"Socialist" Policies Protecting Japanese Electricity Frustrates TCI

"My formula for success is to be found in three words - work - work - work."

Silvio Berlusconi
former Italian premier and media proprietor

More grit for the critics of Japan Inc. The irony is both perplexing and downright sad. In the aftermath of the last market upturn in 2003 (when the Nikkei 225 bounced around the 8,000 level) the authorities encouraged unofficially the movement that quickly took place in the name of corporate restructuring. The feeling was that much of Japanese mangement had grown fat and lazy and was not really focusing on shareholder value, especially as it related to focusing on core activities, cost savings, strategic vision and execution. Japan needed to change.

So along came the domestic and foreign corporate activists or "corporate raiders" according to the mainstream Japanese media. They were portrayed as selfish speculators out to make a quick buck at the expense of the innocent Japanese management and against the interests of Japan Inc's employees. Whatever happened to the interests of the company's shareholders?

As Scrooge would have said: Humbug, sir! Hedge fund assets devoted to investor activism fell from about US$15 billion in 2003/04 to probably under US$8 billion today.

Why the shrinkage in a strategy which typically guns for the 20-30% net of fee returns and typically outperforms their long/short equity brethren at 12-15%? Somewhere between the takeover and transformation of a second tier Japanese bank (LTCB into Shinsei) and the rehabilitation of a domestic auto manufacturer (Nissan by Renault) the stories soured and the media forgot about these "success stories".

Murukami, a prominent and vocal proponent of shareholder value was summarily charged with insider activity and his M&A Consulting with it's impressive list of U.S. and European institutional investors was shut down. Investors holding as much as US$4 billion bolted. Steel Partners was been similarly battered by the press and by its "targets" on the ground hiding behind the bureacratic cloak and legal system which still favors what some would call an unfair playing field.

Now comes the news that Chris Horn's TCI or Children's Investment Fund, with a 9.9% holding in a major Japanese utility JPower stands to lose millions. The company has refused to lift its dividend and has been abetted in its refusal by the Government's iron fist controlling electricity prices; and specificially by keeping electricity prices artifically low. So socialism is not dead!

TCI is now seeking to increase its stake in the utility to 20%, presumably to have more say on the JPower board. Apparently the Japanese Government is going to assess whether this is a "national threat" and get back to TCI sometime in May. Shame.

Of course TCI is taking a big gamble that Japan's stock market will rebound. But, the current global economy is not looking too favorably at further openess when it comes to certain strategic sectors. For example, the U.K. Government recently nationalized failed bank Northern Rock. Moreover, the political chatter in the U.S. has turned towards being more circumspect and potentially protectionist even if recent SWFs have been "allowed" to take stakes in major financial institutions (such as Merrill Lynch, Citibank and UBS).

TCI better button down its hatches and prepare to ride this investment for quite a while. Happily, continued upside nmovements in crude oil prices may add pressure on Japan's budget enough to result in domestic energy price hikes sooner rather than later. This might then help out TCI get what they want from the JPower board. If not, investors can expect short-term losses on some of these strategic investments by TCI and other activists.This might be just more reason for foreigners to abandon Japan and send the Nikkei sliding yet again. Japan still needs to change but by opening itself up not shutting itself in. Mahalo.