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Hitachi Kokusai deal is a victory for the hedge fund manager that lost

Elliott Management rids itself of two thorny issues by letting KKR win

Elliott proposed a deal to Hitachi Kokusai parent Hitachi over Italian company, Ansaldo.   © Reuters

TOKYO Kohlberg Kravis Roberts has finally succeeded in buying a substantial stake in Hitachi Kokusai Electric, ending a monthslong takeover tussle with Elliott Management. But it may be Elliott that emerges as the ultimate winner, having effectively killed two birds with one stone.

Elliott, which operates on a strategy of buying into companies in the process of mergers and acquisitions, built a stake over the past few months in Hitachi Kokusai, a maker of semiconductor manufacturing equipment, to just under 8.59%. With that stake, it was able to pressure U.S. investment fund KKR into increasing its offer price, twice.

In the end, however, Elliott curiously agreed to sell its stake in Hitachi Kokusai to KKR at an offer price of 3,132 yen per share, which is lower than the stock's last traded price of 3,155 yen. Such generosity is surprising coming from the activist hedge fund manager.

That's not to say that Elliott did not pocket a 14% profit from the sale, having bought its holdings at an average of 2,742 yen per share. But the real motive behind Elliott's move appeared to be a war with Hitachi Kokusai's parent Hitachi over an Italian company.

Elliott held a meeting with Hitachi the day before the offer deadline of Dec. 8, asking to settle a dispute in Italy, and in return, Elliott would sell its Hitachi Kokusai shares to KKR, according to sources close to the matter.

THE REAL TARGET Hitachi Kokusai is a relatively small company for Elliott to be involved in, being capitalized at 328 billion yen ($2.91 billion).

In 2015, Hitachi purchased a 40% interest in Ansaldo STS, a key maker of railway signaling systems, from Finmeccanica (now Leonardo-Finmeccanica), a leading defense equipment and aerospace company in Italy. Hitachi then subsequently raised its stake to 51% by buying in the market, with the ultimate goal of taking over Ansaldo completely.

But Elliott stepped in and accused Hitachi and Finmeccanica of colluding to artificially depress the purchase price of Ansaldo, claiming they were using the Italian company's loss-making unit AnsaldoBreda as an excuse to lower the valuation. AnsaldoBreda was a rolling stock manufacturer Hitachi bought to boost its operations in Europe. Over time, Elliott built up its own stake in Ansaldo to 22.5%, with an option to buy a further 8.8%.

The Italian Securities Exchange Commission ruled that Hitachi and Finmeccanica had colluded in the deal and ordered Hitachi to raise its purchase price. But Hitachi filed a countersuit to overturn the commission's decision. The case has been brought to the European Court of Justice and a decision is expected to take years.

Elliott apparently agreed to sell its stake in Hitachi Kokusai to KKR in return for Hitachi's cooperation in the Ansaldo STS case. It is unclear what exactly that cooperation will entail, but sources familiar with the case say detailed negotiations are in the works.

Finmeccanica, together with its subsidiaries Ansaldo and others, won a contract for a subway line in Lima, Peru in 2014.   © Reuters

This, apparently, was the real reason behind Elliott's relatively subdued response to KKR's offer for Hitachi Kokusai: Its ultimate goal was to win Hitachi over in the Italian case. Well aware of Elliott's track record as an outspoken activist investor, market observers had been expecting something much more dramtic to happen in the Hitachi Kokusai deal, but the U.S. fund manager was for once accommodating.

SUBPAR SUBSIDIARIES With about $34 billion under its management, Elliott has been able to pressure a number of conglomerates into meeting its demands, such as a return of 30 trillion won ($27.5 billion) to shareholders from Samsung Electronics and spinoff of the U.S. oil business from major Anglo-Australian resources company BHP Billiton. At Elliott's behest, the CEO of the American aluminum company Arconic, Klaus Kleinfeld, was ousted.

Paul Singer, Elliott's founder, is known in U.S. media as "the world's most feared investor." Singer bought up Argentine government bonds and famously fought a protracted court battle against the country after it defaulted on its public debt in 2001.

KKR is a private equity fund. It acquires companies, takes them private, improves their corporate value through close engagement in management and then makes a profit by relisting them or divesting them to third parties.

Prompted by market pressure and a government initiative to improve corporate governance, Hitachi has been trying to sell off certain subsidaries while completely buying up others. Having both parents and their units listed can cause various problems, such as an erosion of the independence of subsidiaries and conflicts of interests between the holding companies and minority shareholders.

Moves to end the listing of subsidiaries have gradually begun to take hold in Japan. For example, Panasonic, which delisted four of its subsidiaries in 2002 and more later on, most recently made PanaHome into a wholly owned subsidiary, in September.

Additionally, as the owners of Japanese small and midsize companies age, it becomes expedient for ownership to change hands. Under these circumstances, many investment funds, mainly domestic ones, are actively buying businesses whose owners are having difficulty finding successors.

Still, Japanese companies can be blindsided by global activist investors who work out strategies on a larger scale. In the example of Hitachi, Elliott sacrificed a larger profit in KKR's tender offer in pursuit of a larger goal. Japanese companies would do well to learn from this takeover saga.

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