An entertaining clash of corporate cultures
The Wall Street financier Daniel Loeb has a radical plan to reinvigorate conservative Sony
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Wednesday 15 May 2013
If all you knew about Daniel Loeb, the US hedge fund boss who yesterday called on Sony to spin off its lucrative entertainment business, was based on the letter he personally delivered to Sony's chief executive, Kazuo Hirai, you'd be forgiven for thinking that he was just a concerned investor, and a conciliatory one at that.
The billionaire, who during his campaign to shake things up at Yahoo once suggested that the tech firm's board was living "in an illogical Alice in Wonderland world", begins by applauding Mr Hirai's leadership and puts forward the plan to separate Sony Entertainment "in the spirit of partnership". And although his Third Point fund and its associates now own a stake worth over $1bn (£700m), or about 6 per cent, in the business, making them the largest holders of the stock, he doesn't demand a seat on the board; instead, Mr Loeb says only that "we offer our assistance to implement our proposal and would gladly accept a seat on Sony's board of directors".
The tone is telling. Mr Loeb is one of Wall Street's best-known activist investors, who last year got his way with Yahoo and helped to install the Google star Marissa Mayer as Yahoo's new chief. But Sony is a different beast that lives in a very different jungle to the one in which Mr Loeb made his name. Japan's corporate culture is often described as clubby or stuffy and resistant to change, in contrast to the cut-throat, fast-paced world of Wall Street.
To be sure, Sony is already turning around. Only last year, after a decade in which the once undisputed leader in consumer electronics faced competition from rivals such as Apple and Samsung, Sony's stock plunged to levels not seen since 1980 – the year its Walkman cassette player hit the US market. But this year, the stock has been rising, after Mr Hirai's belt-tightening strategy, coupled with the benefits of a weakening yen, helped the company to post its first annual profit – ¥43bn, or $435m, in the 12-month period to the end of March – in five years. The figures are forecast to improve to about ¥50bn this year.
The progress, however, does not appear to have come fast enough for Mr Loeb. "We applaud your frequent statements that 'Sony Will Change'," he wrote in his letter. But then he added: "We also believe that to succeed, Sony Must Focus."
For Mr Loeb, this involves creating distance between the company's still-struggling consumer electronics business, which makes the PlayStation games console, smartphones, DVD players and the like, from its successful entertainment arm, which is home to singers such as Beyoncé and Bruce Springsteen and movies such as Iron Man and Skyfall.
"While the Entertainment businesses are top performers within Sony, profit margins fall short when benchmarked versus their US-listed competitors, despite superior scale and leading market positions," Mr Loeb wrote. "We believe the underperformance would be remedied by a more disciplined management approach to Sony Entertainment."
The way to engender this discipline, he thinks, is to list a 15-20 per cent stake in the entertainment arm which could be used to "reward management through the growth of an equity security specifically tied to the company they control".
He is not, however, calling for a straightforward listing. Mr Loeb's proposal involves selling the shares through a rights offering to existing investors. The move, he says, would also help the parent business to cut its debt burden, by pushing a "meaningful but sustainable" portion "on to Sony Entertainment's newly created entity". Moreover, the cash generated by the spin-off would help the company to invest in revitalising its electronics arm. Third Point, he said, would be willing to back the spin-off financially by providing a backstop of up to $1.5bn to $2bn.
As an example of how this strategy might work, Mr Loeb cited Sony Financial. The profitable insurance business has been spun off, but Sony remains the majority investor, allowing it to share in financial benefits, while devoting its energies to fixing divisions that are still mired in the red.
Mr Hirai, who has been running the sprawling business for around a year, and who is due to make a presentation about his turnaround strategy next week, has thus far resisted any suggestion that Sony might be better off if it were broken up. In its response to Mr Loeb's letter, the company stuck to that line, saying its entertainment businesses were not for sale, although it looked forward to continuing a dialogue with shareholders.
How that dialogue unfolds will be closely watched, not just by Sony shareholders but by the wider business community in Japan and the financial types on Wall Street, who thanks to the economic policies of the Japanese Prime Minister, Shinzo Abe, have begun eyeing the country as potentially the next big investment destination.
Sony: Where the revenues come from
¥730bn Cameras and imaging products
¥1,258bn Mobile phones & communications
¥995bn TVs and stereos
¥849bn Devices and batteries
¥1,597bn Other (including financial services)
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