FREE KIC - NO. 19 APRIL 07
INVEST IN JAPAN (IT’S A STEEL!)
For a number of years I have been confused about the Japanese stock
market and I have written two opinion pieces explaining why this was the case.
(Opinion piece 1 Oct 05 and 7 April 06).
I have recently made a very small
investment in the Japanese stock market and I thought it might be useful to
In my first opinion piece I explained the
conflict that existed between traditional Japan and an aggressive group of
activist fund managers led by Steel Partners. I said that the activist fund
managers had failed in their attempts to acquire companies by means of hostile
takeovers. I felt that traditional Japan was attempting to repel this
bunch of upstarts and therefore I was not prepared to risk investing.
So what has changed you might ask? Well I
think a few things have moved on to the point where a small exposure to the
Japanese market is justified.
First of all the activist fund managers
have not gone away. Steel Partners, TCI and Dalton continue to accumulate stakes in a
large number of Japanese companies. Recently Steel Partners had a stake of over
5% in more than 30 companies. (5% is the limit for disclosure of stakes) They
probably have a lot more stakes below the 5% declaration limit.
The second thing to point out is that these
activist shareholders appear to be getting more aggressive. Steel Partners have
attempted to buy Myojo Food and Sapporo Breweries. Dalton has suggested that Fujitec and NFC go
private through management buyouts. They are getting more aggressive because
generally they make significant returns on their investments. As they make more
money from each attempted takeover it gives them a bigger war chest for their
next battle. Even if they do not succeed in the takeover battle (which has been
the case up until now) it doesn’t really matter that much because of the
profits they are making.
In the case of Steel Partners trying to buy
Myojo Foods I would imagine that they were very happy with the money they made.
They were quite happy that Nissin Foods came along and bought them out at a
The third thing to point out is that there
are plenty of opportunities in the Japanese market. There are many companies
that have loss making divisions that could and should be sold or closed down.
There are other companies sitting on excessive cash or real estate assets. In
the case of Fujitec, Dalton
has proposed that they dispose of unprofitable operations. With all of these
opportunities it would be amazing if nobody attempted to unlock the value. In
my last opinion piece on Japan
I gave the example of Asahi Chemical as a company that had potential. One day
it might be the target of the activists.
This leads me on to my fourth point. In the
last year activist / private equity funds around the world have raised ever
larger funds. This has led to an explosion of deals. In recent weeks we have
seen ABNAmro being the target of activist fund manager TCI. This explosion in
activity will ultimately exhaust many of the most obvious cases in western
markets. I think that this will ultimately lead more funds to look at the value
available in Japan and
ultimately I believe that Japan
will not be able to fend off these activists for much longer.
Finally there are some legal changes taking
place in Japan
that will allow foreigners to buy local companies with shares rather than cash.
I am not sure if this will make a significant difference because I have not
seen cash rich foreign companies attempting hostile takeovers even though they
are not constrained by an inability to use shares. Even if this is not a
significant change it at least creates another option.
In conclusion my decision to invest in Japan has been
based on this idea that there are asset rich companies that are cheap. I now
believe that there is a real chance that those cheap companies will be forced
to look after their shareholders. This is not a view on the short term
direction of the economy. It is not a view on a specific company. It is a long
term investment based on value being realised in the broad Japanese stock
In order to implement the decision I have
bought a Japanese exchange traded fund (ETF). This gives broad exposure to the
I have invested in Japan. It might
not quite be a steal but Steel Partners will help to unlock the cheapness!!!
ANALOG DEVICES AND LINEAR TECHNOLOGY.
In January (opinion piece 16) I wrote about
a technology sector for long term investors. I mentioned that I had bought
shares in Analog Devices and Linear Technology and I said that I would keep
readers in touch with my progress. When I said that, I thought that I might
talk about it in a year or twos time. Little did I think that by April I would
have seen a significant increase in the share price of both companies. Analog
hit $40 this week and Linear was over $38. Demand appears to be picking up but
more importantly Linear announced that they are going to buy back $3bn worth of
shares. I said that I trusted their Chief Financial Officer, Paul Coghlan but
little did I think that this would happen so soon. As far as I am concerned,
this is just the start of things so I am not selling yet.
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