Online Extra: Patience Pays for Sparx Group
By Kenji Hall
Shuhei Abe is one fund manager who bristles at being called an activist. That's because the founder and chief executive of Japan's Sparx Group (SRXXF ) doesn't advocate publicly airing complaints about the management of poor-performing Japanese companies.
Instead, Abe prefers subtlety. After Sparx invested more than $100 million to become the biggest shareholder of camera and medical equipment maker Pentax in 2005, Abe spent the next two years suggesting that the company consider a merger with a stronger rival. "My position was very clear from the beginning—that is, they may survive one, two, or three years, but looking 10 years ahead there is no way" Pentax can survive on its own, says Abe. By May, 2007, Pentax had agreed to an $815 million takeover offer from high-tech glassmaker Hoya .
Abe's low-key approach is paying off in other ways as well. The equity fund he started with a staff of five back in 1989 ranks 11th in this year's Asia BusinessWeek 50. That's a satisfying turn of events for Abe, who got into the market as stocks soared to their all-time highs—and then took a beating when they plummeted back to earth. It's also good publicity for Sparx as Abe caters to rich global clients and broadens the fund's reach in other parts of Asia with the aim of tripling its holdings by the 2010 fiscal year.
At Odds With Typical Hardball Tactics
In the past five years alone, Sparx's funds have ballooned in size, increasing fivefold to about $15.7 billion. And while its investments chalked up losses in the fiscal year through March, the declines were only a minor setback. For the three previous years, the fund had notched high double-digit annual returns in six main investment categories, and profit margins are a stunning 35%.
Abe's preference for quiet lobbying is at odds with the hardball tactics of most Western equity funds prowling Japan's market these days. Some, like New York-based Steel Partners , have launched aggressive offers to buy companies, aired their demands for boardroom reforms, and sparred with Japanese managers over boosting shareholder value. That has led to hostility between a growing number of corporate boards and their shareholders, and prompted hundreds of companies to pass anti-takeover defense "poison pill" policies.
Given his background, Abe would seem likely to side with his Western rivals. After all, he received an all-American business education at Babson College's B-school in Wellesley, Mass., and more management training at Harvard Business School. (An amateur folk guitarist, Abe has been known to strum on any one of the numerous guitars he keeps around the office.)
A Practicing Pragmatist
He even sounds the part of the ruthless capitalist. He's a stickler for having companies improve their return on equity, lashes out at executives who run their companies as if they were royalty, and regularly talks about the need for companies to "create corporate value" and "manage costs." "Top management are the most important to convince [about reforms], though in many of the cases top management are the most incapable," he says.
In practice, he's a pragmatist. After Pentax began talks with Hoya last winter, Abe expressed support but kept Sparx out of the discussions and the limelight. Only when infighting and a boardroom shakeup at Pentax nearly squelched the talks did he step in to rally shareholders behind the directors who favored a deal. When the takeover finally went through, it netted Sparx nearly $70 million in paper gains.
Abe is all too familiar with the demands of investors. Since taking Sparx public on Japan's Jasdaq market in 2001, he's had to look out for his own shareholders. Despite Sparx's medium-term gains, the fund has had a rough year. In the latest April-June quarter, Sparx's operating earnings dropped 75% to $9 million on a 9.1% decline in sales to $69 million. In the past 12 months, its stock has lost more than half its value, shedding about $1.17 billion in market capitalization. That's harsh, considering the profit margins Abe maintains. With luck, his own shareholders have learned from his patient ways.
Hall is a reporter in BusinessWeek's Tokyo bureau