It must be seven or eight years since I wrote “My Last Sony,” predicting the tech giant’s downfall at the hands of overzealous chief executive Nobuyuki Idei and his successor crony, Sir Howard Stringer.
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Sony (SNE) may not be the first tech giant to fall victim to a CEO’s oversized ego, a grandiose vision, and a mega-merger that sounded like a good idea at the time. AOL-Time Warner and HP-Compaq certainly come to mind.
Then again, the company formerly known as the most powerful consumer electronics brand in the world has seen a 27% drop in revenues and $10 billion in losses in recent years, not to mention a whopping $130 billion plunge in market cap from its all-time high.
Since taking the helm in 2012, chief executive Kazuo Hirai has vowed to shake things up and do what’s necessary to transform the company. To his credit, Hirai’s done quite a bit of restructuring but nothing that I would consider transformative, to date.
Enter activist investor and hedge fund manager Dan Loeb of Third Point LLC. You might remember Loeb as the guy who outed Yahoo (YHOO) chief executive Scott Thompson’s resume dysfunction and engineered last year’s board coup that brought Googler Marissa Mayer to the company. Yahoo’s stock is up 68% since then.
Yesterday, in a letter he hand-delivered to Hirai, Loeb revealed a $1.1 billion or 6.3% stake in Sony, making him the company’s largest shareholder. And he’s proposing that Sony spin off a minority stake of its entertainment business in an IPO.
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Suddenly the company’s long-suffering shareholders have something to cheer about. And cheer they did, sending the stock rocketing up nearly 10% yesterday. Still, three questions remain:
Is the spinoff a good idea?
Will Sony’s board go for it?
What does that mean for Sony’s future as a consumer electronics company?
First, let’s start with the spinoff. As much as Idei and Stringer had hoped for synergies between Sony’s entertainment and consumer electronics businesses, they’ve never materialized.
Sure, it’s been fun watching Stringer try to explain the theory behind the nonexistent synergies over the years, but the truth is that they simply don’t exist. Spiderman and James Bond don’t do anything special on a Sony TV, PC, or PlayStation. End of story.
More importantly, Sony’s aggressive expansion into media content and financial services is precisely the reason why the company lost its focus and ceded its dominance in consumer electronics to the likes of Apple (AAPL) and Samsung.
They took their eye off the ball, plain and simple.
So yes, a spinoff of Sony’s entertainment business is a no-brainer. It will allow the management teams of the two unique entities to focus on what they do best and, in all likelihood, unlock considerable shareholder value in the process.
Which brings us to the more practical matter of whether Sony’s board will actually go for it. First of all, Loeb knew that an outright spin-off wouldn’t fly with Sony’s relatively slow-moving and risk-averse Japanese culture. Instead, he’s proposing to float a more palatable 15-20% of the entertainment business in an initial public offering.
By unlocking the value in Sony’s two distinct businesses and allowing their independent management teams to focus on their unique challenges, Loeb presents his proposal as something akin to an offer that Sony’s board of directors almost can’t refuse. Indeed, they shouldn’t.
Unfortunately, there’s one little problem. Sony derives its revenue growth and profits from its entertainment division. That’s what’s propping up its underwater and underperforming consumer electronics division.
Sure, if it doesn’t separate the two, that will likely never change. You know that and I know that but Sony’s board is another story. Remember, this is the board that approved Sony’s mega-expansion and stood idly by while Stringer more or less ran the consumer electronics business into the ground.
At this point, Hirai seems determined to stick to his restructuring plan without spinning off the entertainment unit. Yesterday, a company spokesperson reiterated that the unit is a key growth component of the company and is not for sale.
Then again, if you’ve spent enough time in Japan, you know that “hai” is often taken to mean “yes” or “I agree” when it sometimes means “I understand you but don’t necessarily agree.” Maybe in this case “no” doesn’t actually mean “no.” Who knows?
In any case, there’s no telling what Sony’s board will do in the end. But I will say this: Innovative companies like Japan’s Softbank and Sony’s Korean archrival Samsung didn’t get to where they are by sticking to their staunch conservative Asian management roots. They did it by being entrepreneurial and taking risks.
As for what a spinoff of its entertainment business could mean to Sony’s future as a consumer electronics company, whether it can ever reclaim its lost glory, look at it this way: Apple was nearly bankrupt and didn’t even have a single viable consumer product when Steve Jobs returned and began the most remarkable turnaround in American history.
Samsung was a low budget provider of everything from food and clothing to cheap electronics when Lee Kun-hee took over as CEO and told his management team, “Change everything except your wife and children.”
Today, Apple and Samsung are the world’s leading consumer electronics companies.
That said, Sony was originally a radio repair shop in post-war Tokyo. Its first original product was a tape recorder. A lot’s changed since then. And a lot more change is yet to come. Anything can happen in technology, that’s for sure.