Sony on Tuesday said it has rejected a U.S. hedge fund’s proposal to spin off part of its profitable entertainment arm, marking the latest failed bid by an overseas investor to stoke change at a major Japanese firm.
“The Sony board of directors has unanimously concluded that continuing to own 100 percent of our entertainment business is the best path forward and is integral to Sony’s strategy,” Sony president Kazuo Hirai said in a letter to U.S. billionaire Daniel Loeb.
“We... will continue to give full consideration to any constructive feedback from our valued shareholders,” Hirai added, promising to maintain “a productive relationship with you and welcome an ongoing dialogue”.
Sony shares dropped after the announcement, which adds to a growing list of failed attempts by foreign investors to penetrate corporate Japan. Shareholder activism is not firmly entrenched like it is in Europe and the United States.
Major Japanese firms often hold large investments in each other to prevent hostile takeovers while the cloistered corporate sector remains deeply suspicious of foreign private equity firms.
In June, Hirai told an annual investor meeting in Tokyo that the company’s board was studying the spin-off proposal from “all sorts of angles”, but said it would not be rushed into a decision. Sony’s chief had previously expressed reservations about breaking up the company.
“There was no surprise in the letter, which was in line with Sony’s previous comments,” said Hiroshi Sakai, chief economist with SMBC Friend Research Centre.
“But I don’t think Third Point will give up its bid now. It is likely to continue its strategy by calling on other investors to join its bid,” he added.
Loeb, who says his hedge fund Third Point has amassed the largest stake in Sony, called on the firm’s executives to list up to 20 percent of the entertainment unit, which includes a major music label and a Hollywood movie studio.
The hedge fund executive, known for his aggressive style in stoking change at target firms, had argued the spin-off would make the entertainment unit’s managers more accountable and help improve profitability.
In a quarterly letter to investors last week, he said the division “remains poorly managed, with a famously bloated corporate structure, generous perk packages, high salaries for underperforming senior executives, and marketing budgets that do not seem to be in line with any sense of return on capital invested”.
He added that “drastic - rather than incremental - action is required”.
Sony’s Tokyo-listed shares dropped 5.52 percent to 2,019 yen in morning trade, as the benchmark Nikkei 225 index turned down 1.36 percent by the break.
Sony’s rejection of the deal came after the electronics giant said last week it had swung back to a net profit of $35 million for the April-June quarter, reversing a year-earlier loss as it boosted its annual sales forecast.
It also saw a small operating profit in its dented television business and said smartphone sales were picking up.
Sony and its domestic rivals including Panasonic and Sharp have been undergoing painful restructurings aimed at stemming years of record losses largely tied to their electronics units.
The sector has faced serious challenges keeping up in the low-margin television business, while foreign rivals including Apple and South Korea’s Samsung have overtaken them in the lucrative smartphone sector.
Japanese exporters have been given a much-needed boost since November as the yen lost about 20 percent of its value against the dollar, helping to make them more competitive overseas while inflating the value of repatriated foreign income.