Daniel Loeb's bid to break up Sony will need to overcome a history of failed efforts by activist investors in Japan.
Loeb's Third Point hedge fund asked Sony, which had seen its market value shrink almost 90 per cent from its peak, to sell as much as 20 per cent of its entertainment business in an initial public offering, and focus on its struggling electronics division. The entertainment business was not for sale, Sony replied whereupon the company's shares rose by the largest amount in more than four years.
While Loeb successfully pushed for a management shakeup at Yahoo last year, efforts by American investors to wring higher returns from Japanese companies have met limited success.
"In Japan, you're dealing not just with a different governance system, but almost a different form of capitalism," said Rakesh Khurana, a professor at Harvard Business School. "Japanese companies try to balance the interests of finance, labour and government, while the US in recent decades has become investor-centric, so raiders and activists are more tolerated."
Sony shares have more than doubled in price this year. Sony's staggered board could further complicate Loeb's efforts, said Charles Elson, director of the John L Weinberg Centre for Corporate Governance at the University of Delaware. "Just a third of directors are up for election each year, so it takes two years to take over the board," Elson said. "And in Japan's well-ordered, hierarchical society, those who challenge from outside aren't viewed as positively as those from within."
Even so, Sony's international image and reputation for being open to foreign ideas, including having a non-Japanese chief executive until recently, mean Loeb has a chance to make an impact, said John Buchanan, who co-authored a study of 49 shareholder initiatives between 2000 and 2008 at the Centre for Business Research at Cambridge University. "It would not surprise anyone if it suddenly started having international-style problems with activists taking positions," Buchanan said.
Activism in Japan dates back to at least 1991, when the oilman T Boone Pickens acquired a 26 per cent stake in Koito Manufacturing, a car parts dealer affiliated with Toyota, and tried to obtain a board seat. Pickens ended up selling the stake at no profit, after Koito spent the equivalent of US$4.4 million to block his efforts. Almost two decades later, a similar scenario played out at Sapporo, Japan's fourth largest brewer. Warren Lichtenstein's Steel Partners sold its entire stake in 2010, held for some six years, after failing in efforts to win board seats and get the brewer to cut capacity. Takashi Goto, president of the hotel and rail operator Seibu, said last month he would not offer any concessions to the American private equity firm Cerberus, the company's biggest investor, in a dispute over the private equity firm's proposals.
An IPO would make Sony easier to understand while also making the company more vulnerable to swings in the consumer electronics industry, said Hideki Yasuda, an analyst at Ace Securities in Tokyo.
"I'm for a spin-off. Sony has many segments, so it's getting difficult to figure out what Sony is," Yasuda said. "However, there is no possibility that Sony would accept the suggestion. It would be unstable if Sony only had the electronics unit."
Third Point, which holds 115 billion yen (HK$8.77 billion) of Sony shares, said it can underwrite a rights issue for as much as 200 billion yen to support the IPO, according to the letter. The hedge fund manages assets of US$12.9 billion.
While a weaker yen, job cuts and blockbuster movies like Skyfall have helped return Sony to profit after four years of losses, the US$18.7 billion company's smartphones and flat-panel TVs are still being battered by competition from Samsung Electronics and Apple.
Sony's film division, which includes Hollywood's Columbia studio, accounted for 26 per cent of operating income in the year ending March 31, while the music division, featuring Adele and Bruce Springsteen, represented 20 per cent.
The value of Sony would rise if the entertainment business was listed, Third Point said Earnings before interest, taxes, depreciation and amortisation at the entertainment division could rise by 50 per cent if it reached typical industry profit margins, potentially increasing Sony's market value by 625 billion yen, it said.
Sony's response, however, was that "the entertainment businesses are important contributors to Sony's growth and are not for sale".