spinoffs

Break up Sony? It's harder than it looks

May 16, 2013: 7:37 AM ET

Until recently, takeover bids were rare in Japan, where private equity and hedge funds have been traditionally viewed as vultures.

By Michael Fitzpatrick

<> on April 10, 2012 in New York City.

FORTUNE -- Sony's best selling TV, the Bravia, translates as "ferocious, savage, wild, untamed" -- the very adjectives that are probably on the minds of Sony executives as they consider the latest bid from gaijin, or outsiders, to upset the highly ordered decorum of doing business in Japan.

The latest audacity aimed at Japan from beyond its shining seas? A U.S. hedge fund, one of Sony's (SNE) biggest shareholders, has proposed the firm should spin off up to 20% of its entertainment business and use the funds to revive and focus on its struggling electronics arm. In a May 14 letter to Sony President Kazuo Hirai, first published in the New York Times, Daniel Loeb, chief executive of hedge fund Third Point, suggested Sony take 15% to 20% of the entertainment unit, the one that makes Sony money, public. In the light of such counsel, which analysts have for years been calling on as sound if not essential, Sony shares are surging.

Oddly the reaction in Japan has been muted, with Sony merely issuing a terse statement to politely and gently rebut the advice, although apparently it may have come as a recent surprise that Mr Loeb held such a large control -- his fund owns 64 million Sony shares, which is about a 6.5% stake in Sony. "The entertainment businesses are important contributors to Sony's growth and are not for sale," wrote Hirai in Sony's statement.

It ends: "We look forward to continuing constructive dialogue with our shareholders as we pursue our strategy." A suggestion, given Japan's long history of not tolerating any shenanigans from shareholders, particularly foreigners with an eye out for the main chance, that would have better ended as "just as long as you are as quiet and undemanding as the average Japanese shareholder." Shareholder activism has never been much of a participating sport in Japan.

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But there is hope. "Mr Loeb's proposal certainly came out of the blue, so I am not surprised that there is no immediate response," says Gerhard Fasol of Tokyo-based Eurotechnology. "And Mr Hirai did meet Mr Loeb which was not always the case in the past." However Mr. Fasol is unsure just how far Mr. Loeb may get. "He does not have that much power over Sony. After all they are not like Sharp ," he says. "They don't have the same problems as Sharp so they don't have a gun to their heads." The hope must be that like the the other Bravia that is plaguing Sony -- its eight years of loss-making TVs -- the foreign meddlers might just disappear.

Struggles with foreign shareholders have nearly always turned to favor Japanese companies, after all. Just six years ago when Steel Partners launched a tender offer for the 90% of a famous Japanese sauce maker, Bull-Dog, the food firm sought a white knight intervention and then a poison pill to save itself from an aggressive takeover bid from the Americans. Finally, Japanese courts voted in favor of the pill.

Analysts here say an increase in more moves like this from foreign firms is further proof that Japanese industries now face a new era of corporate mergers and acquisitions that will more closely resemble deals seen overseas. Until very recently takeover bids were rare in Japan where private equity and hedge funds have been traditionally viewed as corporate vultures. Nor have efforts by overseas investors to wring higher returns from companies found much success in Japan.

Mr Loeb's tactics are less hostile. But historic evidence suggests that Sony and Japan Inc. are unlikely to heed his call, which essentially echoes the lead of the country's new prime minister, Shinzo Abe. His economic policies seem to have done so much to put Japan back on the map recently. Thanks to massive spending by the Bank of Japan, the nation's economy is on the up, though deflation is still the norm and firms are refusing to budge on lack of plans for new investments, according to the latest figures.

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"Successful or not is Mr Loeb's call for action, we all agree that Sony must change, but how?" asks Mr Fasol. He suggests like the rest of Japan's big eight electronics makers, it is time to focus on a few products -- many reproduce in droves the same as their competitors -- and pick whichever can succeed. "Many other companies in Japan should focus like this, they all do too much," he says.

Regarding Mr Loeb's proposal, Fasol believes it constitutes major surgery. "I think that everyone including Mr Hirai agrees that massive change is necessary at Sony, and all other Japanese electronics companies," he says. "However, massive surgery is only one part. In addition, many changes in attitude, execution, company culture, etc. are also necessary -- but the most important are visionary products which I am still waiting for at Sony!"

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