Mindshare: Sony: To split or not to split?

Sony: To split or not to split?

by Carlos Roa

The time has come to break apart Sony.

That’s what Daniel Loeb, a billionaire hedge fund manager, is arguing at least.

Mr. Loeb is an activist investor; an individual who acquires a large amount of shares in a company and uses this new position to push for major changes within said company. Loeb himself has done this before with Yahoo, where he spearheaded a major shakeup in that company’s board of directors, replacing the previous CEO with the current one. According to Loeb, Sony reminds him of Yahoo in that both companies need to be shaken up in order to return to profitability and growth. This is especially acute in Sony’s case, given it’s performance over the past few years. And a scandal or two. So to prove his point, Mr. Loeb acquired a 6.6% stake in Sony, which is around $1.1 billion.

Courtesy of Reuters/Steve Markus

Mr. Loeb’s argument is rather simple: Sony is simply too big and complicated a company. While it’s main business is in electronics, it also has interests in film, music, production, telecommunications, finance, and more. The solution? Split the entertainment business from the main company and turn it into a separate firm of which the old Sony would own a 15 to 20% stake in. With this, the software side of the business (Sony Entertainment) could thrive and focus once freed from the hardware side of the business (Sony Electronics). In a letter from Loeb to Sony CEO Kazuo Hirai, Loeb wrote that:

We [Loeb's hedge fund, Three Points LLC] see clear paths to increasing Sony Electronics’ value if investors turn their attention to its profitable franchises and product cycles as management continues to streamline Sony’s product offerings to improve profitability.

Loeb also wrote in the letter that his firm was willing to put up another ¥200 billion ($1.97 billion) to help support the initial public offering of up to a fifth of the company’s entertainment units. So big money is clearly involved in this idea.

Overall, the solution is sensible enough, though implementation would be very tough. A major barrier will be Japanese corporate culture, which tends to be against any form radical change, especially anything foreign. Indeed, corporate boards are usually filled with insiders and creditor banks that side with management in preserving the status quo. Activist investors like Loeb don’t have a strong record of success in the country.

As a contrast, consider how Loeb handled Yahoo: he encouraged the sale of Yahoo’s stake in Alibaba (China’s e-commerce giant) in order to save cash, pushed for the removal of several board members which he argued were ruining the company, and then finally revealed that former CEO Scott Thompson’s resume advertised a computer science degree which he had never received. Loeb made this possible by courting other major shareholders, convincing them that it was in their best interest to do away with the old board in an effort to turn around the company. Such a move is, as mentioned before, difficult in Japan, where a widespread preference for the prevailing status quo is valued over radical change.

But besides that, there is another major problem that could undo the entire deal: Sony Computer Entertainment (SCE), the company’s video game division.

Courtesy of Sony

SCE is unique in that it stands in the middle of the line between the proposed company split. It both manufactures the video game hardware AND produces the video game software. If Sony were split, in which direction would SCE go? If it went with Sony Entertainment (the better fit), it would still require the engineering capabilities of Sony Electronics. Likewise, if it went with Sony Electronics then it would completely out of place.

But that’s not all. The technology and hardware that SCE develops is probably the best in the entire company. So if Sony Electronics wants to revitalize their business, then they would probably need to draw some of the expertise from SCE. Furthermore, Sony’s PlayStation Network (PSN) could also be a point of dispute: the platform could be just what Sony Electronics needs, since it could be used as a content distribution system that would revive the hardware side of the business.

So the heck is to be done?

As an investor/business-type person, I can understand Loeb’s line of thinking. Sony, despite years of attempting to fix itself up, hasn’t made much progress. A serious shake up is needed in order to bring in real change. This kind of split would serve that exact purpose: it would allow Sony Entertainment to focus on their own growth while giving investors the ability to focus their own portfolios (if you buy into Sony you’re getting the whole packet, even if you just want to get into the music and movie business or the video game business). And by extension, this would force Sony Electronics to reform itself by necessity, since it could no longer rely on revenues from the entertainment wing to keep it afloat.

But at the same time, this change could backfire. While the short-term benefits for Sony Entertainment shareholders would be great, the long term prospects for both companies wouldn’t be as bright. In essence, think of SCE as the child stuck between two parents considering a divorce. Breaking up the two could ruin the kid’s childhood.

Real change is certainly needed at Sony. A dramatic and radical move, to be sure. If anything, now is the time to implement such a change, considering the dramatic events that are currently ongoing in Japan’s economy. But splitting up the company in this manner probably isn’t the way to go.

 

Carlos Roa is the founder and publisher of Ghost Agenda, an online blog that looks into the political and business issues that are going on in our modern world. In addition to Ghost Agenda, Carlos is a financial blogger at the Motley Fool, where he writes articles on various U.S. Equities. He is regularly syndicated on Fool.com, Yahoo! Finance, AOL DailyFinance, MSN Money, CNNMoney, and more. You can follow him on the Motley Fool here.

Whiplash's picture

I do think Sony should move forward and try to capitalize on more opportunities, but they need to do it in a way that doesn't alienate their already existent line of business; rather, they should try to improve their current firms, while expanding on what they don't have.

disgruntledavians's picture

Well if you look at the way the company is divided, it makes sense. Sony's entertainment and devices division (read: the one that we in the West know about) is a terrible performer that continues to lose money every quarter and has just now stopped the hemorrhaging. The reason Sony is still around, is funnily enough, because of the Japanese culture that Simon brings up now and again. The company is organized into a keiretsu, a uniquely Asian model where a company encompasses almost every aspect of life imaginable. 

In this case, Sony is mainly propped up by its insurance division which is doing great and able to support it's flagging tech business. This is akin to what you guys were talking about being the difference between Microsoft and Sony vs. Nintendo, but for Sony, it's an order of magnitude larger than Microsoft even, in being able to shift around money and having more areas of business to prop itself up.

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