Why Sony Music Hit Sour Notes In Tokyo

The $923 million initial public offering by Sony Music Entertainment Inc. ought to have been an attractive deal for investors. The country's top distributor of Japanese music software has an unrivaled stable of Japanese pop artists, not to mention Michael Jackson. An industry leader, the unit of electronics giant Sony Corp. has been a pioneer in such lucrative fields as compact-disk stamping and sales. Its healthy profit margins are above 15%.

But when trading in the newly issued shares opened on Nov. 22, the thud could be heard around the world. Hoping to cash in on an anticipated early rise in the share price, thousands of investors flooded the market with sell orders. At market close, they were still waiting, despite their offers to sell at a 16% discount to the offering price. The poor response reflects Japan's ailing stock market and the concern about Sony's flagging performance. Beset by angry investors, company officials offered profuse apologies. "We're very sorry," says Tadaki Abe, manager of gener-al administration at Sony Music.

STRETCHED THIN. The ill-fated offering thickens the gloom that already surrounds the parent company. Profits are plunging, some key markets are saturated or in recession, and high interest rates have axed capital-spending plans. Extensive investments in Hollywood and forays into high-definition television are soaking up oceans of cash.

Just days before trading in the new shares opened on the Tokyo Stock Exchange, Sony predicted a 19% drop in consolidated net profits for the fiscal year ending next March. It also confirmed plans to cut $77 million from this year's $3.5 billion capital-spending budget and slashed an additional $690 million from the 1992 allotment.

The cutbacks make stock analysts worry that Sony may be stretched too thin. To stay ahead of rivals Matsushita, Toshiba, and Hitachi in the fast-moving consumer-electronics business, Sony must keep up investments both in finished products and in components such as semiconductors and color displays.

With less operating income, Sony will be obliged to go back to the markets. The company is already reeling under an accumulated $13 billion in debt, a big chunk of it from its 1989 purchase of Columbia Pictures Entertainment Inc. But after the recent offering, says UBS Phillips & Drew market strategist Craig O. Chudler, "investors are not going to forget what Sony has done."

The dimmer prospects for raising capital could damage Sony's celebrated capacity for churning out innovative products. Next summer, for example, Sony is due to launch a miniature compact-disk player called a "minidisk" that makes digital music recordings and also plays special prerecorded disks, most of which will be supplied by Sony Music. But analysts say the botched stock listing could hurt the product's launch.

Still, Sony has survived serious bumps in the past, such as its Betamax VCRs, which became outmoded. What it can't tolerate for long is a slump in America and Europe. This year, the protracted recession drove the yen up against other currencies, socking Sony with huge exchange-rate losses. Roughly 70% of Sony's $31 billion in annual sales are overseas. A 7% appreciation of the yen against the dollar was enough to knock $2.3 billion off the company's consolidated sales this year, estimates Yoshihide Kondo, an analyst at Daiwa Securities. At the same time, Sony stock has been heading south generally, to about $34 a share, from a high of about $55 in 1989. The Nov. 22 debacle suggests that Sony faces a long, tough fight to win back investor confidence.

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