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Stocks

American activist investor targets Japan Inc.

Elliott Management ups stake in Hitachi unit in apparent 'bumpitrage'

Paul Singer's Elliott Management zeroes in on Hitachi Kokusai.   © Reuters

TOKYO -- A well-known U.S. activist investor has raised its stake in a Hitachi unit up for sale, a potential sign that the fund sees the Japanese stock market as ripe for the picking.

Elliott Management, famous for pushing its agenda as an investor to big-name companies around the world, disclosed in a report to the Japanese Finance Ministry Monday that it has obtained more than 5% of Hitachi Kokusai Electric.

Hitachi in April agreed to sell Hitachi Kokusai to an alliance of Kohlberg Kravis Roberts and Japan Industrial Partners, via a tender offer for 2,503 yen ($22.64) per share.

But the stock has since risen continuously, and the tender offer has been pushed back. "I was perplexed as to why the gap wasn't narrowing," an individual investor in Tokyo said.

Elliott has paid an average of 2,570 yen for the shares, higher than the agreed-on tender offer price. This suggests that the fund is trying to block the tender offer from happening. Elliott is apparently in contact with managers of Hitachi Kokusai and Hitachi. If things do not proceed as it demands, it may take action publicly.

Most likely, Elliott is engaging in what is known as "bumpitrage," a practice of buying into a company subject to a takeover and prompting the bidder to raise the offer price.

Hitachi Kokusai shares rose 1% Wednesday to 2,930 yen, 14% higher than the average of prices Elliott has paid. It looks like the market is exploring the offer price that Elliott would be happy with.

Elliott "may demand Hitachi Kokusai spin off operations," said an official at a foreign investment bank. Hitachi Kokusai's two key businesses are a robust chipmaking equipment line and a video and communication solutions segment, which is bleeding an operating loss. Selling off the latter could lift Hitachi Kokusai shares.

Fresh focus

The U.S. hedge fund, which manages $33.2 billion in assets, has not actively invested in Japanese shares before. But with the Stewardship Code widely taking root, there is now a greater chance for activist investors' proposals to be adopted, said Yutaka Suzuki of the Daiwa Institute of Research.

American stocks are at a historic high, so staging a bumpitrage there would be difficult. Comparatively cheap Japanese shares thus become a tempting target.

Elliott has previously demanded business sell-offs or spin-offs from Samsung Electronics of South Korea and Anglo-Australian resource major BHP Billiton. Hitachi, trying to narrow its business focus by unloading Hitachi Kokusai, may have caught Elliott's eyes for the same reason. And now that Hitachi is considered a blue chip stock in Japan for its efforts to raise capital efficiency, it stands out for Elliott all the more.

The Japanese company should not let these developments slow its efforts to improve capital efficiency. But one lesson the management could learn is that it should be more considerate to minority shareholders, as noted by Daigo Shimizu of Goldman Sachs Japan. Methods aside, many minority shareholders are quietly applauding the demands made by big activist investors.

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