Two aggressive U.S. hedge funders open up a new activist frontier
Although he failed to persuade Sony Corporation last year to break itself up and spin off its entertainment business, Dan Loeb of Third Point ($14 billion AuM) now has his sights set on Fanuc Corporation, Japan’s tenth largest company and the world’s leading automation and robotics manufacturer. Fanuc counts Airbus, Ford and Tesla among its principal customers.
Loeb’s target this time, however, is not a restructuring of Fanuc’s business – whose 40% profit margin he lauds – but the $8.5 billion cash hoard sitting on its balance sheet. In Third Point’s Q4 2014 investor letter, Loeb argues that Fanuc’s stock is trading too cheaply at 13x earnings in light of its blockbuster products, solid growth prospects and lack of outstanding debt, so he is pressing the company to use its excess cash to bump up the price of its stock through a buyback program.
Meanwhile, Elliott Management’s Paul Singer, best known for holding Argentina’s feet to the fire on its defaulted debt, is now embroiled in a legal battle with Bank of East Asia, the biggest family-controlled bank in Hong Kong. BEA plans to sell 222 million shares of its stock (almost 10% of the bank) to Sumitomo Financial Group to raise capital which Singer contends is financially unnecessary and designed solely to dilute existing shareholders. Elliott, with $25 billion under management, invested $232 million in BEA shares (2.4% of the float) and bases its contention on the fact that the bank’s tier-one equity capital ratio is already well above Basel III requirements. The case is expected to be heard in an HK court this spring.
Clash of cultures
Both of these campaigns promise culture clashes in Asia. In the case of Fanuc, its business is flourishing even if its stock isn’t, and management may have other investment ideas for its cash pile. Japanese companies traditionally view themselves as ‘communities’ rather than property, so corporate governance is ultimately controlled by management rather than the shareholders. Nonetheless, Loeb does have one advantage in the discourse since most of Fanuc’s stock is in the hands of foreigners, and its price did spike up 6.2% on triple its average trading volume on the Tokyo Stock Exchange when Loeb publicly called for the buyback.
Bank of East Asia on the other hand is family-controlled, so Singer has gone the legal route rather than appeal to public shareholders or a captive board. A Harvard Law School grad, he has certainly demonstrated his legal acumen in trial after trial over the past decade against Argentina in the U.S. and he recently precipitated a bankruptcy filing against Caesars Entertainment in Delaware to protect Elliott’s interest in credit default swaps on Caesars’ bonds. It’ll be interesting to see if Paul Singer can match his U.S. judicial successes against an HK adversary in an HK court which may not recognize the concept of ‘shareholder primacy.’