Market meltdown? Global pandemic? At times like these, “cash is king.”
Nidec’s outspoken CEO Mr Nagamori - hitherto a profligate spender when it comes to M&A - told us as much from the front page of the Nikkei (JP | EN). Companies will hoard cash in the face of a sharp revenue decline because, well, they have to - or some of them do.
It’s therefore little surprise to find those pesky corporate raiders, the barbarians at the gate - otherwise known as activist hedge funds - under attack in the press once more (see this Bloomberg Opinion piece). Now the problem is not their behaviour, but that the opportunity set has evaporated, because corporate leaders like Mr Nagamori are hoarding cash and no amount of backroom diplomacy, letters to management, or AGM proposals is going to get them to part with it. The “great cash grab” has ended.
Cash rich companies have outperformed
Certainly, you’d have been much better off on average over the past three months if your portfolio were stuffed with cash-hoarders rather than heavily indebted stocks in Japan: on a simple average share price performance basis, indebted stocks were down 23%, net-cash stocks only 9%. The cash might not be being handed out, but the market has given credit for it - and activists have probably outperformed.
But the flight to cash, and the obsessive hoarding of it, is a temporary state of being. It’s the painful period before we learn to “dance” with coronavirus (this is the best we’ve seen on that topic) rather than having to impose the “hammer” of economy-crushing lockdowns to control it. But when the economy opens up again, and we figure out how to walk, talk, eat and work together again without infecting each other, the opportunities will still be there.
Activists need not give up - companies haven’t
Arguably, those opportunities will grow, not necessarily because of activism - but because it makes business sense to Japanese companies, and because the government is encouraging them to do so through its governance codes and guidelines. It was reported this week that NTT - which already has half its $85bn market cap in net debt - intends to sell assets (Nikkei, JP only) - not just a few, but up to twenty-eight billion dollars’ worth - in order to slim the balance sheet and fund greater shareholder returns. Longtime followers of the company may not be so surprised: NTT has, despite significant government ownership, been a generous payer of dividends and an early proponent of stock buybacks. It also realises that some parts of its business are mature, and so the quest for greater return on equity must, in part, be driven by changes to the balance sheet. Big ones.
Telcos have been a great beneficiary of the work-from-home trend - now is not the time to be cancelling your phone subscription, and many users are upgrading their internet connections. So perhaps it’s unfair to single out one of the few companies that will suffer least from the COVID-19 pandemic.
In that case, how about Ricoh? We are all working from home, while the office printer sits idle, failing to generate the cash flow from the sale of consumables (“non-hardware” in local industry parlance) that its manufacturer counts on as the core of profits. As China is starting to show, however, after lockdown comes a return to work and some degree of normality (while Hong Kong has shown that it can carry on more or less throughout, if the spread is well-managed). The problem is we don’t know exactly when that will be. So while Ricoh’s medium term plan didn’t bring any hard numbers in terms of future earnings - too early to say - it did promise to go ahead with a further ¥100bn shareholder return (press release) as soon as reasonably possible. For those struggling to work from home, it is also a premier provider of teleworking packages here in Japan, something with which SMEs continue to grapple.
A 20% buyback from a blue chip? In your dreams…
The fact that Ricoh's share price, one of the worst-hit in the COVID-induced crash, could not bring itself to react positively to such a shareholder-friendly move perhaps proves that Nagamori-san is right - cash is king, and you should probably hold on to it for now. But this won’t be forever. Taking a step back, most activists in Japan over the last ten years would never in their wildest dreams have expected a campaign to bring about a buyback of twenty percent of outstanding stock by a Japanese blue chip (yes, Ricoh’s market cap is now less than ¥507bn), or to see a telecom company liquidating assets to the tune of one third of its market cap, to improve shareholder returns.
These are the times we live in - where “henkaku” (change, reform, revolution, transformation) is a daily occurrence, thanks to the coronavirus: but it is also a product of the long process of governance reform in Japan, one that won’t stop just because hedge fund “corporate raiders” (Bloomberg’s term) are unable to extract cash from Japan Inc’s balance sheets over the next few months. The companies will do it for them, given a little patience. And some dancing lessons.
About Vido Research Consultants
Enjoyed this post? Want to learn more? Contact us here to see what Vido Research can do for you, on-the-ground in Japan. We provide honest and objective bespoke insights into Japan, a service we believe is even more valuable now the pandemic means travel bans, time differences, and conference calls through interpreters making life more difficult. See here for details of how we can help.