Hedge Fund Crusade Stymied as Japan Inc. Clings to Cross-SharesBy and
Cross-holdings are little changed despite Abe governance push
Only financial firms have significantly sold such investments
Hedge fund manager Seth Fischer has a powerful ally as he campaigns for Japanese companies to sell their stakes in each others’ businesses: Prime Minister Shinzo Abe.
Not that it’s made much difference. Kyocera Corp. still owns a $9 billion slice of KDDI Corp., the phone company with which it shares a founder, despite Fischer pushing since at least 2015 for a sale. Electronics-maker Kyocera offloaded a small part of the holding last year, but otherwise hasn’t budged, and the investment makes up about 40 percent of its own market value.
“They absolutely do not have to own the stake,” Fischer, the chief investment officer of Hong Kong-based Oasis Management Co., said in a phone interview. “We will continue to engage.”
The reluctance to sell is mirrored at many companies across Japan, as a push led by Abe fails to get them to unload such investments. Cross-shareholdings held by listed non-financial firms stood at 5.7 percent of the market’s value last year, compared with 6.2 percent in 2002, according to Nomura Holdings Inc. The practice matters to asset managers because when they buy Japan’s stocks, they have to unpick the web of cross-shareholdings to work out which companies they’re actually investing in.
In his eyes, Kyocera’s holding in KDDI is an “extraordinarily capital-inefficient” investment that exists only because the two companies trace their roots to entrepreneur Kazuo Inamori. Elly Yoshikawa, a spokeswoman for Kyocera said the company cannot comment beyond what it publicized in its filings. Kyocera holds certain shares to help business relationships and make profits from the holdings, the company has said. Investments are sold if they don’t make economic sense, it has said.
Banks, at least, have been selling. Their cross-holdings fell to 4 percent of the market’s value from 9.1 percent in the same period, the Nomura data show. But that, says Jiro Nakano, head of equity fund management at Nikko Asset Management Co., happened not because of Abe’s efforts but in preparation for stricter global capital regulations. Regular firms, he says, face no such pressure.
“The big focus is on whether the selling will spread to those non-financial companies that have, thus far, shown little change,” said Kengo Nishiyama, executive director for corporate governance at Nomura. “But is there a catalyst? Not really.”
Toyota Motor Corp., for example, holds at least 2 percent of almost 70 companies in Japan, according to data compiled by Bloomberg. For Toyota, a “large amount” of assets aren’t being used efficiently as a result, Fischer said. Toyota announced plans this month to acquire about 5 percent of Mazda Motor Corp. as the two carmakers agreed to jointly build a plant in the U.S. Mazda will own 0.25 percent of Toyota.
Toyota’s stock acquisitions are based on the company’s business strategy and synergy-creation from a medium to long term perspective, said Akiko Kita, a spokeswoman for the company. Toyota is reevaluating its existing holdings where appropriate and believes the government understands its position, she said.
Fischer also points to Toppan Printing Co. and Tosho Printing Co., which he says have large cross-shareholdings relative to their market capitalizations. Toppan Printing didn’t immediately respond to a request for comment, while a spokesman for Tosho Printing declined to comment.
Japan’s corporate governance code, which was implemented in June 2015 and calls on companies to outline the economic rationale for such holdings, is too vague, according to Nikko Asset’s Nakano. The money manager discourages cross-shareholdings at companies it invests in and requests detailed explanations when firms have such investments, he says.
“It kind of says that it would be better to sell them, but it doesn’t go into why companies must get rid of them,” Nakano said of the comply-or-explain-based code. As it is, companies won’t understand why cross-shareholdings are bad, he said.
The decades-old practice of companies taking a minority equity stake in one another evolved as a way to strengthen business ties and ward off hostile forces. It’s criticized by investors for reducing return on equity and creating a base of friendly shareholders who won’t hold management accountable, a key goal of Abe’s governance overhaul.
For Hideaki Miyajima, a professor at Tokyo’s Waseda University who has studied cross-shareholdings for more than a decade, bigger companies may reduce such investments, but smaller firms with a domestic focus and less exposure to foreign investors could increase them. The end result, he says, could may well be no change overall.
For sure, Japan has come a long way since the early 1990s, when cross-holdings made up half the stock market. These days, they account for about 15 percent, according to Nomura, helped by years of selling by lenders, which needed to offload assets to stay afloat during the country’s banking crisis.
But Kyocera, like many of its peers, is standing fast. The KDDI investment has a 3.1 percent dividend yield. Kyocera’s ROE stood at 5.3 percent as of the end of June, short of a government target of 8 percent. And its shares trade at a discount to the Topix when measured by price to book value.
Fischer also has no plans to back down. He says he’s “actively engaging” with several other companies on cross-shareholdings, which he declined to identify.
“I believe these will eventually be divested,” he said of Kyocera’s KDDI shares. “Whether it comes in the long run when they need the capital or whether it happens in the shorter run, I don’t know. We hope it comes in the shorter run.”
— With assistance by Emi Nobuhiro, Kevin Buckland, Hikari Kawano, and Jason Roh