On May 22, Sony shares reached their highest level in two years as it mulls over Dan Loeb of Third Point hedge fund’s proposal to spin-off Sony’s movie and music division. Currently, Dan Loeb is one of Sony’s largest stockholders with 6% stake.
First of all, what is a spin-off? According to Brian Kohl, spin-off is when “companies take an existing internal operation within the parent company structure and allow it to stand on its own. The parent company may offer IPO shares in the market to new investors as a means of enhancing shareholder value for those that own shares in the parent company.”
Dan Loeb wants Sony to setup Sony Entertainment as a separate company in order to enhance its increasing earnings in the past years compared to Sony’s struggling consumer electronics business. He hopes that the money from the spin-off will help Sony’s electronics business and it will also provide shareholders an opportunity to share a piece of a more profitable unit of the company.
According to New York Times, in the past 13 years Sony has seen its stock freefall by nearly 85%. Since then, Sony has been clamoring to revive its market share and provide a turnaround for all parts of the company. But the company has seen tough competition envelop the market. Sony lagged behind Samsung, Apple, and Google and suffered in mobile, PC and television sales.
The market anticipates that investors and consumer’s sentiment will improve upon the release of the upcoming Playstation 4. Meanwhile, Microsoft already revealed the latest Xbox, Sony Playstation’s biggest competitor.
In its 2012 annual report, Sony said that it’s working to reinvent itself. Company President and CEO Kazuo Hirai said that “Sony will change.” He also revealed that only two of its three main business units, entertainment and financial services, are the most stable and “poised for future growth.” Its third area, electronics, isn’t as fortunate: “the operating environment remains harsh, with profits suffering from price competition resulting from product commoditization and the impact of persistently worsening foreign exchange rates.”
Sony is reportedly leaning towards accepting the spin-off proposal. If this happens, Sony will undergo a corporate reorganization in which the Sony parent corporation transfers some of its assets to a newly formed corporation.
“Sony stands at the crossroads of compelling corporate opportunity and massive Japanese economic reform,” Loeb wrote in a letter to Sony. “Under Prime Minister Abe’s leadership, Japan can regain its position as one of the world’s preeminent economic powerhouses and manufacturing engines.”
“As President and CEO Kazuo Hirai has said repeatedly, the entertainment businesses are important contributors to Sony’s growth and are not for sale,” Sony said. “We look forward to continuing constructive dialogue with our shareholders as we pursue our strategy.”
Sony’s board of directors held a meeting on Wednesday, May 22, in Japan to discuss this matter.
While Sony mulls over this subject, Sony shares were up 8% in Nikkei. The company is set to rise 16% in net profits before the fiscal year ends.
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