Loeb plays the long game

Sony’s biggest investor is trying to shake things up by encouraging a public selloff of the company’s most valuable asset. Not everyone is thrilled about the idea

 
 
September 13, 2013

Kaz Hirai has long held a reputation as being one of Japan’s calmest CEOs. He’s had no choice. Hirai has spent the better part of five years promising investors of the world’s top electronics conglomerate that things will get better. Thanks to a weak yen and fierce competition from up-and-coming rivals, Sony’s electronics division has consistently limped behind sales projections and fallen into the red.

Bearing that in mind, one would think Hirai should have been ecstatic to finally be able to report a return to profit at Sony’s annual shareholder meeting in June. The company’s stock has nearly doubled since the end of 2012, and brands such as Playstation and Bravia have finally returned to modest profit. Yet there’s an elephant in the room keeping tensions at an all-time high among shareholders.

Profitability-led spinoff
Indeed, while the company’s 10,000 investors voted on new board appointments and proposed stock options, everyone’s mind was on one man: Daniel Loeb. In June, the billionaire hedge fund owner (and Sony’s top investor) wrote a letter to the company’s board calling for a spinoff of its lucrative entertainment business. Loeb’s Third Point fund owns a seven percent stake in the company, and wants Sony to sell off up to 20 percent of its entertainment branch in an IPO.

Loeb claims such a sale would help improve profitability by adding transparency and accountability to the way the business is managed. Meanwhile, the capital raised from an IPO could be used to bolster an electronics division still in turmoil. In May, Sony admitted its sales targets for PCs and digital cameras were over-optimistic, and sliced expectations all the way through March 2015.

It also changed its forecasted operating profit margin for Playstation from two percent to eight percent. Sony is struggling to catch up with the blockbuster gadgets being rolled out by Apple and South Korea’s Samsung. In the end, an improving yen and overall healthier economic climate won’t be enough to encourage further expansion. Therefore, Loeb may be correct in his assumption that serious action must be taken to stimulate growth. The board isn’t so gung-ho.

Shareholder demand
Sony’s heavy investment in the global entertainment industry is a sleeping giant. Since acquiring Columbia Pictures 24 years ago, Sony Pictures has provided a steady stream of income for the electronics firm – averaging 11.4 percent annual growth in sales like clockwork. Last year was particularly kind to the company thanks to the successes of blockbusters like Skyfall and The Amazing Spiderman.

Sony’s music label, whose powerhouse acts include the likes of Beyoncé, has continued to sit pretty over the last four years, too. With that in mind, Kaz Hirai and Sony’s executive board appear understandably hesitant to risk losing a chunk of this lucrative profit to an IPO. If the cash raised were to fund unwise investments in the company’s sputtering electronics division, Sony will not be able to report good news at next year’s shareholders meeting.

Loeb wasn’t at the annual meeting in June, so his proposal wasn’t widely discussed. Yet it will be on everyone’s mind in the coming months. He carries an infamous reputation for causing massive shakeups at every company he invests in – most recently instigating a huge reshuffling of the executive board at Yahoo. Japanese shareholders tend not to be as active in corporate strategy as some of their American counterparts.

However, with 70 million shares, the board can’t afford to ignore the demands of Loeb’s Third Point fund. Bearing in mind that Sony’s shares have surged seven percent since Loeb called for an IPO, it looks like investors don’t think a spinoff is a bad idea, either. For now, Hirai has yet to show his true colours, assuring investors that Sony’s executive board won’t be making any rash decisions.