American Investor Targets Sony for a Breakup

Daniel S. Loeb's hedge fund, Third Point, has amassed a stake of about 6.5 percent in Sony.Steve Marcus/ReutersDaniel S. Loeb’s hedge fund, Third Point, has amassed a stake of about 6.5 percent in Sony.

3:42 a.m. | Updated

An American hedge fund billionaire known for starting big fights has called for a breakup of the entertainment and electronics colossus Sony, according to people briefed on the matter, possibly setting off a battle that could roil Japan’s famously staid corporate culture.

The call, which came on Tuesday, will most likely be viewed by government officials and corporate leaders in Tokyo as a shot across the bow from Wall Street, just as Western investors begin piling into Japanese stocks.

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The hedge fund manager, Daniel S. Loeb, is pressing Sony to spin off part of its entertainment arm, which includes one of the biggest film studios in Hollywood and one of the largest music labels in the world, responsible for movies like “Skyfall” and artists like Carrie Underwood.

Mr. Loeb — known for ousting Yahoo’s former chief executive and luring Marissa Mayer away from Google to run the company — also signaled that he would accept a seat on Sony’s board.

His hedge fund has quietly amassed a stake of about 6.5 percent in Sony, making it one of the biggest shareholders. The holding, made up of stock and derivatives, is valued at about $1.1 billion.

Still, even big Japanese investors have often faced resistance in seeking changes at companies, a hurdle that may be significantly higher for a foreign hedge fund manager.

A spokesman for Sony, Shiro Kambe, said in a statement that the company welcomes investments. “We are focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the stable business foundations of the entertainment and financial services businesses,” he said.

But Mr. Kambe also pointed to repeated assertions by Sony’s chief executive, Kazuo Hirai, that Sony Entertainment contributes significantly to the overall company and is not for sale. “We look forward to continuing constructive dialogue with our shareholders as we pursue our strategy,” he said.

Mr. Loeb, 51, the founder of the hedge fund Third Point, flew to Tokyo this weekend for three days of meetings with government officials, regulators and senior Sony executives, according to people briefed on the matter. He hand-delivered a letter on Tuesday to Mr. Hirai that praised a turnaround effort but asked for more.

“So while Third Point supports your agenda for change, we also believe that to succeed, Sony must focus,” Mr. Loeb wrote in the letter, a copy of which was obtained by The New York Times.

After the meeting, the hedge fund manager told associates that he was impressed by Mr. Hirai and supported management, according to a person briefed on the matter.

Mr. Loeb said he believed that spinning off a portion of the entertainment business to Sony shareholders could sharpen the company’s focus and lead to higher profit margins, while helping to revive the core electronics business. He has also contemplated a potential spinoff or sale of other operations, including Sony’s insurance division, which accounted for much of the company’s profit last quarter.

The campaign is a bet that Japan will prove the next gold mine for global investors. Long hobbled by a so-called lost decade of little economic growth, the country has come to life in recent months under the stewardship of Shinzo Abe, who as prime minister has promoted policies meant to attract private investment. Mr. Loeb is betting that Mr. Abe will expand deregulation.

“Under Prime Minister Abe’s leadership, Japan can regain its position as one of the world’s pre-eminent economic powerhouses and manufacturing engines,” Mr. Loeb wrote in his letter.

Despite its decade-long slump, Sony, the 67-year-old electronics pioneer, remains one of the most prominent companies in Japan, with a market value of roughly $18 billion.

Still, Mr. Loeb has plenty of ammunition. Shares of Sony have plunged nearly 85 percent over the last 13 years. The company long ago ceded its crown as the king of cool electronics to Apple, and its dominance in televisions was eroded by the emergence of Korean rivals like Samsung and LG.

Last week, Sony reported its first annual profit in five years. But it reached that milestone thanks largely to the weakening yen and some belt-tightening, including the consolidation of businesses and the sale of its American headquarters.

Sony’s chief executive, Mr. Hirai, is scheduled to make a presentation about the company’s turnaround plan next week. He has argued that despite having come late to the era of digital media, the company that made the Walkman, the Trinitron television and the PlayStation can rebound.

To Mr. Loeb, more must be done, starting with the spinoff of Sony Entertainment. Though the division accounts for more than 40 percent of the company’s enterprise value, he said in his letter that it needed discipline to raise its profit margins. Mr. Loeb estimated that a partial spinoff of the entertainment business could bolster Sony’s share price by as much as 60 percent.

In his letter, Mr. Loeb proposed handing 15 to 20 percent of Sony Entertainment to existing shareholders. His firm would be willing to backstop the initial public offering up to $2 billion to ensure its success.

Other underappreciated assets include the company’s 60 percent stake in Sony Financial, which largely sells life insurance policies, as well as real estate holdings and stakes in other companies. And Mr. Loeb is expected to argue that Sony’s electronics division must sharply reduce costs, including by taking a cue from its protégé, Apple, in focusing on a few core products.

Mr. Loeb has recently expressed his interest in Japan. Referring to the changes by the Abe government, he called it “a huge game change” at an industry conference last week. “And there’s a lot more room to go,” he added.

Mr. Abe has called his revival effort a plan of “three arrows,” including aggressive monetary easing by the Bank of Japan and enormous stimulus spending by the government.

So far, that effort appears to have drawn investor plaudits. The yen weakened in value last week, to 100 to the dollar, a level unseen in four years, helping local companies like Sony and Toyota. And the Nikkei 225-stock index has risen 43 percent so far this year. At the same time two years ago, the Nikkei was down 5.7 percent.

Shares in Sony rose 1.2 percent in Tokyo on Tuesday, while the Nikkei closed down 0.16 percent.

But it is the third arrow that has Mr. Loeb’s attention. The Abe government hopes to shed Japan’s reputation as a land of strict hierarchy and bureaucracy. Business mistakes were often seen as shameful, and outright confrontation largely disdained.

“There’s an entrenched management culture there,” said Lawrence B. Lindsey, a former top economist in the administration of President George W. Bush. “Activists aren’t particularly popular here among management, and they won’t be popular in Japan either.”

No less than Howard Stringer, Sony’s own chairman, has criticized the status quo.

“Japan is a harmonious society which cherishes its social values, including full employment,” he said in a speech last year. “That leads to conflicts in a world where shareholder value calls for ever greater efficiency.”

Yet there have been changes. The percentage of foreign ownership in companies on the Tokyo Stock Exchange nearly quintupled, to 24 percent, from 1990 to 2008. And Japanese shareholders have increasingly adopted the aggressive tactics of Western fund managers.

Sony is the biggest bet yet for Mr. Loeb, an intense California native who built his name largely upon acidly written letters, berating targets for mismanagement and calling for change.

The strategy has proved profitable. Third Point’s returns are up 13.3 percent this year and up 2.6 percent for the first week of May. Forbes estimates Mr. Loeb’s net worth at about $1.5 billion.

Perhaps the most prominent victory has been Third Point’s investment in Yahoo, where Mr. Loeb pushed for the dismissal of a chief executive after exposing the executive for falsifying academic credentials.

Mindful of Japanese decorum, however, Mr. Loeb strikes a more conciliatory tone in his letter to Mr. Hirai of Sony. His calls are couched as suggestions aimed at improving the company, rather than aggressive demands.

“Third Point would not have made this substantial investment if we did not believe in a bright future for Sony’s global brand, superior technology, and dedicated employees,” he wrote. “We are confident that by acting as partners, Sony will grow stronger.”

Hiroko Tabuchi contributed reporting.

Correction: May 16, 2013
An article on Tuesday about an American hedge fund manager’s push for a breakup of the entertainment and electronic giant Sony referred incorrectly to the recording label of a singer. The singer, Taylor Swift, records for the Big Machine label, not for a Sony label. (A Sony joint venture, Sony/ATV, is her music publisher.) The error was repeated in a Business Day article on Wednesday about the reaction in Japan to the hedge fund manager’s move. Because of the error, a picture of Ms. Swift that accompanied the Wednesday article should not have been used.

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