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Finance

Japanese companies can and should do both

TOKYO -- U.S. hedge fund Third Point prodded Japan's Fanuc to use some of its 1 trillion yen ($8.4 billion) in accumulated cash to repurchase stock. Now, Fanuc has pushed back.

     The factory robot manufacturer said Monday that it will spend 130 billion yen on new production and research facilities in Japan. Its share price touched an all-time high before slipping at the close, doing the same Tuesday. But not everyone was impressed.

     "I would have also liked Fanuc to have said how it will return the rest of its cash pile to shareholders," said Masayuki Kubota, chief strategist at the Rakuten Securities Economic Research Institute.

     Indeed, Fanuc's proposed investments leave more than 800 billion yen in cash idle.

     The choice facing Fanuc and companies like it would seem to be one of rewarding shareholders or investing in growth. But there is another way. In his 1994 best-seller "Built to Last: Successful Habits of Visionary Companies," American management guru Jim Collins describes what he calls the "Genius of the AND." With it, companies can achieve both low costs and high quality, long-term investment and short-term profits.

     Flashes of this ability can be seen in corporate Japan. Toyota Motor announced last year a 360 billion yen round of share repurchases, its first in six years, even as it maintains a 1 trillion yen research and development budget. Fujifilm Holdings, no slouch in plowing money back into areas of growth, unveiled a three-year plan for distributing more than 200 billion yen to shareholders, mostly through buybacks. Both stocks have outperformed the broader Japanese market since last year.

     An intriguing debate is going on in the U.S. over how companies ought to spend their earnings. Funds that pressure boards to sacrifice investment in the name of shareholder returns have met with pushback from not only management, but also fellow members of the investing community. Shareholder activism can "destroy jobs," BlackRock chief executive Laurence Fink, who leads the world's biggest asset management company, declared at a conference last December.

     Only in America does shareholder pressure actually stand a chance of forcing companies to skimp on investments. In the U.S., shareholder distributions roughly equaled capital expenditures over the past five years, a Citigroup analysis found. But in Asia, including Japan, payouts totaled less than a third of capex.

     No wonder some argue that companies can spare a little more for shareholders. It is hard to criticize Third Point's demands for buybacks as job killers.

     From 1987 to 1989, corporate Japan raised 55.5 trillion yen through stock issuance, 27 trillion yen more than it needed, Yasuo Kanzaki wrote in a 1992 memo as vice president of Nikko Securities, now SMBC Nikko Securities.

     Kanzaki lobbied the government to end a prohibition on share repurchases so that companies could start winding down the over-the-top stock floats of the bubble era. In the more than two decades since the ban was lifted in 1994, much of this excess has gone.

     "The purpose of buybacks has changed to a means by which companies communicate to the market how they use their cash," he says.

     And many Japanese corporations can surely serve as benchmarks for measuring the "Genius of the AND."

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