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 seeking value.
The shake-up, which Hirai said yesterday would be considered by the board, could increase Sony’s market value by 60 per cent
Struggling electronics giant Sony Corp., though, with more foreign and fewer bank shareholders, may prove something of an exception. That is the hope, at least, of Californian billionaire Daniel Loeb, whose Third Point hedge fund has built up a more than six per cent 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 battered by competition from Apple Inc. and Samsung Electronics. He reckons the shake-up, which Hirai said yesterday would be considered by the board, could increase Sony’s market value by 60 per cent.
The target and timing of Loeb’s polite hand-delivered overture are not accidental.
Sony earns two-thirds of its revenue overseas and, for corporate Japan, appears more westernised. Hirai, who spent most of his childhood in the US, 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 US-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 said 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.”
Third Point’s proposal is “one that affects a core part of Sony’s business and the direction of our management, so the Sony board will give it thorough consideration,” Hirai told reporters. Sony shares earlier closed up 5.9 per cent as investors bet that Sony would at least look at the proposal. The stock has gained 22 per cent since Third Point arrived.
Highlighting the challenge Hirai faces in reviving consumer electronics as a profit centre, Sony scaled down its sales targets for digital cameras and smartphones for the year to end-March 2015 by 13 to 17 per cent, and chopped its operating profit margin goal for its PlayStation gaming business to two per cent from eight per cent.
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.
Sony’s foreign ownership peaked at 53 per cent 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 per cent 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 per cent owned by the top 20 investors.
While driving change in Japan can be tough, Loeb may be in the vanguard of a new wave of activism attracted by ‘Abenomics’.
“Westernised 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.