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More on Steel Partners and Bull Dog from Stippy and Japan Inc.

We’ve recently added the Japan Inc website to our list of links. If you haven’t read it before, check it out - as the byline reads, the site (and the accompanying print magazine) focuses on business, technology and people. There also happen to be some online personal ads in case you’re lonely.

I’m mentioning the site now because this week’s edition of Terrie’s take deals with Steel Partners, their attempted hostile takeover of the Bull Dog sauce company, and the resulting lawsuit/appeal/court rulings. Actually, as Terrie puts it, he is commenting on what someone else wrote on this same issue over at stippy.com.

So first, let’s look at the Stippy article, which is titled “Japan High Court Rules Against Saucy Gaijins“. The author starts by giving us some background information and then, concerning the Tokyo District Court’s decision to allow Bull Dog to issue equity warrants to all shareholders but buy back those from Steel Partners with cash rather than shares, asks this:

[W]asn’t the idea of a free market just that, it was free, and equal rules and fair competition by all ultimately drives up the value of the economy and the companies which are a part of it?

Well…not exactly. That’s not really the legally developed idea of a free market at all, unless you’re an anarchist (even a Libertarian would have to admit to some level of laws and regulations). Markets are also free to set limits on what constitutes “free and equal.” The principle of “equal rules and fair competition” thus does not leave out the possibility of defending against destructive forces, which is what this court case was about; the court ruled that Steel Partners was “abusive” in its dealings with Bull Dog shares. I’m certainly not saying that I support the court’s decision in this case (because I don’t - the court’s decision was basically insane), but there are two points to be made: 1) The idea of a free market is just that, an idea. As such, it is a slightly different concept in everyone’s mind, and thus exists in reality only as shadows on the wall of a cave. 2) Nothing even resembling an actual free market exists anywhere, and especially not in Japan.

That said, I don’t find the court’s decision surprising at all. It had the 80% support of Bull Dog shareholders to fall back on, as well as the business community’s distaste for hostile takeover bids, which must have been a strong silent pressure.

Towards the end of the article, the author states that the ruling:

has also signaled to foreign investors that Japan is still not a fair and transparent market to invest in, that the establishment is still more than happy to jump in to block actions from foreigners which they don’t like, and it also shows that Japanese investors are still more happy to receive their box of tonkatsu sauce during dividend season than support that company to make higher profits and increase the value of their investments.

Investors already knew that Japan is not a 100% fair and transparent market to invest in, since none truly are to begin with. But my question is this: What was transparent about Steel Partners’ post-takeover plans for Bull Dog? They might have had great strategic direction (and I don’t think it would take much to come up with something better than what the current management is doing), but it wasn’t communicated to the market. Transparency, if we’re going to demand it, should play both ways.

What I disagree with is the idea that the courts treated Steel Partners differently because it’s a foreign fund; domestic hostile buyout attempts have been strongly resisted as well, with DaVinci being the most recent case, even if it has not yet gone to the poison pill stage. This is where it gets tricky, because you have to ask yourself if Steel Partners ever actually intended to take over the company. If the fund did intend to take it over, we have to worry about their business practices and how they fit into Japan. As Terrie Lloyd put it in his piece:

Japan isn’t a third world country, it doesn’t like carpetbaggers and greenmailers, and it gets to make its own rules and retain its own social and legal values.

Of course, it was fun to watch staid management get the shakeup it probably deserves. It was fun to point out the gaping holes in their risk management strategies (or complete lack thereof). However, it’s probably worth noting that none of the three sides came away as winners in this case, at least in terms of public image: Bull Dog has wasted a lot of money defending itself due to its lack of business acumen, foresight and risk management, Steel Partners has not helped the image of foreign funds in Japan (intentional or not, and apart from whether or not the fund stands to profit), and the Tokyo High Court, in its appeals ruling on the Steel Partners case, showed gaps in logic that have left many scratching their heads. As the Nikkei put it:

[U]nconvincing is the high court’s argument that Bull-Dog’s move to strip a specific shareholder — Steel Partners — of its voting rights through a special resolution supported by a two-thirds majority of shareholders does not violate the principle of equality among shareholders…

…There are many holes in the logic used by the courts, and their rulings have left many financial experts unconvinced as to why Murakami is guilty of insider trading and why Steel Partners is an abusive fund. With these questionable rulings, “Japan could be seen as a country with too much legal unpredictability to be suitable for fund businesses,” warned an official at a major U.S. brokerage.

The court should offer more persuasive arguments based on solid logic for condemning the tactics used by Murakami and Steel Partners. Otherwise, the only lesson market players may draw from these verdicts may simply be, “Don’t attract attention.”

But that’s another story for another day…

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