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Opinion

Is this Sony's moment of truth?

Daniel Loeb may have struck at the right time, with Japan Inc. reforming governance

Japan's latest rush of annual general meetings coincides with a few tantalizing firsts.

Olympus this month became the first corporate icon to add an activist U.S. fund to its board. Toshiba is naming the first non-Japanese directors in eight decades. The CEO of Sojitz, the trading company, submitted himself to a first-ever shareholder forum. And Mitsubishi UFJ Trust, the bank, calculates that a record 54 companies faced reform proposals from shareholders, up from 42 in 2018.

Yet the real mark of progress may be at Sony, where a U.S. hedge fund has long been a thorn in CEO Kenichiro Yoshida's side.

In early June, Daniel Loeb's activist Third Point fund circulated a 104-page thesis on how Sony can raise its competitive game. He accompanied it with a fresh $1.5 billion bet on an electronics behemoth that once changed the world. These days, Sony is struggling to break out of also-ran status.

Investor negativity, too. It shares change hands for 11.17 times next year's earnings, well below Nintendo, Disney or other approximate peers. As Loeb points out, it suffers from a so-called conglomerate discount. The idea is Sony is woefully undervalued because it runs too many disparate businesses.

Hence Loeb's push for Sony to separate interests that do not complement each other. In this case, spin off the conglomerate's image sensor business. Loeb argues that the semiconductor unit, which mostly supplies smartphone makers, would do better untangled from game, music and movie operations.

Yet Loeb is acting more stealthily than overtly -- in ways that may bear fruit. He did not, for example, file a formal proposal that would have been voted on at Tuesday's AGM. Instead, Loeb is lobbying from both the inside and out.

In New York in late June, Loeb met Yoshida and detailed his case. Judging from the AGM, Yoshida will need more convincing. There, Yoshida brushed off investors' questions about Third Point's rationale, saying: "We cannot comment on specific shareholders. Sony will continue engaging with all of its shareholders and investors."

Still, there are signs Loeb's pitch is winning support. Press reports from the AGM suggest shareholders are unimpressed with Yoshida's responses.

It is not just that Third Point makes a sound case. It is that Loeb is making the rounds with shareholders to build support. And doing so at a moment when government policies are encouraging them to speak out.

Loeb is a familiar name in Japan Inc. circles. In the past, he has targeted Suzuki Motor, retailer Seven & I Holdings and robot maker Fanuc. In 2015, Yamanashi-based Fanuc handed Loeb a victory when it sharply boosted dividends.

An earlier Third Point run at Sony went nowhere. In 2013, the fund called on Sony, then run by Kazuo Hirai, to sell off entertainment assets -- a top music label and a Hollywood studio. Sony balked, and Third Point sold its stake in 2014.

This latest run benefits from three developments since then. One, Sony's failure six years later to address the conglomerate discount. Two, a dearth of new game-changing products. Three, the corporate reforms unleashed by Prime Minister Shinzo Abe.

The change for which Abe hoped has been slow. In 2014, his government implemented a U.K.-like stewardship code. In 2015, a corporate governance framework to prod companies to increase return on investment.

Since then, though, scandals drowned out success stories. Quality failures from Kobe Steel and KYB to Mitsubishi Materials vied for headlines with accounting shenanigans from Olympus to Toshiba. Topping everything is Nissan Motor's Carlos Ghosn mess, a corporate governance disaster on a global scale.

Nissan's AGM did not disappoint. It featured rancorous exchanges between shareholders, CEO Hiroto Saikawa and Jean-Dominique Senard, chairman of alliance partner Renault. With Ghosn in jail awaiting trial for alleged financial wrong doing, Nissan's leadership looks more hapless than able.

Even so, action elsewhere offered hints that the year ahead looks promising. Olympus shares are up around 43% this year, thanks partly to giving ValueAct Capital, a San Francisco fund, a board seat. Toshiba is up 6% so far in 2019.

More broadly, there are signs companies may accelerate moves to boost dividends, reduce cross-shareholdings, sell noncore assets and elevate board structures toward global norms. These are all steps, incidentally, that Third Point wants Sony to take.

Topping Loeb's Sony wish list: a full semiconductor unit spinoff, listing it as Sony Technologies; selling stakes in Sony Financial and in non-related companies including Spotify.

One number sums up Loeb's frustration: 70. That in percentage terms is how much of the market for smartphone image sensors by revenue Sony commands with few profits to show for it. The spinoff, he says, would produce a $35 billion-valuation company within five years.

Not quite, say Mizuho Financial analysts Yasuo Nakane and Kenichi Saita. They argue a spinoff semiconductor unit "could in fact reduce its actual value." Its assets, the analysts say, "are inseparable from the electronics products and solutions."

At the same time, the global market for smartphones may have peaked. The trade war being waged by U.S. President Donald Trump's White House is targeting Huawei Technologies, one of Sony's top customers. Loeb's $35 billion figure may be too rich.

Even so, the more activists pressure Yoshida to get radical, the harder it will be for Sony to stick with mediocrity. Until now, Yoshida has effectively bought off the opposition. Already this year, Sony, a company with a market capitalization of around $67 billion, has announced two record share buybacks amounting to $2.8 billion. Nothing like serious cash to pre-empt calls for drastic restructuring.

The approach, though, is emblematic of why Sony is no longer, to borrow its slogan back in the late 1970s, the "one and only." Then its Trinitron television and Walkman revolutionized consumer electronics. In the decades that followed, Sony lost sight of its innovative strengths as it dabbled in everything from banking and insurance to medical devices.

Since rising to chief financial officer in 2014, and CEO four years later, Yoshida sold the money-losing personal computer business, hacked away at the troubled TV unit, took a $1.7 billion write-down on smartphones and trimmed staff. Reducing bloat is great, but it just treats the symptoms. It is equally important to rebuild innovative muscle to compete in a world minting new tech "unicorns."

Sony is indeed changing. Even Loeb seems to view it as a very different operation from what it was in 2013. But pressure from shareholders suggests that it is still not different enough.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." 

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