Japanese Activist – Yoshiaki MurakamiThe Acquirer's Multiple
In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Japanese Activist – Yoshiaki Murakami. Here’s an excerpt from the episode:
Japanese Activist – Yoshiaki Murakami
Jake: So, this brings us to our story of this Japanese investor who I had never heard of, and maybe you guys haven’t either, but his name is Yoshiaki or Yoshiaki Murakami. He was born in 1959, and graduated, and went to work actually at the Ministry of International Trade and Industry for 16 years. So, he worked in the government for 16 years, and he realized that corporate governance is a really important thing to the sustained growth of Japan. He left to start his own fund at 40 years old, and he launched an activist fund about 20 years ago, and he started– He got it like he started doing activism in Japan. His style was to obtain shares in a target company, and then try to force them to focus on the profitable businesses within that business and try to divest the ones that weren’t profitable and not just make work, which is something you tend to see in a lot of Japanese companies. Nope.
Actually, earlier this summer, he just completed Japan’s first hostile takeover bid. So, I’d be curious to see if this is sort of– does Japan today look a little bit like the US did in maybe the early 1980s as far as a potential heyday of call it lazy balance sheets, low ROEs on business, lots of potential maybe and in fact like 50% of non-financial companies that are listed have net cash on their balance sheets in Japan, which relative to the US. I think that number is more like comparable is like 15%. So, obviously the starting valuations are a lot lower than the US, and especially in the small end value basket likely. Maybe, Japan is a place as a value investor that might–
I think, Toby, you’ve pointed this out very correctly before that. A lot of times the catalyst of very cheap is that, like business people come along and they see like, gosh, there’s all this cashier, it’s a business that’s underperforming, let’s get in there and clean it up and hopefully, they don’t take it to the extremes of the 1980s, where you get like a Milken kind of fueled LBO where like, you just borrow a ton of cheap money, and then go, and kind of raid and, you end up with the barbarians at the gate kind of stories. But there were some– a lot of good returns for value guys that saw a lot of traditional value on a balance sheet, on an income statement, and we’re able to go unlock that through activism and maybe there’s some good work to be done here.
Tobias: Was America resistant to that kind of activism before that sort of 1970s, 1980s?
Jake: I’m not sure that’s true. Buffett was getting in there and doing stuff at Dempster mills. I’m sure there were activists. I just don’t know if– Well, one, I think there was a much more financialization of the world post in like the 1980s, Wall Street went from being a backwater to something that everyone, well, not everyone, but a lot of people aspired to go get on there and make a ton of money. I think cheap money also played a factor like price movement, too.
Going from 15% interest rate to whatever five-ish, like that’s– some stuffs going to lift off when you do that, and that’s just going to attract attention, it’s going to attract people who want to make money, and I think there’s– the action just gets heated up, and then you introduce a financial innovation, maybe like mortgage-backed securities and junk bonds at that time that allowed corporate raiders to have a bigger artillery to go wage war against these companies. So, I think it’s like a confluence of factors. What do you think?
Tobias: America had the conglomerate boom before the LBO boom. So, there were a lot of those cross shareholdings and they were under earning because they were using that sleight of hand a little bit where they were trying to grow EPS on a per share basis rather than looking for so, you can buy something very cheaply, but not great, and that would translate through an EPS, but it meant that they held all these very low return on–
Jake: Yeah, a lot of empire building I think at that point too.
Tobias: It was the picking apart, the 1980s was about busting all of that up and picking it all apart, and they started from very low valuations. It’s an interesting corollary that Japan might be in that situation. If they start seeing performance out of the stock prices, there’s been a well-established culture of owning stock in Japan for a long period of time. I think they call the households, Mrs. Watanabe, and she’s very long-term holder. She doesn’t trade a lot, but if they start seeing some performance out of these things, they might start chasing them, and then get the scenario [crosstalk] as you described.
Jake: Some of the corporate governance changes have actually come from the Japanese pension side, who realize the trouble that they’re in as far as returns go and have wanted to make the change now to get better returns out of their business ownership. Like actually forcing the idea that, “Hey, this capital has a cost and you need to get over your cost of capital, which was being ignored before.”
Tobias: This guy’s an activist and Warren Lichtenstein at Steel Partners had a run up in 2000. There’s been a few– over the last 10 or 20 years, they’ve been a few attempts at trying to improve corporate governance, but maybe they needed an insider who could culturally push it through rather than American to a just a different style.
Jake: Well, doesn’t this kind of rhyme a little bit to what the US of, let’s call like 1989 Japan maybe comparable to 1968 US. NIFTY 50, huge blowout, big bear market for a long time, death of equities articles finally at the bottom after 17 years of nominal sideways, but real return just absolutely gutted you. That’s kind of been Japan a little bit, why wouldn’t some consolidation maybe happen there as well? I don’t know. It’s interesting to imagine. Was it like Graham always quoted Horace about how the fallen shall be mighty again, or something like that. What’s the quote, Toby?
Tobias: Many should be restored.
Jake: Yeah, that’s it.
Tobias: Yeah, he’s talking about words funnily enough. Yeah. Ars Poetica. Yeah, I like that. Is it Edward Chancellor? What’s the name of the article?
Jake: Japan tortoise will outpace US hare.
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