May 15 (Bloomberg) -- Dan Loeb, the hedge-fund manager who successfully pushed for an executive shakeup at Yahoo! Inc., is taking his activism overseas for the first time with a $1.1 billion stake in Sony Corp., seeking change in a country where few U.S. investors have succeeded with that approach.
Loeb, whose event-driven fund has returned an annual average of 18 percent since he started his firm out of another manager’s weight room almost two decades ago, chose Sony as part of a wager that Japan’s stocks will gain as Prime Minister Shinzo Abe uses stimulus spending and aggressive monetary easing to spur growth.
Third Point LLC, Loeb’s $12.9 billion firm, has profited this year from wagers that Abe would successfully devalue the yen, improving the competitiveness of the country’s exporters and boosting stocks. Geography aside, the New York-based firm often targets companies the hedge-fund manager sees as mispriced because they’re misunderstood by equity markets, even when he’s not agitating for change in a so-called activist holding.
“Many casual observers would be surprised to learn that while Sony is electronics, much of its current value is derived from a hidden gem –- Sony’s entertainment division,” Loeb wrote in a May 14 letter given to Chief Executive Officer Kazuo Hirai and obtained by Bloomberg News. “Like many conglomerates we have invested in previously, Sony has two strong businesses facing different challenges side by side, each obscuring the other’s true worth.”
In his letter, Loeb asks the company, whose market value has shrunk almost 90 percent from its peak, to sell as much as 20 percent of its Sony Entertainment unit. The breakup would allow the company to focus on its struggling electronics business, he said.
Elissa Doyle, a Third Point spokeswoman, declined to comment on the firm’s Sony investment.
While Loeb has long invested globally, he’s been increasingly focusing outside the U.S. over the last 12 months.
He told investors in April he was starting a hedge fund focused on buying Greek assets, after a bet that European officials would rescue the indebted nation from financial collapse helped drive gains last year to 21 percent.
In a first-quarter letter to clients, Loeb said he visited Japan in April 2012 following the Bank of Japan’s announcement of a new policy targeting a 1 percent annual inflation rate to spark economic growth. He came away convinced “the articulated ‘changes’ were more rhetorical than practical at the time,” according to the letter.
Later in the year, as it became clearer that Abe would be elected, Loeb started to believe that after more than a decade of deflation, the incoming political leader’s “reflationary” policies would bring dramatic change where central bankers had failed, he wrote.
U.S. managers have attempted activist campaigns in Japan with limited success since at least the early 1990s, when T. Boone Pickens was thwarted in a bid to get board seats at auto-parts maker Koito Manufacturing Co.
Of almost 800 forays by activist investors in the country from 1998 to 2009, only about one-third managed to effect any change, according to a study from researchers at Kobe University and the University of Southern California.
Christopher Hohn’s Children’s Investment Fund Management LLP tried in late 2005 to get Tokyo-based Electric Power Development Co., known as J-Power, to increase dividends, force the disposal of cross-shareholdings and require independent members on its board. Three years later, Hohn gave up and sold his shares at a loss of about $130 million.
More recently, some firms have gotten better results.
Two years ago, TCI, as the London-based hedge-fund firm is known, tried again, this time focusing on Japan Tobacco Inc., then majority-owned by the government. The company is returning more than 100 percent of profits to shareholders in the form of dividends and share buybacks this year, two moves encouraged by the fund in a 2011 letter, according to Oscar Veldhuijzen, a partner at the fund company.
Loeb also held shares in Japan Tobacco, according to his firm’s April report to investors.
A Los Angeles area native, Loeb, 51, first learned about the stock market from his maternal grandmother. A social worker, she invested her savings in industrial companies in the 1950s and ended up with a nest egg of several million dollars by the time she died. She also introduced him to activism, showing up at annual meetings and asking management why there were no women on the board.
Loeb traded throughout college, first at the University of California at Berkeley, and then at New York’s Columbia University. He amassed $120,000 by his senior year, only to lose it all on one stock -- medical respirator maker Puritan Bennett Inc.
He started Third Point in 1995 out of hedge-fund manager David Tepper’s weight room after stints as an analyst at private-equity firm Warburg Pincus LLC, head of corporate development at Island Records Inc. -- home to reggae star Bob Marley -- distressed debt analyst at brokerage firm Jefferies & Co. and high-yield bond salesman at Citigroup Inc.
Loeb, while not primarily an activist investor, has profited by making noise at U.S. companies.
He triggered last year’s ouster of former Yahoo CEO Scott Thompson and won a board seat at the Internet company. Yahoo was Third Point’s biggest money-maker in the first quarter, and one of its most profitable investments last year, according to letters sent to clients. The stock rose 18 percent in the first quarter and 23 percent in 2012.
With his investment in Sony, Loeb hopes the company will become a leader in how business is done in a resurgent Japan.
“As Finance Minister Taro Aso recently wrote, ‘in many big Japanese companies, success in the past led to inflexibility and risk aversion,’’ Loeb said in his letter. ‘‘Strengthened corporate governance may be needed to change the way they do business and facilitate open innovation.’’
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