Activist Investing Booms in Japan, Led by Elliott's Successes
(Bloomberg) -- There’s never been a more popular time to be an activist investor in Japan.
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For activists, the country has always been seen as fertile but dangerous ground, full of cash-rich companies that trade at extreme discounts. But for years, a closed-off business world resisted outsiders, making the strategy an exercise in frustration. That has changed as the government and the Tokyo Stock Exchange have aligned to push corporate Japan to pay more attention to shareholder returns. International hedge funds like Elliott Management Corp. and home-grown investors such as Strategic Capital Inc. have turned the country into the world’s second-largest market for activists, outstripped only by the US.
So far this year, activists have made 100 investments in Japanese companies with a market value of around $318 billion, according to data compiled by Bloomberg. That’s compared with 102 companies with a value of about half the amount for all of 2023. Shareholder proposals are at a record high for the third consecutive year. While exact returns are difficult to quantify since investors typically build up positions ahead of disclosure, overall, last year’s campaigns outperformed the benchmark Topix index by 2.3 percentage points while this year’s crop are 4.6 % ahead of the market, according to data compiled by Bloomberg.
The lure for activists has been a new emphasis on corporate governance reform. The powerful Financial Services Agency has pressured companies to end cross-shareholdings, a decades-old practice that provided reliable support for management to fend off outside investors. Another champion for change has been Hiromi Yamaji, who is in charge of the bourse. After taking the position in 2023, he introduced a public name-and-shame list of firms whose shares traded below book value. While there was no actual penalty, the threat of public humiliation forced executives to come up with plans to raise their market capitalization.
“It’s a huge change,” said Michael Jacobs, an investment analyst at T. Rowe Price Japan, who has spent 25 years working in the country. “The TSE and Yamaji-san have helped to give public companies and the entire investor base a common language.”
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The shift has also redefined the role that shareholders play in the country. Historically, companies have relied heavily on debt, giving lenders, rather than shareholders, the biggest sway over firms. In Japanese, activists have been often traditionally termed “shareholders who say things,” a reflection of the widespread perception that investors are supposed to be quiet and support management.
That is not the style of one of the most successful activists, Elliott. The US hedge fund founded by Paul Singer made its name battling the government of Argentina for 15 years over defaulted debt. The fund has been investing in Japan since at least 2017 and has steadily taken positions in larger companies. Whereas many activists go after smaller firms in which it is easy to take relatively large stakes, Elliott has taken taken three large positions this year with blue chip Japanese firms: Mitsui Fudosan Co., Sumitomo Corp. and SoftBank Group Corp. It has publicly pushed for share buybacks and asset disposals.
Mitsui Fudosan, one of the country’s largest real estate firms, reacted quickly after Elliott took a stake with a 40 billion yen buyback and a pledge to cut cross-shareholdings and return more cash to shareholders, handing the hedge fund a quick 10% return. “Mitsui Fudosan's case is unusual at this point, but it’s given activists a taste of success,’’ said Yutaka Suzuki, an analyst at Daiwa Institute of Research Ltd. “Similar cases will likely appear more in the future.’’Making money is not a given, however. While some funds have enjoyed strong performance, about 49 campaigns started this year are sitting on losses. Take the case of Palliser Capital and its investment in Keisei Electric Railway Co. last year. The London-based hedge fund’s founder, James Smith, has been investing in Japan for over 20 years and is currently advocating for Keisei to sell off part of its 21% stake in Tokyo Disneyland operator Oriental Land Co. So far the company has only trimmed its holdings and the fund’s investment is down 5.1%, according to data compiled by Bloomberg. Smith is still encouraged that Keisei’s management continued to engage with his fund even after he publicly pushed for change. He chalks that up to a more nuanced approach than just criticism. "The learning is that the harder, more contentious form of activism, of trying to force things and be very public and write lots of letters, I think is not the preferred way from our perspective," Smith said.
The growth in activism in the country is far from a foreigners-only phenomenon. The number of vocal Japanese funds has also swelled in recent years and in some cases they are even more willing than Western investors to play hardball. A case in point is Strategic Capital. The fund, led by long-time activist Tsuyoshi Maruki, is trying to convince shareholders to force out the president of Daidoh Ltd. at the company’s AGM this month. The clothing manufacturer, which sells Brooks Brothers brand suits in Japan, is trying to keep the executive.
“Small and mid-caps we invest in haven’t really changed,” said Maruki. “They still prioritize employees and management over shareholders. That means I will still have a lot of business to do for the time being.”
By picking a fight at the AGM, Maruki is tapping into one of the activists’ advantages. Minority investors in Japan have considerable influence at shareholder meetings. Anyone with 300 votes and who has held those shares for at least six months can put forward proposals. By contrast, in the US investors have to have held stocks for at least one year while in Europe, the threshold for the minimum stake is much higher in many countries. Moreover, resolutions made at shareholder meeting are binding.
That makes corporate AGMs important — and potentially contentious. Activists try to leverage their positions with resolutions on selling off assets or restructuring companies. This year’s crop of AGMs will see activists pushing for more buybacks, management changes and selling of assets, particularly real estate.
“It’s only really over the last 2-4 years that you’ve seen the AGM become very disputed,” said Peter Tasker, a co-founder of Arcus Research Ltd., who has worked in Japan for 42 years. When he entered the industry “a lot of attention was paid to how you step upon the stage and who’s got to step on the stage first and the precedent of who spoke, all that kind of stuff. The change from then to now is very, very remarkable.”
James Rosenwald can attest to the change in the investing environment. The co-founder of Dalton Investments in Los Angeles with $4.6 billion under management has been investing in Japan for decades. In 2002, he built about a 5% stake in a company called Teikoku Hormone. He repeatedly asked for a meeting with the CEO only to be consistently rebuffed. Finally Rosenwald made an offer to take the company private and was told the CEO threw his proposal away. In 2005, Teikoku Hormone merged with another Japanese company and was renamed Aska Pharmaceuticals Holdings Co.Fast forward to the present day and Rosenwald has built a 7.7% stake in Aska, where the former CEO’s 37-year-old son is a managing executive officer. This time the reception could not be more different, with regular interaction and a willingness to engage on suggestions.
“The son met with me and I love him,” said Rosenwald. “This generation is very different from his father’s generation.” The stock has also gained 32% since Dalton’s investment was first made public.
Institutional investors, who in the past were more inclined to side with management, have also shifted their positions to join forces with activists. The tendency for Japanese companies to hold large amounts of cash on their balance sheets frustrates investors, according to Nissay Asset Management CEO Hiroshi Ozeki. If the money is not being put to use as part of a long-term growth strategy or for mergers and acquisitions, he echoes activists that more funds should be returned to investors.
When Elliott took a stake in Dai Nippon Printing Co. in 2023 and pushed the company to increase its share buyback, Amundi Japan supported the activist. The printing company ended up conducting a record share buyback of 300 billion yen and targeting a return-on-equity of 10%. Elliott reaped a return of at least 51%, according to data compiled by Bloomberg.
“We have actively addressed the concerns raised by Elliott and fully agree that these points are key factors contributing to the undervaluation of the company,” said Hiromi Ishihara, the head of equity investment at Amundi Japan.
Despite the changes, there is still resistance to activists and companies that have been targeted often seek out advice on how to engage with their new shareholders. Yo Ota is a lawyer at Nishimura & Asahi who fills that niche. He made his name by helping many companies including Sony Corp. when Dan Loeb’s Third Point LLC tried to convince management to spin off its semiconductor segment. He sees the activist trend gathering strength.
“This year has been the busiest in my career,” said Ota. “But I thought the same thing last year too.”
--With assistance from Nao Sano and Yasufumi Saito.
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