MITI Criticism of Japan Poison Pills Starts

"What is food to one, to others is bitter poison."

Lucretius, (96 BC - 55 BC)
Philosopher

Hooray for Japanese officialdom! According to a recent MITI panel conclusion emanting from Japan, corporate managers should review the use of anti-takeover provisions and consider whether they harm shareholders' interests.

A MITI panel released a report as part of national efforts to shore up its reputation on corporate governance and receptiveness to international investors.

The report follows increased criticism in recent months from some non-Japanese investors (like The Children's Fund) over anti-takeover practices such as poison pills and cross-shareholding arrangements. These are anathema to shareholder value and corporate governance.

This follows on the heals of a recent MITI decision that ordered The Children's Investment Master Fund to abandon a plan to double its stake in Japanese electricity-grid company Electric Power Development Co., known as J-Power, to nearly 20%. MITI said then that J-Power was of strategic interest to Japan. Strange that the same complaint was used by the Russian Government when BP was denied access to a stake in oil reserves in that country!

The ministry panel's report Wednesday warned takeover defenses shouldn't be adopted simply to protect corporate managers' own interests. Managers should consider putting takeover proposals to shareholders to allow investors to assess the merits of approaches themselves. Let's hope that shareholders now have the gumption to actually do something that is in theiur interests and not in the interests of "management stooges". Maybe Japan activism does have a role after all. Mahalo.

Long-Biased Equity Strategies Still Underwater in Asia

"Remember this - that there is a proper dignity and proportion to be observed in the performance of every act of life."

Marcus Aurelius Antonius (121 AD - 180 AD)
Philosopher

Investors in many of the Asian region's long-biased equity strategies have suffered considerable performance heartburn according to latest YTD numbers. This fact, coupled with net outflows of assets and the "silent" closing of funds (Odey Japan, one of Rubato's and a whole host of others) is putting a lot of pressure in an industry that not too long ago was one of the highest growing in the global hedge fund industry. Not anymore.

The performance destruction among Asia funds and Japan funds has been equally bad. For example, according to the Banque Syz data from their Hedge Fund Advisory group for the period ending May 29 2008 (#22), 21 out of 27 funds of the Asia Equity variety carried negative YTD returns. The average of those negative returns was minus 8.84% while the positive funds posted 4.06% - which is not likely to pay for fees and associated costs. The average fund performance was minus 2.39%.

The best performer is Bill Hwang's Tiger Asia Overseas fund which returned 13.39%. The worst performer (not by far) is Martin Hughes' Tosca Asia Fund which posted minus 17.18%.

For Equity Japan, the average equal-weighted performance of the 44 funds was minus 2.48%. A total of 30 funds continue to post negative YTD retuns with the worst being Ken Nishizawa's Melchoir Japan Fund $ at minus 21.55%. This continues a pattern of double digit losses that has been seen over the last 2 years and it is almost certainly leading to serious assets depletion. On the positive side, the best performer on a YTD basis in the Banque Syz Japan Equity universe at 12.81% was the Martin Currie ARF - Japan Fund - VAMI managed by Donaldson, Temperley and Troup.

A worrying trend has been the fact that it seems very obvious that many of these funds are not in fact "hedged" their returns tend to mirror the direction and scale of returns offered by passive ETFs or traditional indices. It does not take an institutional investor with a degree in quant finance from MIT to work this out.

For this reason expect the new trend of managers to favor passive, low cost beta-vehicles to continue. Further, there may be a move towards more illiquid strategies including multi-strategy for above above performance in the near future. That is where alpha will be more easily produced which may be non-correlated (at least for the majority of the time). There is also an opportunity for 130-30 funds and equity market neutral strategies that can demonstrate an ability to produce alpha.

The days of the US$1 billion single manager strictly trawling Asia may be over unless of course the vehicle is large enough to be able to tackle large buyouts, private equity and real estate deals. I predict the emergence soon of the multi-strategy alternative investment shop. In the meantime, look for more "silent closings", primes getting squeezed and squeezing smaller managers and the industry to undergo major changes. Mahalo.

Japanese Corporates Reveal Attitudes to Hostile Acquisitions

"A bank is a place that will lend you money if you can prove that you don't need it."

Bob Hope (1903 - 2003)
Actor

In the midst of a contentious debate between a leading hedge fund activist and J-Power the electricity utility, a recent survey from a leading Japanese brokerage sheds new light on what Japan Inc. thinks about M&A.

The survey was conducted in May 2007 and polled 1,464 major listed companies of which 205 responded to the 28 questions.

There were certainly a lot of answers that support the view that Japanese management views any criticism, much less, from foreign activists with suspicion and resentment. Not surprisingly, the case that many activists make is readily dismissed by boards of directors and management that feels "threatened".

A total 59% of respondents consider that perceptions of an increasing number of hostile acquisitions are unfavorable and negative (but for whom?) while 62% were negative with regards to the role of investment funds (or hedge funds) although this was pretty close to the level of suspicion that is leveled at other corporations that alos engage in the practice!

Apparently, the increasing trend is not really permeating down to the corporate boardroom as a combined total of 84% of respondents saw little/no threat to date from hostile acquisitions. This supports the view that many large multi-strategy funds (like Ramius) based in Tokyo have been saying about the climate for some time - that there really is nothing really going on other than a few high profile M&A cases, and that Japan Inc. still is not open to ANY discussion when it comes to shareholder value.

It seems that in terms of defensive tactics Japanese coporates prefer to rely on the introduction of a "poison pill", to strengthen cross-shareholdings, and to increase long-term shareholders who approve the current management. In terms of the type of "poison pill" a majority tend to favor the pre-warning type and they execute this typically through an ordinary resolution at a shareholder's meeting, and in some cases this may mean a change in the Articles of Incorporation of the firm.

Interestingly, for those firms that do take up an aggressive defensive tactic and have introduced a poison pill, there is often a special committee with independent members voted on the board. These members are typically between 3-4 with attributes at the sub-committee level of outside auditors and other outsiders. Other interesting facts include that these people rarely meet, are not considered "active". Many companies often introduce a sunset provision of 2-3 years at board meetings.

Regretably, the legal system, the media and the authorities are to blame for this apparent paralysis. A good dose of M&A activity is needed to bring corporate Japan kicking and screaming into the future. It is needed as one component to bring "life" back into the unlisted and listed company markets in Japan. Mahalo.