US billionaire tries light touch in Sony shakeup

TOKYO - A US billionaire's gentle bid to convince Sony to spin off part of its entertainment arm could mark a dramatic shift from previous, mostly unsuccessful, forays by foreign investors into Japan's cloistered corporate landscape, analysts say.

The electronics giant is holding its annual shareholders meeting on Thursday in Tokyo where the break-up plan devised by Daniel Loeb, head of hedge fund Third Point, was expected to feature.

But rather than seeking a public showdown with Sony's board, Loeb has opted for the soft touch with a hand-delivered letter that lauded Sony chief Kazuo Hirai's efforts at dragging Sony back to profitability.

The letter also suggested the board take a serious look at his proposal. A further polite letter was delivered to Hirai this week.

Sony said it was reviewing the idea to sell off part of its entertainment unit, which includes a major Hollywood movie studio and a music label.

Hirai has resisted previous calls to break up the electronics behemoth which has struggled for years as it bled money from its television unit.

Loeb has a reputation for aggressively trying to force change at target companies. But he appears to be making a break from past investor confrontations with management, something which is rarely seen in Japan.

Shareholder activism in Japan is not firmly entrenched like it is in Europe and the United States.

"Their (Third Point's) style seems different from so-called vulture funds in the past," said Hiroshi Sakai, chief economist with SMBC Friend Research Center in Tokyo. "Third Point appears to be taking a long-term approach to gradually change Sony."

The Sony bid and a growing appetite for change among even some Japanese investors is setting off more constructive dialogue with management, said Tetsuyuki Kagaya, an associate professor at Hitotsubashi University in Tokyo.

"This is a quite flexible approach. Sony will have difficulty ignoring it," he said.

London-based The Children's Investment Fund has also been employing a methodical, multi-year effort to help boost shareholder returns at Japan Tobacco instead of rushing in aggressively.

"It is getting more difficult for firms to have a management that completely ignores shareholders," Kagaya said. "The era of activist shareholders is coming."

Foreign investors have long found stoking change in Japanese companies to be an uphill battle.

Among high-profile clashes was a failed effort by US fund Steel Partners to oust top executives at brewer Sapporo Holdings.

Meanwhile US private equity fund Cerberus Capital Management is locked in a battle with management at hotel and railway operator Seibu Holdings over a proposed corporate governance overhaul and other issues.

A huge accounting scandal at camera giant Olympus saw its whistleblowing Britain-born former chief fail to win support from institutional Japanese shareholders to run the firm, despite the backing of foreign investors.

Part of the cultural clash stretches back to Japan's post-war economic boom when firms were given leeway to focus on growing the company rather than shareholder needs.

Hostile takeovers are rare in corporate Japan and companies tend to be deeply suspicious of foreign private equity firms. Companies also own large stakes in each other, a system of mutual security known as "keiretsu" that can prevent unwanted takeovers.

Employees have been traditionally granted lifetime employment and promotions if they proved their loyalty to management.

All this means shareholder meetings are usually just a formality. Dissident investors have been known in the past to have their grievances drowned out by a chorus of management approval from young employees in the audience.

However, foreign investment in Japanese companies has been soaring as Prime Minister Shinzo Abe moves to reinvigorate the world's third-largest economy with a growth blueprint dubbed "Abenomics".

"For foreign investors, Japanese companies used to be unattractive because they did not want to change," said Shuichi Chizawa, senior analyst with NLI Research Institute. "Abenomics is playing the role of catalyst in getting foreign investors to turn their eyes to Japan."

And that means Japanese firms are also looking at different ways to deal with foreign investors.

"The key to closing the gap between foreign investors and Japanese companies is dialogue," said Kagaya at Hitotsubashi University.