Darrel Whitten on relationship investing in Japan

February 28, 2007
By Ken Worsley

Today, Darrell Whitten of the The Japan Investor published an interesting piece entitled “Relationship Investing Pays in Japan,” both on his own site and in the Japan section at seekingalpha.com. Mr Whitten, in this observer’s humble opinion, is one of the best independent commentators on the Japanese economy and related issues.

As he points out, back in the 1980s, those individuals involved with leveraged buyout (LBO) funds were labeled “greenmailers,” “corporate raiders” or “asset strippers.” As time has passed, they have succumbed to the power of branding, and now prefer to call themselves “relationship investors,” “shareholder activists,” “buy-out funds,” “corporate governance funds” or “restructuring funds.” The industry has certainly changed since the Big Bad 1980s, but often the image of such firms (and private equity) has not, especially in Japan, where management has remained very hostile to the idea of LBOs.

Mr Whitten correctly points out that “relationship investors” are hardly the barbarians at the gates that the senior management of targeted Japanese corporations would have us believe. As he points out:

Due to pressure from relationship investors, the mindset of Japanese senior management has undergone a sea change. Concepts such as return on equity [ROE], return on assets [ROA] and return on investment capital [ROIC] are now at the forefront of managers’ minds.

Very true. We reported on recent shareholder’s revolt led by Scott Callon at Ichigo Asset Management. Mr Whitten’s piece does not mention this event, but this may be due to the fact that it was just happening as he drafted his article (which was published at the Japan Investor on February 26, four days after the shareholder revolt).

For the rest of the article, in which Mr Whitten discusses his tracking of the performance of 16 companies that Steel Partners has invested in, see the source linked above. Steel Partners, of course, has recently been in the news as they’ve made a move to take over Sapporo Breweries; a move which has caused the Japan Times to ask: “Steel Partners — foreign raider or catalyst for shakeup?”

Despite what anyone calls the “relationship investors” these days, perceptions and attitudes in Japan are slow to change. Last Tuesday, Minister of Economy, Trade and Industry Akira Amari offered this comment on the proposed takeover:

The world does not want to see someone who simply sells off (stocks at higher prices) and makes money regardless of whether a target’s corporate value has been raised or not.

Should this deal go through, we’ll find out which side of the fence Steel Partners sits on. I wonder which side Mr Amari is hoping to see…

Filed Under Business