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“The beer business in Japan is not growing because the population is aging,” said Marc Goldstein, an ISS research director who previously headed the Japanese research team.

March 3, 2020

Japan’s Activist Conundrum

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Though Japan’s annual meeting season remains some months away, high-profile proxy fights are an emerging trend in a country where public companies are held tightly by a legacy management structure.

No longer is it a battle between an under-the-radar hedge fund and a small Japanese company operating in a niche market like men’s hairpieces. Activist investors are targeting some blue-chip Japanese companies in 2020 such as Kirin Holdings, Sekisui House, Ltd., and Sun Corporation.

Kirin, a leading beer brewer, rejected calls by for a share buyback by UK-based Independent Franchise Partners in 2019. The investor is also pressuring the company to sell assets it holds in the biotechnology and pharmaceutical industries, change executive compensation plans, and nominate new board members.

The activist fund wants Kirin to focus on its core beverage business. Given the market dynamics and the country’s changing demographics, Kirin is facing the same existential question that other Japanese companies encounter: whether to expand its core business overseas or expand into a different line of business.

“The beer business in Japan is not growing because the population is aging,” said Marc Goldstein, an ISS research director who previously headed the Japanese research team. “They have expanded overseas, but those moves haven’t always worked out well, and there’s lots of competition for any good assets that come up for sale.”

At Sekisui, a former executive director is running the proxy campaign seeking to remove the entire board following allegations that the board mishandled a fraudulent land transaction which cost the company 5.5 billion yen. Sun reported losses in 2019 and expects to report another loss in 2020, prompting Oasis Management’s call for an extraordinary meeting to replace the company’s entire board of directors.

In 2019, there were activist campaigns at Sony and Toshiba, and actual proxy fights at Lixil, Kyushu Railway, and Shinsei Bank, among others. Until 2019, activists targeted companies in the $1 billion market cap range, but now they are aiming higher at companies valued above that threshold, according to Nelson Seraci, executive director with ISS Special Situations Research. Most of the high-profile campaigns are being driven by American and British investors, although domestic activists continue to target Japanese companies as well.

“Japanese companies have a lot of cash and no debt, or they have investments in other companies,” Seraci said. “Once activists see that other activists are successful with their campaigns, you cannot stop it. For activists pursuing balance sheet strategies, it is a big market with so many opportunities.”

What changed from the past is the desire among activist investors to acquire seats on the boards of large companies. Seraci noted that companies are more willing to listen to proposals for share buybacks even if they aren’t approved by shareholders, something that was unthinkable a decade ago.

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