Furthermore, the funds who used to be more vocal have quietly changed their strategies. They became less hostile and more constructive.
Sony: The Activist Fight That Should Not Have Been Fought
New on the scene is Mr. Loeb from Third Point Reinsurance Ltd. His first target in Japan was Sony. Mr. Loeb did not succeed at Sony. He made a strategic mistake when he let leak to the public a letter to Mr. Kazuo Hirai, President and CEO of the Sony corporation, that was aggressively demanding the company to sell as much as one-fifth of its money-making entertainment arm. Mr. Loeb's idea was to free- up cash in order to revive the ailing electronics business at Sony. Personally, I do not see the merits in such a strategic move.
But more importantly (and surprisingly (-:), Mr. Loeb was not familiar with my serious of posts on shareholder activism in Japan. If he had been he would have got to know that when writing a letter to a Japanese CEO firstly, you do not let it leak to the public before the letter even is in the mailbox.
Secondly, you astutely begin such a letter by apologizing for writing to them out of the blue. Japanese just do not like surprises too much. Then carefully you explain your thought why company x needed to do more for its shareholders and what action you have in mind enhancing shareholder value and the company’s competitive position on the long run.
The company might than respond with a letter on its own, and very likely your proposal gets dismissed in a polite manner. But by trotting carefully, and by deciding to lose round one gracefully, you set the stage for getting traction on the longer run. Especially foreign Investors have to recognize that Japan is still just getting used to a more activist approach by its shareholders. If foreign activist start treating Japanese firms differently to U.S. ones they very likely will reap benefits on the long haul in many cases.
Mr. Loeb changed tactics at Sony later on. It is said that he had a polite meeting in Tokyo with senior management behind closed doors. For an activist venturing in Japan whose fame first came on letting leak letters to the public this was quite an u-turn. Suddenly he wanted to be a partner to Sony. But it was too late. He started what could have become the biggest fight of his activist career wrong footedly. Mr. Loeb's request was politely rejected by Sony and after one and a half years he was throwing in the towel and selling its stake with supposedly a 20% gain. Not a bad ROIC but not great either for such a hassle.
For many observers and investors, especially those located in the western hemisphere, the victory of Sony was vindicating their negative bias towards Japan. To them it was plain clear that activist approaches in Japan are fruitless and will never succeed. But that conclusion is far off the mark. And Mr. Loeb is well aware of that fact. He did make a mistake in choosing the wrong company to get engaged with and the way in which he approached Sony was inadequate. But not the fact that he dared targeting a Japanese company. After the Sony disappointment he publicly stated that: “We are excited about potential investment opportunities in Japan (...) Abenomics is working (...). In 2014 Japan created an index of 400 domestic companies that employed ‘best practices’ of corporate governance. The jockeying to be part of the index set off conversations about outside directors, transparency, and modernizing investor relations.” (Bloomberg)
When the news came out that Mr. Loeb was targeting Sony for an activist campaign I was more than surprised. Mainly, because Sony is a highly leveraged company with a low structural profitability. I do think that the situation at Sony could be mend by certain strategic shifts. But I could not get my head around why an activist would approach a company like Sony. Especially when bearing in mind that so many undervalued Japanese companies exist that have a good underlying business and are in much better financial condition.
Fanuc: The Activist Fight that Should Not Have Succeeded
Apparently, Mr. Loeb was well aware of the need to change tactics when approaching a Japanese company. After the abovementioned interview, where Mr. Loeb pointed to the huge investment opportunities in Japan, he walked its talk. In late 2014 Third Point took a stake in Fanuc.
Governance and profitability wise Fanuc is the total opposite of Sony. It is a highly secretive and very profitable robotics firm, which rarely had engaged inot direct dialogue with its shareholders. Instead it had chosen to hoard a vast and ever expanding amount of cash. Market observers were bewildered by Mr. Loeb's latest move. Not one expected his foray to succeed at this company. Fanuc was basically a synonym for the old guard of corporate Japan. Numerous investors in the past had been trying to encourage Fanuc to change its attitude towards its shareholders. Rather sooner than later most of them gave up, often with a loss.
When the firm surprisingly announced that it would start talking to shareholders and return some of its cash to the investors it resonated far and wide in the investment community. Since than Mr Loeb has even met with Fanuc’s president Yoshiharu Inaba for having a tea and chatting at its headquarters in the foothills of Mount Fuji.
In addition, Mr. Loeb is receiving further encouragement from the very top of the Japanese government. It is said that he had private meetings with Prime Minister Abe, Finance minister Aso, and with Haruhiko Kuroda, Governor of the Bank of Japan. Eureka! How things have changed in Japan. Can anyone imagine Daniel Loeb getting to see any top politicians here in Europe? Third Point’s strategic shift concerning activism in Japan is certainly bearing fruit.
Shareholder Activism in Japan: The Enigma
There is some irony in Mr. Loeb's activist approaches to corporate Japan. With Fanuc Mr. Loeb succeeded at a Japanese company that had the traditional Japanese corporate governance framework in place and was considered as one of Japan’s most secretive and intransparent company. Sony, on the other hand, has an Anglo- Saxon style, committee based, corporate governance framework. Nine out of 12 directors are independent.
This shows once again that the formal corporate governance framework is of minor importance when it comes to looking out for promising companies in Japan. More important is who the managers and directors in charge are. Any investor in Japan needs to sense if those people in charge are aware of a stock being undervalued and if they have any desire to tackle that issue. Only than will the activist venture into Japan, and investing in the Japanese stock market in general, crowned by success.
Source:
Sony Meets Outspoken Activist Investor, but Courtesy Reigns (Dealbook)
Loeb Sees More Opportunities in Japan as Fanuc Stake Makes Gains (Bloomberg)
Winds of change (Economist)
Sieg von Sony über Investor ist Niederlage für Japan (Japanmarkt)
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