By Ichiro Suzuki
Earlier this month, Paul Singer of activist fund Elliot Management Corp has announced that his firm has built a $3 billion stake in Softbank Corp, Japan’s mobile communication and investment group. Mr. Singer thinks shares of Softbank are undervalued. It’s been known that the sum of the parts of Softbank’s sprawling investments is considerably higher than the company’s book value. Conglomerates in general without fail trade below book value, and this is known as conglomerate discount. Softbank is no exception. Softbank founder Masayoshi Son who owns 22% of the company has been running the company as he likes. For the first time, he’s got a shareholder who would like to speak up against him. Mr. Son and Softbank have been in trouble since last summer when the planned initial public offering of WeWork went awry. WeWork was a key component of his $100 billion Vision Fund. The fund has been actively investing in a variety of tech start-ups around the world though many of those companies are yet to report positive free cashflow. The WeWork debacle hit the share price of other unicorns that are invested by Vision Fund. The fund’s weak performance was a major reason behind Softbank’s earnings plunge in the latest reported quarter. Being in a difficult position, Mr. Son still offered a conciliatory tone to Mr. Elliot’s move. Softbank founder Masayoshi Son, while stunned, made a public statement to welcome such investments, saying “We are thankful that such a distinguished investor is a friend”. This is a different response from the top management to unsolicited large shareholders into a Japanese company, especially by foreign investors. Mr. Son is receptive to Elliot’s stake, and the public does not say anything to this move. In the old days, but still as recently as the first decade of this century, such an unsolicited stake build-up by a foreigner was taken as barbarians at the gate, invasions by foreigners into a serene environment in Japan, or foreigners’ attempt to conquer the way of cozy life in Japan. In the summer of 2007, activist Steel Partners made a tender offer to buy shares of Bulldog Sauce Company in order to realize what they believed was the company/s true value. Bulldog’s management spurned the offer saying that taste of their sauce they make represented a unique culture of Japanese consumers, and cannot be understood by foreigners, and that the offer would be value-destructive. Thus this takeover attempt became a culture war. Even in the 21st century when the Japanese economy is boosted by foreign tourists and foreign brands are seen everywhere on the streets of major cities, many Japanese still believe that Japanese companies should be left in the hands of Japanese. Corporate Japan has been apprehensive about accepting a large amount of capital into their own balance sheets, until they became acutely desperate. Mergers & acquisitions or takeovers of corporations were received by the public with negative connotations, as somethings that kicks out existing management and throwing employees out into the streets, not as an activity to revitalize struggling companies or enhancing value for shareholders. Opposing the offer vehemently, Bulldog’s management hired Nomura Securities as an advisor and issued 3 shares to one existing shares except Steel who was to receive the cash equivalent of 3 shares. Thus, Steel’s stake was to be diluted down to o only one-quarter. Steel protested to this discriminatory treatment and brought the validity of this poison pill to the court. The case eventually went to the Supreme Court the next year and the legality of the poison pill was upheld. The decision led Steel Partners to drop the tender offer. At the end of the day, Steel Partners still had the last laugh, having been forced to take hard cash. A year after Steel made a tender offer, Lehman Brothers collapsed, sending the global financial markets into a tailspin. Bulldog’s share price, of course, did not escape the rout. Its shares tanked, making Bulldog’s Japanese shareholders regret for not accepting Steel’s offer a year before at an inflated price. More than a dozen years after the incident, Bulldog Sauce’s shares have never even come close to 1,584 yen offered by Steel Partners in the summer of 2007. (Its latest share price is 1,147 yen 12 and a half years after the offer was made, and the market has more than doubled during the period.) Despite lackluster performances of Bulldog Sauce, time has changed and shareholder value has become a popular buzzword in Japan even though it is doubtful how seriously it is embraced by Corporate Japan. Mr. Son behaves more like a CEO in Silicon Valley than than the one in a C-suite in Tokyo. Softbank is a young company whose employees have a totally different value system from those with a quintessential Japanese company. One’s reaction would be certainly different if this happens to a more traditional Japanese monolith. That said, a progress is witnessed.
About the author: Ichiro Suzuki is a retired senior investment banker and sits on several university boards.
Recommended reading: Elliot’s Softbank investment is a test case for shareholder activism