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Friday, July 20, 2007

CROSSING THE LINE

Murakami: investor activist turned greenmailer?


Staff writer

Convicted of insider trading Thursday and more than a year after he stepped down as a high-profile fund manager, it still isn't clear how to define Yoshiaki Murakami.

Former shareholder activist Yoshiaki Murakami walks to a Tokyo courthouse to hear the ruling on his case
Former shareholder activist Yoshiaki Murakami walks to a Tokyo courthouse Thursday morning to hear the ruling on his case. KYODO PHOTO

Was he a shareholder activist targeting status quo company executives or an aggressive greenmailer seeking quick returns on investments?

Perhaps he was a bit of both. The general sentiment is that he began as a moderate shareholder activist but later turned into a greenmailer.

"He was no doubt the first shareholder activist in Japan," said Aiichiro Mizushima, a freelance journalist and author of "The Study of the Murakami Fund."

"At first, Murakami was vocal about increasing corporate value for all of the stakeholders, including shareholders," Mizushima said.

But Murakami gradually transformed into something of a greenmailer — someone who obtains a substantial portion of a company's stake and then pressures management to buy back the shares at a higher price to retain control — after the fund he was managing ballooned in size, Mizushima argued.

"Because the increased capital forced him to make tens of billions in profit a year, he had to resort to aggressive behavior" to make money, Mizushima said.

By the end of March 2006, Murakami's fund had more than 440 billion yen in capital, more than 100 times the initial figure, according to the Japan Securities Investment Advisors Association.

While Murakami has exited the domestic business scene since his arrest last year, foreign investment funds have increased their presence in Japan. And the same question that was asked of Murakami's fund is now applied to funds like Steel Partners Japan Strategic Fund (Offshore) L.P.

This year, foreign investment funds introduced shareholder proposals at at least 34 companies' general shareholders' meetings — an unheard-of figure in recent years, according to Daiwa Institute of Research.

Most proposals sought higher dividends from the companies. In other cases, investment funds entered into proxy fights with corporate management to stop them from introducing poison pill takeover defenses.

However, the results were a complete defeat for the investment funds. Every one of their proposals was voted down by shareholders, who then supported the management-proposed takeover defenses.

At a glance, it seems odd that Japanese shareholders did not side with the investment funds, especially when their proposals for larger dividends could have financially benefited them.

Yutaka Suzuki, a senior analyst at Daiwa Institute of Research, noted that shareholders bought the management argument that cash needed to be kept on hand for future investments instead of being distributed as dividends.

But there's more to it than that, Suzuki said.

"Shareholders had negative feelings toward Steel Partners' aggressive approach to the management of targeted companies," Suzuki said, adding that other foreign investment funds, including Brandes Investment Partners, were also considered in the same ranks as Steel Partners.

In the past year, Steel Partners made headlines seeking control of one Japanese company after another, including Sapporo Holdings Ltd. and Bull-Dog Sauce Co., after obtaining a major stake in these firms.

But its bids have not won the support of other shareholders, who in turn authorized the takeover defenses proposed by management of the targeted firms. In rejecting Steel Partners' request for an injunction against defense measures prepared by Bull-Dog Sauce, the Tokyo High Court branded the U.S. fund an "abusive acquirer."

Koji Morioka, professor of economics at Kansai University, said individual shareholders eyed Steel Partners and other foreign investment funds as short-term investors seeking a quick buck.

"To gain a profit in the short term, the target company may be forced to slash jobs or streamline its operations, which was considered damaging in the long term," said Morioka, who also heads the nonprofit organization Shareholder Ombudsman, which monitors corporate management.

Morioka noted the rejection of investment fund proposals is a sign that Japanese management is returning to a traditional style that tended to exclude outsiders.

"In the late 1990s, Japanese businesses shifted their priorities, putting more importance on investors than their employees," Morioka said. "But amid a series of takeover attempts (by foreign investment funds), they started to have second thoughts."

Foreign investors have increased their stake in Japan's capital market since the late 1990s, when cash-strapped Japanese companies reduced their cross-shareholdings with firms they had had long-standing business ties with.

Murakami's fund also cashed in on that opportunity and saw its capital swell year after year.

In 1999, Murakami, a former Ministry of International Trade and Industry bureaucrat, founded his own investment fund with about 4 billion yen in capital. BOJ Gov. Toshihiko Fukui, who at that time was head of the private-sector Fujitsu Research Institute, was among the first to invest in Murakami's fund.

Murakami grabbed media attention when he launched a proxy fight against Tokyo Style Co. in 2002 after obtaining an 11.9 percent stake in the women's clothing maker. Since Tokyo Style was sitting on a large pool of idle cash, he pushed it to pay higher dividends to shareholders.

The amount sought — 500 yen per share — was 25 times higher than the dividend Tokyo Style's management had planned for the year. In the end, his proposal was voted down at a general shareholders' meeting.

Freelance journalist Mizushima said foreign investment funds will continue to be active in Japan because share prices of Japanese companies are still considered below their potential.

And it is only a matter of time, Mizushima said, before a new activist fund like Murakami's will emerge in Japan.

"But even in the United States, greenmailerlike activist funds have lost shareholders' confidence and disappeared because of their high-handed tactics," he said. "For activist funds to survive, they need to strictly devote themselves to monitoring corporate management and serve the interests of all of the shareholders, not only their own."



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