Activists at The Gate

Over the last few months, there has been much media coverage of activist investors such as Nelson Peltz, Bill Ackman and others, as they campaign for improved corporate efficiency and shareholder returns. As I wrote about in my last LinkedIn article, shareholder activism in Japan is also heating up again, but this time the environment for activists appears to be much more favorable than the period of the early to mid 2000s.   The objective of this article is to highlight the most recent activist play in Japan and to show how closely it parallels the journey of Bill Ackman and ADP.

 In addition to TBS (9401), it was recently reported that hedge fund veteran, Seth Fischer, had taken a stake in staffing company Pasona (2168) and is urging for greater corporate efficiency and shareholder returns. In contrast to Asset Value’s target of Tokyo Broadcasting, Seth Fischer’s Oasis Asset Management, decided to target a staffing company, which is in my opinion, a better choice. Let me explain. 

First, Seth picked a company in a fantastic industry that is seeing tremendous demand for their services despite online resume search databases. Many forecasters predicted that the recruiting process would get completely disrupted by the internet and by “job databases,” but the reality has actually been the opposite with the internet becoming simply another arrow in the quiver of corporate recruiters and headhunters. This is somewhat analogous to how the spread of the internet has actually increased demand for real estate agents and is their tool, rather than their replacement. 

The decision by Oasis Management to go after an underperforming company in a growing industry is like picking low hanging fruit. Unlike the activist hedge funds in TBS, the staffing industry in Japan has many players with various market caps and is not a protected sector. The staffing industry is ripe for consolidation and given the poor operating efficiency of Pasona, the company would very likely become a target of a bigger firm in the industry. 

While Pasona has some of the lowest operating margins in their industry, the stock has actually performed well this year as it benefitted from not only the bull market in general, but also due to their 49% stake in Benefit One. In fact, the market cap of Benefit One is greater than that of Pasona and is why it is such an attractive investment for an activist like Oasis. In other words, if you buy Pasona, you are essentially buying their stake in Benefit One and getting all of Pasona’s own business’s for free. Thus, if Oasis can coax Pasona’s management to improve their tremendously low operating margins, Pasona’s stock could theoretically skyrocket.

 In addition, Oasis has also presented a white paper, which outlines areas where the company could substantially improve their business.  For example, the company has “diworsified” as Peter Lynch would call it, into building money losing theme parks, an expensive greenhouse as well as a building a zoo in downtown Tokyo!!

 If Pasona chooses to ignore Mr. Fischer and other shareholders, Oasis will recommend a management buyout to improve shareholder returns. The biggest obstacle Mr. Fischer faces is the fact that the current CEO currently controls around 40% of the shares and makes a proxy contest pointless. Thus, Mr. Fischer has to win the hearts and minds of current shareholders including the GPIF (They own 2.85%).

This move by Mr. Fischer is quite similar to Bill Ackman’s recent investment in ADP. In Mr. Ackman’s case, he took a stake in a more operationally efficient company, but who’s stock had also outperformed its equity benchmark, the S&P 500. While Pasona has also outperformed its index this year, I would point out that both companies have very low operating margins. I would also note that Mr. Ackman similarly chose a company in a growing and steady industry, which was payroll and benefit processing. While Mr. Ackman was unsuccessful at obtaining board seats at ADP, he seems to have sharpened the focus of the CEO, who has stated that he is now determined to improve ADP’s margins. 

It seems that the fate of Oasis and Pasona may very well end up being similar to that of Ackman and ADP. While Oasis is unlikely to press for a proxy vote, the end game here seems to be for them to put enough pressure on the CEO that he too will improve margins and take other actions to increase shareholder returns.

To the foreign eye, Pasona is a very simple case of diversifying into disparate business with no benefit to shareholders. However, like many things in Japan, this is not exactly what it seems. Since WWII, corporate Japan abandoned a truly capitalist corporate business model and replaced it with one centered around the concept of the “community firm.” In other words, the corporation did not exist for shareholders, but was rather created and managed for the stakeholders. Thus, even in 2017 with the Nikkei making new 25 year highs, the heart of corporate Japan, and more importantly the soul of corporate Japan, is for the benefit of stakeholders!!! As a result, you get a staffing company with a green house, a zoo and money losing theme parks!

In sum, activism in Japan is having a resurgence thanks to Prime Minister Abe’s push for better corporate governance and emphasis on improved stewardship. In addition, the emergence of the GPIF has a major shareholder of corporate Japan also puts another layer of scrutiny on management and perhaps to some degree, outright pressure on corporate boards. While the outcome of the Tokyo Broadcasting case will have an enormous impact on activism in Japan on a high level, how Mr. Fischer’s investment in Pasona turns out, will also give investors a clue if corporate managements’ and boards will be open minded to improve shareholder value before placating stakeholders.