FocusActivist shareholders target Japan

16 October 2007 17:58  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS news)--Activist shareholder funds in the US and Western Europe are targeting a number of Japanese companies, including Nippon Fine Chemical, according to investment sources.

However, progress in getting these companies to change has been limited, according to observers.

“Japanese management does not consider shareholders seriously yet,” said Junichiro Sano, chief executive of Dalton Investments in Japan, in an interview with ICIS. “They believe the company is run for management, employees, related domestic financial institutional investors, suppliers and customers. Lastly comes shareholders. They say that this goes back over 100 years in the history of Japan.”

Los Angeles, California-based Dalton Investments, with $1.3bn (€910m) in assets under management, is one of a number of activist funds in Japan. Others include New York-based Steel Partners and London-based The Children’s Investment Fund.

Activist shareholders such as Dalton see great opportunity in Japan because of the inefficiencies of the corporate culture. These inefficiencies include excessive management layers, hoarding of cash and reluctance to cut staff.

Dalton Investments has targeted Nippon Fine Chemical (NFC), offering to buy out the company in April for (Y) 900/share ($7.67) or Y24bn representing a 12% premium to its previous stock price. Dalton holds a 14% stake in NFC.

“NFC has a real estate development business which is irrelevant to their core chemical business,” said Sano. “We have been advising management to sell out and concentrate on their main business.”

While Dalton has not been able to engineer a buyout, progress has been made, said Sano.

“We have been holding this company for three years and management has finally started listening to us in the last 18 months,” he said. “They adopted our ideas of raising dividends every year by 35%, giving $26 worth of detergent to shareholders at the end of the fiscal year; lowering the minimum trading unit to improve liquidity; and having a more open shareholders meeting with a presentation of their business model by the president.”

However, most Japanese firms have resisted change. Many have implemented poison pill defence mechanisms to keep activists at bay.

In July, condiment maker Bull-Dog Sauce effectively blocked Steel Partners’ takeover bid by instituting a highly unusual poison pill that diluted Steel Partners’ 10% stake in the company to a less threatening 3%.

A Tokyo court labelled Steel Partners a “hostile acquirer” and upheld the poison pill Steel Partners had challenged as discriminatory and in violation of Japanese law.

“The characterisation of Steel Partners as an ‘abusive investor’ by the Tokyo higher court was a disappointing setback in shareholder activism in Japan,” said Dalton’s Sano. “As a result of the court decision, the public perception of these Gaijin [foreign] funds has been that they are abusive and evil to the Japanese business community. Unfortunately, the Japanese media accelerated the propaganda.”

“It is very unlikely we’ll see a takeover of a large Japanese company by a foreign fund,” said Young & Partners’ Young. “In the lower tier, it may happen one day, but it is still very difficult. For private equity or venture funds to go in and do traditional deals is very challenging. Even for Japanese private equity firms, it’s difficult.”

For further analysis of shareholder activism in Japan, look for the 5 November issue of ICIS Chemical Business.

By: Joseph Chang
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