Japan's Electronics Under Siege
Pressure for Sony Entertainment Spinoff, Shake-Up at Sharp Humble Former Technology Powerhouses
By
DAISUKE WAKABAYASHI
CONNECT
Updated May 15, 2013 12:12 a.m. ET
TOKYO—Hedge-fund billionaire
Daniel Loeb's campaign to pressure
Sony Corp.
6758.TO -0.55% into spinning off its entertainment arm is the latest tremor to ripple through Japan's electronics industry, already reeling from unprecedented losses stemming from its lost standing in the technology world.
After a miserable past few years, marked by the rise of
Samsung Electronics Co.
005930.SE -0.27% and the dominance of
Apple Inc.,
AAPL -0.37% Japan's once-powerful electronics manufacturers are grappling with outside investors and fed-up creditors looking to break the cozy and insular bonds that were once a hallmark of the country's corporate sector.
This shift in corporate Japan comes at a time of heightened optimism in the country for change and reform under the new government of Prime Minister Shinzo Abe. Mr. Abe and his choice for Bank of Japan governor, Haruhiko Kuroda, unveiled an aggressive monetary policy aimed at breaking the country's long-running economic malaise. The measures are credited with helping to weaken the yen and push Japanese stocks higher.
"Sony stands at the crossroads of compelling corporate opportunity and massive Japanese economic reform," wrote Mr. Loeb, founder of Third Point LLC, in a letter that he hand-delivered on Tuesday to Sony Chief Executive
Kazuo Hirai. "To maximize Sony's overall success, we believe the Company should change the structure of its ownership of Sony Entertainment."
Mr. Loeb's letter urged Sony to sell via public offering between 15% and 20% of its entertainment arm—composed of its movie and music businesses. Mr. Loeb said he sees as much as 60% upside to Sony's share price if the Japanese company followed his proposals, because the value of the entertainment business would be unlocked.
Sharp Corp.
6753.TO +0.70%said Tuesday it would replace its president and chairman in a rare public rebuke of management after it posted an annual net loss of ¥545 billion ($5.4 billion), the biggest in its 100-year history. The management shuffle follows a tumultuous year during which it scrambled to secure capital and warned about its future as a going concern, while creditors complained about the lack of leadership at Sharp.
"We need to say goodbye to the Sharp that we knew in recent years. We need to be ready to change everything at the company, other than the founding principles," said Sharp's new president, Kozo Takahashi, at a news conference.
The recent problems at Sony and Sharp are a microcosm of the industry's woes. Looking to protect its lead in bulky cathode ray tube televisions, Sony was late to the shift to flat-panel TVs and relinquished its lead to Samsung. As a result, its television business has lost money for nine straight years. All the while, Sony was too slow to cash in on new innovations such as e-readers and LED televisions, products first introduced by the company but made popular by rivals.
Meanwhile, Sharp spent billions of dollars to build a state-of-the-art LCD plant in Japan. When demand for flat-screen televisions slowed in the wake of the financial crisis and the yen rose sharply-hurting the competitiveness of its exports, Sharp's losses ballooned. Ultimately, it sold half of the factory to Taiwan's
Hon Hai Precision Industry Co.
2317.TW -1.18% , or Foxconn, which manufactures goods for Apple.
Japan's electronics manufacturers also failed to capitalize on their early advances in mobile technology. While Sony is now trying to break the smartphone duopoly of Samsung and Apple, Japan's firms largely missed the boom and are now paying the price as the do-everything devices encroach on traditional areas of strength.
In digital cameras, one of the few areas where Japanese electronics manufacturers are still dominant, sales are plunging especially for the point-and-shoot models. In the first quarter of 2013, global digital camera shipments are down 43% in the numbers of units, according to data from the Japan-based Camera & Imaging Products Association.
Mr. Loeb, whose Third Point has amassed about 6.3% of Sony shares worth about $1.18 billion, blamed Sony's troubles on spreading itself too thin. He argued that by selling off part of the entertainment business, Sony would reduce debt and gain liquidity to help streamline its electronics unit, whose "many strong businesses" are "obscured by a lack of focus."
"Many casual observers would be surprised to learn that while Sony is electronics, much of its current value is derived from a hidden gem—Sony's entertainment division," Mr. Loeb wrote in the letter. "To maximize Sony's overall success, we believe the company should change the structure of its ownership of Sony Entertainment."
Valuing the entertainment arm at about $10 billion, Mr. Loeb offered to "backstop" a potential subscription rights offering, for up to $2 billion or about 20% of the entertainment business, without taking any fees.
The move isn't necessarily hostile. The proposal is similar to what the company has already done at
Sony Financial Holdings Inc.,
8729.TO -1.06% which is 60%-owned by Sony and is publicly traded. Sony is weighing Mr. Loeb's proposal, said the person familiar with Sony's thinking.
Crippled by two straight years of record losses, Sharp has been forced to turn to rivals Hon Hai and Samsung as well as chip maker
Qualcomm Inc.
QCOM +0.32% for equity investments. In addition, it is in talks with its bankers to extend loan payment deadlines and has exercised an additional credit facility of up to ¥150 billion from its main lenders,
Mizuho Financial Group Inc.
8411.TO 0.00% and Bank of Tokyo-Mitsubishi UFJ. This additional borrowing is on top of a ¥360 billion credit line extended by the banks and others.
In a sign of greater control exerted by the banks, an executive each from Mizuho and Bank of Tokyo Mitsubishi UFJ will join Sharp's management and take board seats, to help oversee restructuring. Sharp is facing a ¥200 billion convertible bond redemption in September and an additional ¥130 billion in bond redemptions in 2014.
Sharp has stayed afloat by selling its Tokyo office buildings, cutting salaries, and scaling back investments. Last year, it also cut 5,400 jobs globally, its first layoffs of domestic workers since 1950. It will continue to squeeze costs by limiting new hires, restructuring overseas units, and lowering capital spending for LCDs, it said.
