Sony Says “No” Means “No” to Daniel Loeb : Sends Him Considered Rejection Letter

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Daniel Loeb

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/ By Clive Minchom / 

Activist hedge fund investor Daniel Loeb of Third Point LLC is certainly not shy about taking on sacred cows. Two weeks ago he walked away with a bundle of cash from Yahoo, where his efforts at rejuvenation with the installation of Marissa Meyer as CEO paid off for him in spades, and indeed for all investors who benefited from a big rise in the Yahoo share price.

Now he has been upping the pressure on Sony Corp. the entertainment and electronics giant where he announced in June he had taken an approximately 7% position and publicly demanded the spinning off of parts of its entertainment division and began a semi-public harangue, or dialogue, depending on your viewpoint, with its board and its management.

One could say to some extent Loeb has been acting like the school yard bully by picking the walking wounded in the first place – Yahoo and Sony were both under-performing sleeping giants who needed an external stimulus.

At Sony’s Annual Meeting a month and a half ago Chief Executive Officer Kazuo Hirai had said movies and music were crucial to the company’s revival as he spoke to investors in attendance, but nevertheless promised that the Sony Board of Directors would use outside information to “thoroughly discuss” the proposal from Loeb’s private equity company Third Point to sell as much as 20 percent of the entertainment assets.

This newspaper reported at the time that this was quite possibly a very typically Japanese way of saying “no” to the barbarian foreign investors, just being very, very polite about it indeed.

And so it has proven. After Sony announced improved earnings last week we were first treated to the spectacle of a bruising, knock-down, rant from George Clooney, who partners with Sony in the movie business, in an interview with Deadline Hollywood saying very bluntly that basically Daniel Loeb had no idea what he was talking about.

Now yesterday Sony itself announced to the public in Tokyo its official rejection of all of Daniel Loeb’s suggestions, couched it must be said in extremely polite, very respectful and carefully considered tones, but a total rejection nonetheless. Sony also released the full text of its reply to Daniel Loeb in an open distribution of the letter which it has now sent to him. And just to make sure everyone understood it Sony accompanied the publication of the letter with a summarizing press release which ends with the following comment from the company’s President and CEO Kazuo Hirai:

“We are encouraged by our progress as we continue to execute on our One Sony strategy, ” said Kazuo Hirai, President and CEO of Sony. “We have made many changes during my tenure as CEO, and we are confident that we are on the right path. Sony’s entertainment businesses are critical to our corporate strategy and will be important drivers of growth, and I am firmly committed to assuring their growth, to improving their profitability, and to aggressively leveraging their collaboration with our electronics and service businesses. We are determined to pursue sustained growth in profitability and shareholder value, so that we can meet and exceed the expectations of all of our stakeholders.”

Sony also provides their reasoning for keeping 100% of its entertainment assets in their announcement:

• Demand for content is increasing its value in a dynamic industry environment characterized by emerging distribution platforms and the proliferation of both powerful mobile devices and access to broadband. Sony believes its entertainment businesses will increasingly benefit from these trends, and the Company’s shareholders will benefit from owning all, rather than a part, of these valuable assets; and

• Full control of Sony’s entertainment businesses drives internal collaboration, facilitates synergies, and allows the Company to be more nimble. Sony believes that the opportunities for collaboration among Sony’s businesses are numerous and increasing, and a rights or public offering would create the need for otherwise unnecessary and burdensome arm’s length intercompany relationships as a result of minority shareholder rights, thereby limiting Sony’s control and strategic flexibility.

Sony then goes on to state that its Board and management believe it has adequate capital resources to fund its business plans. Should Sony require capital, or in the event of unanticipated events, the Company’s priority would be to raise capital without selling a portion of an asset fundamental to the growth strategy, and without unnecessarily burdening Sony’s ability to execute its business strategy for both entertainment and electronics.

Summing up, Sony clearly believes the entertainment business is a good one and that it has the money it needs to manage and develop all its businesses. In other words in its view it makes no sense to part with any of it.

Where Sony does make a small concession to Daniel Loeb is in the area of reporting and transparency, where it promises to begin providing additional disclosures regarding its entertainment businesses from the second quarter of the current fiscal year onwards, to help market participants better analyze performance of these businesses.

This last point is a small consolation, but in reality Daniel Loeb may have already realized his objectives. If the entertainment business should be spun off, true some of the proceeds could be dividended out to shareholders, including him. More to the point, by picking as his target a company that was likely already over the worst of its previous problems anyway, and which had already changed its management, he was helping it by simply bringing massive publicity to its shares. So while Sony’s shares initially fell yesterday about 5% subsequent to the announcement they nevertheless have already doubled so far this year, which will not have hurt Loeb’s return one bit on his stake. So he is making money anyway, and it must be pretty smart to be able to do this just by writing a few letters to management!

Loeb now has the option to continue his battle or to withdraw graciously with his, likely substantial, profit to date. If he chooses the latter option it will be interesting to see if he can be as polite to his counterparts at Sony as they have been to him.

Read More About Daniel Loeb :
George Clooney Delivers Knock Out Punch To Daniel Loeb Over Sony

Intelligent Shareholder Activism At Play : Daniel Loeb Now Sells Two Thirds Of His Stake In Yahoo

Sony Corp Says No To Daniel Loeb Japanese Style At Annual Meeting

The Daniel Loeb Tsunami : He Makes Waves In Japan Taking On Sony