up a $1.1 billion stake in Sony. "And we wouldn't
be here if we didn't think there was a tailwind from the
economic policies in Japan."
Sony shareholders will be able to gauge Hirai's response to
Loeb's proposals when the CEO gives an update on his revival
strategy - with a focus to date on growing sales of smartphones,
digital cameras and PlayStation game consoles - at a press
briefing on Wednesday.
The Nikkei Japanese daily newspaper reported that Sony was
considering evaluating Loeb's proposal. Sony's U.S. listed
shares rose more than 9 percent.
Sony's share registry could work in Loeb's favour.
The $21.2 billion electronics group has a large pool of
foreign shareholders, who could be more easily tempted by the
lure of a near-term valuation gain. Before Third Point amassed
its stake, 35 percent of Sony stock was held overseas, compared
with 22 percent at rival Panasonic Corp.
Sony's foreign ownership peaked at 53 percent six years ago,
but has been whittled down as the group's losses ballooned and
investors exited deflation-snarled Japan.
Sony also stands out among its Japanese peers by having less
of its stock held by conservative banks and insurance companies.
Prior to Third Point's arrival, Sony's top 20 shareholders held
around 13 percent of its shares, with Japan's big banks
accounting for about half of that. At Panasonic, with an
ownership structure similar to most Japanese blue chips, banks
and insurers hold more than half of the 22 percent owned by the
top 20 investors.
While driving change in Japan can be tough - foreign
activist investors are often stigmatised as asset stripping
sharks - Loeb may be in the vanguard of a new wave of activism
attracted by 'Abenomics'.
"Westernized companies are in the minority among large caps,
for sure. Boards tend to focus on stakeholder management at the
expense of shareholder value," said Oscar Veldhuijzen, a
London-based fund manager at The Children's Investment Fund
Management (UK) LLP. "The background of activism is very
negative as it used to be a sort of Mafioso involved with a very
different type of activism involving a lot of violence."
A preoccupation by Japanese companies in the 1980s and 1990s
to keep shareholder meetings benign created a niche for sokaiya
- gangsters who extorted money by threatening to disrupt
carefully orchestrated annual meetings.
Veldhuijzen can boast a rare success for foreign activist
shareholders. Rebuffed in a 2007 bid to raise dividend payouts
at Japan's Electrical Power Development Co, or J-Power, The
Children's Investment Fund Management bought a stake in former
state-run monopoly Japan Tobacco in 2011, and called
for higher dividends, management changes and a share buyback.
At the time, the government was looking for cash to help the
reconstruction effort after the devastation of the March 2011
earthquake and tsunami. It agreed to increased dividends and
this year sold a third of its stake in Japan Tobacco for more
than $10 billion. At the same time, Japan Tobacco bought back
stock worth more than $2 billion.
"They needed the money and the popularity of the government
was very low. It was a very unique activist situation in that
respect," said Veldhuijzen, who says his fund's return on its
Japan Tobacco stake is "close to half a billion dollars."
Veldhuijzen said 'Abenomics' could spur foreign activists to
seek out Japanese targets, though he warned there are few
big-name companies where their attentions would be welcome.
"When I look at Japan, I struggle to find large caps with
attractive business models," he said, though he noted that
Central Japan Railway Co, which operates the country's
most lucrative bullet train lines, could be a "phenomenal"
company if management could be persuaded to raise prices and
ditch plans to spend $50 billion on a high-speed magnetic
levitation rail line from Tokyo to Osaka in western Japan.
To tap into the 'Abenomics' effect, Veldhuijzen said his
fund recently raised its stake in Japan Tobacco - which now
accounts for 15 percent of the fund - hoping a return to
inflation will push up cigarette prices, which at around $4 a
pack are far cheaper than in other developed markets.
Josh Schechter is another investor who has succeeded where
others have failed in Japan. Schechter is a partner at activist
fund Steel Partners Holdings, which forced the removal in 2008
of management at Japanese wig maker Aderans Co. A year
later Steel Partners wrested control of the board, and still
owns 28 percent of the company.
"It's important you have a credible plan," said Schechter,
who sits on the Aderans board. He said his fund aligned itself
with local shareholders unhappy with the board and with managers
wary of where the company was heading. The fund, though, could
not repeat its success in 2010, failing to place its candidates
on the board of brewer Sapporo Holdings. It later sold
its 18 percent stake in the company.
Schechter declined to say whether his fund would chase new
Japanese targets in the current climate, but noted Japan could
spur investors if it tweaked its tax code to let companies turn
business units into separate entities and offer their shares to
existing stockholders free of a capital gains levy - the type of
corporate rejigging at the core of Loeb's proposal for Sony.
SHORT-TERM VS LONG-TERM
Loeb needs to convince other Sony shareholders that selling
part of the entertainment business would both generate cash to
help the struggling maker of Bravia TVs and Vaio laptops and
improve profitability at Sony Entertainment, which would remain
under Sony's control.
"I think the proposal will be welcomed by foreign
shareholders, but won't be 100 percent acceptable to Japanese
ones," said Yuuki Sakurai, CEO at Fukoku Capital Management, the
investment arm of Fukoku Mutual Life Insurance, which owns Sony
stock. Although Sony looks westernized, its "culture is heavily
rooted in Japan," he noted.
"The American way of focusing on efficiency is not the only
way to raise profits," Atsushi Osanai, associate professor at
Waseda Business School, told Reuters Insider television. Osanai
worked at Sony from 1997 to 2007. "Japanese companies are not
very efficient, but they make very good products and have the
ability to create new things. That's more valuable on the
long-term scale. Chasing after short-term benefits isn't
necessarily good for shareholders," he said.
An investment banker in Tokyo, who has worked on projects
for Sony, said the risk of Loeb's plan would be that it could
deliver a $2 billion gain, but depress the share price by
putting at arm's length one of its few stable profit centres.
Sony considered, and dismissed, such a plan over a decade
ago, said the banker, who didn't want to be named because he was
not authorised to speak to the media.