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Sony Woes Seen Prelude to Loeb-Inspired Breakup: Real M&A

Sony Corp. Booth at CES 2014
Sony Corp. forecast a $1.1 billion annual loss as it sells the personal-computer business and splits the TV-manufacturing division into a separate unit that it may divest eventually. Photographer: Patrick T. Fallon/Bloomberg

Sony Corp.’s latest earnings disappointment held a silver lining: the company’s willingness to entertain some of activist investor Daniel Loeb’s suggestions. And it may be just the beginning.

The Tokyo-based company forecast a $1.1 billion annual loss as it sells the personal-computer business and splits the TV-manufacturing division into a separate unit that it may divest eventually. While falling short of Loeb’s calls for a bigger breakup, the moves sparked an 11 percent jump in the shares last week, and followed a pledge to provide more transparency in Sony’s financial statements.

“This goes a long way towards what Dan Loeb was talking about,” Lawrence Haverty, a fund manager at Gamco Investors Inc. in Rye, New York, said in a phone interview. Gamco oversees $47 billion and owns Sony shares. “I like the idea of first things first and one step at a time. There’s an awful lot of really encouraging stuff that’s happening.”

More changes are needed at the $17 billion company, said Hudson Square Research Inc., which suggests spinning off a portion of Sony Entertainment, the unit that encompasses film and music, as Loeb suggested last May. Or Sony could follow the lead of rival Panasonic Corp. and continue to sell off pieces of its electronics business, said Jefferies Group LLC. Sony’s insurance and banking unit, which contributed the most operating income in the year ended March 2013, also could be split off as a separate company, Gamco’s Haverty said.

John Dolak, a spokesman for Sony in the U.S., didn’t respond to a phone call or e-mail requesting comment. A representative for Sony in Japan didn’t respond to an e-mail sent after normal business hours.

Loeb Push

Loeb, who heads hedge fund Third Point LLC, urged Sony in May to sell as much as 20 percent of its entertainment division in an initial public offering so that the company could focus on turning around the struggling electronics business. At the time, shareholders had lost more than $100 billion in market value since 2000, according to data compiled by Bloomberg.

After Sony Chief Executive Officer Kazuo Hirai and the board rejected the proposal in August, the activist investor said he was “disappointed” with the decision and intended to “explore further options to create value for Sony shareholders.” Last month, Third Point called for a “serious effort to restructure the PC and TV businesses,” according to a letter sent to the hedge fund’s investors.

Third Point declined to comment last week.

Right Direction

Sony announced Feb. 6 that it’s selling the Vaio computer business to buyout firm Japan Industrial Partners Inc. and splitting its TV manufacturing unit into a separate operating entity. CEO Hirai also said he hasn’t ruled out a divestiture of the TV division in the future after receiving “various offers.”

The company’s shares had their the biggest three-day gain in more than eight months on news of the sale. Before the rise, Sony had dropped 18 percent since Loeb first pushed for changes.

Separating “the TV segment and selling the PC business are steps in the right direction to unlock value,” Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees about $17 billion, wrote in an e-mail.

Sony has more to do and should reconsider Loeb’s advice on the entertainment spinoff, according to Daniel Ernst, a New York-based analyst at Hudson Square. The unit makes the “Spider-Man” movies and represents music artists such as Miley Cyrus.

Undervalued Shares

Sony is cheaper than most of its peers. Last week, it was valued at a 28 percent discount to its net assets. Consumer electronics makers with market values exceeding $1 billion have a median price-book ratio of 1.7, data compiled by Bloomberg show.

“The shares are quite undervalued,” Albert Saporta, the head of research at Makor Capital Ltd. and a managing director at AIM&R, said in a phone interview. ‘We’re pretty much on the same wavelength as Daniel Loeb.’’

Based on the sum of its parts, Sony should be valued at least 50 percent more than last week, Haverty of Gamco said. That implies about $25 per American depositary receipt, or about 2,500 yen a share. The stock closed at 1,691 yen last week.

Today, Sony shares gained 0.7 percent to 1,702 yen. Its ADRs fell 0.8 percent to $16.68.

Sony could consider spinning off its financial services unit, which is consistently profitable and could exist on its own, Haverty said. The company sold shares in the division in 2007 and currently retains a majority stake in the unit, which has a market value of about $7 billion.

Electronics Exit?

Others think Sony’s focus should instead be on selling more assets in its consumer electronics division. Competitor Panasonic has jumped about 57 percent in the last 12 months in part because of shrinking its TV and handset business, and Sony should take note, according to Atul Goyal of Jefferies.

“For them, salvation is an exit from electronics,” Goyal said in an interview last week with Bloomberg Television. “If there’s any buyer whatsoever in the electronics business -- and there might still be some today for TV and others -- get out now.”

Besides TV’s, Sony makes products including digital cameras, headphones, MP3 players and speakers.

While Haverty said he would be happy to see Sony break up, he’s optimistic about the prospects for the TV business, which he said is showing the most promise among Sony’s electronics products. Sony may make a comeback in the next 18 months as the company introduces ultra high definition TV sets that cost as much as $25,000 to meet consumer demand, he said.

‘New Cycle’

“The consumer electronics business, I don’t really want to be an owner of that,” Haverty said. “But within electronics, investors have a shot at making money on the television business. It has a shot of working because we’re going into this new cycle.”

It’s difficult for Japanese companies to make drastic changes, said Masahiko Fukasawa, co-Japan representative and managing director at AlixPartners LLP.

“Discussions over strategy at Japanese companies are veiled in a haze,” Fukasawa said. “It’s hard for them to make a decision to dispose of a business that is sometimes profitable and sometimes not. In our view, it’s a waste of resources trying to sustain a business with little expectation for growth.”

While Sony’s management may not think seriously about a transformation unless performance suffers even more, the moves announced last week signal at least somewhat of a shift in the company’s attitude toward the consumer electronics business, according to Goyal of Jefferies.

“These are the first baby steps in the right direction,” the analyst said. “If they continue, that’s a good sign.”

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