Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

I expected something, but I did not expect this thing, nor did I expect it this quickly, but there is exciting new news on <a href="https://www.smartkarma.com/entities/toshiba-machine-co-ltd" target="_blank" data-smartkarma-citation="entities:7943:1" rel="noopener">Toshiba Machine (6104 JP)</a>. This does not change the investment recommendation made on the morning of 16 January in <a href="https://www.smartkarma.com/insights/nuflare-is-a-done-deal-here-comes-the-aftermath" target="_blank" data-smartkarma-citation="insights:35854" rel="noopener">Nuflare Is a Done Deal; Here Comes the Aftermath</a> nor the one made 10 December in <a href="https://www.smartkarma.com/insights/murakami-raises-stake-in-nuflare-toshiba-machine-again-the-other-toshiba-machine-angle" target="_blank" data-smartkarma-citation="insights:35165" rel="noopener">Murakami, Nuflare, and Toshiba Machine - The OTHER Toshiba Machine Angle</a>. It may change how this plays out, but it may not. <h2>The New News</h2>On Friday the 17th, at 9pm local time, Toshiba Machine put two announcements on the Tokyo Stock Exchange's TDnet system.<ul>
<li>One was the <a href="https://www.release.tdnet.info/inbs/140120200117447931.pdf" target="_blank" rel="noopener">announcement</a> that in response to the receipt of an announcement of an intention by a company called Office Support KK - one of the companies and holders linked to or under the de facto control (reporting as joint holders, in any case) of noted Japanese activist MURAKAMI Yoshiaki to launch a Tender Offer for Toshiba Machine, the Company would seek to decide whether or not the large scale purchase (or attempted purchase) of additional shares by Office Support would damage the corporate value of Toshiba Machine, and to determine such, it would announce the establishment of an Independent Committee, and might hold a shareholder meeting to approve any changes. It also said that it would establish a new policy to prevent the large scale accumulation of its shares by buyers deemed undesirable. 
</li>
<li>It <a href="https://www.release.tdnet.info/inbs/140120200117447933.pdf" target="_blank" rel="noopener">announced</a> the launch of said Independent Committee and provided three members' "resumes."</li>
</ul><div class="content-remarks">Nota Bene: The two links are "temporary" (they last 30 days). They will likely be posted to the company's own news page here (<a href="https://www.toshiba-machine.co.jp/jp/NEWS/index.html" target="_blank" rel="noopener">Japanese</a>, <a href="https://www.toshiba-machine.co.jp/en/NEWS/index.html" target="_blank" rel="noopener">English</a> (note the English page for news is sparse and incomplete), and for Smartkarma subscribers, you can see the PDFs attached to this insight.</div>The background here is important. In 2007, near the height of the frenzy of Japanese companies putting poison pill structures in place, Toshiba machine joined the party. It put a three-year limit on the poison pill measure added to the Articles of Incorporation, then asked shareholders to renew it in 2010, 2013, and 2016, which they did. In May of 2019, despite having seen Toshiba sell a large number of shares of the Company in the meantime so there were fewer large shareholders, and despite the fact that Murakami-san had shown up already on the shareholder register, the company announced that after extensive input from domestic and international shareholders and taking into account the environmental changes wrought by the implementation of the Corporate Governance Code and its subsequent amendments, it would not seek to renew its poison pill measures at the June 2019 AGM. Instead, it would "monitor" the situation, and seek advice from an independent counsel should such events arise in future. Certainly, there are probably many ways that the Company could figure out how to do something with its existing net cash position, and the significant incoming cash company could figure out how to do something with its resulting large net cash position and the fact that it has a five-year average ROE of 4.7% which will go lower on an implied basis after the sale of its Nuflare position.The plan to be put in place here is indeed, as described in the announcement, different than the old poison pill, and it is admirable that the Board would seek to put this decision to shareholders, but in the next breath they say that if there is not sufficient time, it shall be decided by the board. And while this looks a little This show has played out before.And it did not work well for minority shareholders. There is reference to a plan which appears to look like it is taken from a previous event, and Toshiba Machine makes references to the <a href="https://www.meti.go.jp/policy/economy/keiei_innovation/keizaihousei/pdf/080630TakeoverDefenseMeasures.pdf" target="_blank" rel="noopener">Takeover Defense Measures in Light of Recent Environmental Changes </a>report by METI's Corporate Value Study Group, published in summer 2008. I remind investors that report included the delicate phrasing...<blockquote>“corporate value and the shareholders’ common interests” is referred to as “shareholder interests”... and this report will follow this usage of the term. In relation to this, “corporate value” appearing in the “Guidelines” and in this report is conceptually assumed to be “the discounted present value of future cash flow of the company”. This concept should not be arbitrarily stretched in the interpretation of the “Guidelines” or this report.</blockquote>That tells you that if "corporate value" is deemed to be the DCF value of the company, it is up to the company to explain how the DCF of the company would be impaired to the detriment of shareholders through such a takeover event. It should be noted that if there IS a takeover event, the shareholders hurt by such a takeover would be the shareholders doing the takeover. This should make the entire process a very tricky one legally, but this being Japan, it is clear the arguments will get muddied.<div class="content-highlight">
HINT:  If you as institutional investor would sell to the Tender Offer at that cash price if it were friendly, but would not sell at the same cash price if it is not friendly, you are not doing the right thing by your own investors.
If you sell when it is friendly, you only sell if the price is above what you think it is worth. And then you let go because you no longer own it. You have chosen cash over the potential future of that company for the right reason. It is now someone else's problem. And management and the board works for the new owner. 
If you would sell that price, but would not do so if hostile because management asks you not to sell, you are choosing company management over your own investors. You are making a different economic decision. Why? Of course, if you would not sell even if it were friendly, that is a different story, but be honest with yourself (far too many tender offers go through at too-low prices in Japan because the tender offers have 'management support' or 'board recommendation').
If there were a friendly takeover with exactly the same terms except for the fact that the cash price were 5% lower than the hostile takeover attempt, would you accept the lower bid? If so, think VERY carefully about why you would. In either case, you are out, and no longer own shares, and management and the directors and employees owe you nothing in either case. 
If it is a cash offer against scrip, or scrip vs scrip, the calculus changes, and that is OK. But if it is cash deal vs cash deal or cash deal vs no deal, you as investment manager have a fiduciary duty to do the right thing by your own investors - a duty unaffected by the opinion of management's opinion of the would-be buyer of your shares. 
</div><hr>There is considerable attention paid in the Document to the Murakami group of companies, and their history. The idea appears to be to paint the companies as opportunistic. I would agree they are opportunistic. Historically, they have found companies trading at a discount to their value and have tried to reap that value for themselves and for other shareholders. They have used tactics which have tended to favor their exit over the exit of other shareholders. I find this objectionable. But I can guarantee that EVERY SINGLE TIME that a company has implemented a buyback or tender offer, takeover, MBO, or other capital action in response to the "Murakami Fund" entities owning shares and being activist, the companies have done so with the approval of their Board of Directors, and have done so with all appropriate guidance and advice, with the intention of increasing corporate value for all shareholders. There will not be a single contrary case. It may be that the Boards are not wise to the differences in method which offer advantage to the Murakami entities over other shareholders, but their bankers are. And shareholders who have seen the events pass them by can make it clear to Murakami-invested companies that the appropriate course of action should not include methods which favor a Murakami exit over other shareholders. <hr>There is a fundamental misunderstanding by Toshiba Machine and its directors in this particular case. They make every effort to sound like they are doing the right thing by shareholders by wanting to provide the time so that shareholders may make a decision using all appropriate information. There is some element of bread and circuses here. <ul>
<li>If delaying things to provide a forum for a far greater amount of information than you'd normally get is appropriate in this Tender Offer case, it is appropriate in ALL Tender Offer cases, including Tender Offers conducted by friendly parties. <ul><li>While the 2008 METI Guidelines are a strong document in support of shareholder rights and the importance of directors doing the right thing by shareholders, there is one element which is short-sighted. The requirement for adequate information and time for shareholders to make a decision does not ONLY come in the case of a hostile large scale acquirer. If it is appropriate for investors to have the extensive information to make a decision to sell based on a Price and an Offer, if the only difference is information about the post-sale disposition of the company, then that should be required of all deals - not just hostile deals. </li></ul>
</li>
<li>Furthermore, investor decisions to sell are made with information about the company's prospects and financials, and price. Information about the company's financials, and prospects are provided by the Company itself - that is part of the Board's Governance Code obligations. While it may sound insensitive, if I am being asked to sell my shares, I do not need to know what the buyer is going to do with them. The effect of the Cash Buyer's purchase on corporate value is NOT MY PROBLEM. Suggesting an investor should accept a lower consideration so that the board is happier with the outcome is tantamount to a request by the board for board and management entrenchment. 
</li>
<li>A Tender Offer is, if for more than 50% of the shares outstanding, functionally equivalent to a Shareholder Meeting agenda item to approve the purchase of 50+% of the shares and transfer control over major board decisions to that Buyer. If 51% of shareholders do not agree, the Tender Offer will not succeed.</li>
<li>If a Buyer who buys a number of shares which is lower than all of the shares but does so at a premium has plans which include actions which may lower the Corporate Value of the target, the first to be injured will be the Tender Offeror. Other shareholders can make their decision. The Company can attempt to provide a more attractive alternative. It will be very easy for the Company to provide such an alternative in this case. The question is will they think of it?
</li>
</ul><hr>More discussion below.

I expected something, but I did not expect this thing, nor did I expect it this quickly, but there is exciting new news on Toshiba Machine (6104 JP). This does not change the investment recommendation made on the morning of 16 January in Nuflare Is a Done Deal; Here Comes the Aftermath nor the one made 10 December in Murakami, Nuflare, and Toshiba Machine - The OTHER Toshiba Machine Angle. It may change how this plays out, but it may not. The New NewsOn Friday the 17th, at 9pm local time, Toshiba Machine put two announcements on the Tokyo Stock Exchange's TDnet system.
One was the announcement that in response to the receipt of an announcement of an intention by a company called Office Support KK - one of the companies and holders linked to or under the de facto control (reporting as joint holders, in any case) of noted Japanese activist MURAKAMI Yoshiaki to launch a Tender Offer for Toshiba Machine, the Company would seek to decide whether or not the large scale purchase (or attempted purchase) of additional shares by Office Support would damage the corporate value of Toshiba Machine, and to determine such, it would announce the establishment of an Independent Committee, and might hold a shareholder meeting to approve any changes. It also said that it would establish a new policy to prevent the large scale accumulation of its shares by buyers deemed undesirable. 

It announced the launch of said Independent Committee and provided three members' "resumes."
Nota Bene: The two links are "temporary" (they last 30 days). They will likely be posted to the company's own news page here (Japanese, English (note the English page for news is sparse and incomplete), and for Smartkarma subscribers, you can see the PDFs attached to this insight.The background here is important. In 2007, near the height of the frenzy of Japanese companies putting poison pill structures in place, Toshiba machine joined the party. It put a three-year limit on the poison pill measure added to the Articles of Incorporation, then asked shareholders to renew it in 2010, 2013, and 2016, which they did. In May of 2019, despite having seen Toshiba sell a large number of shares of the Company in the meantime so there were fewer large shareholders, and despite the fact that Murakami-san had shown up already on the shareholder register, the company announced that after extensive input from domestic and international shareholders and taking into account the environmental changes wrought by the implementation of the Corporate Governance Code and its subsequent amendments, it would not seek to renew its poison pill measures at the June 2019 AGM. Instead, it would "monitor" the situation, and seek advice from an independent counsel should such events arise in future. Certainly, there are probably many ways that the Company could figure out how to do something with its existing net cash position, and the significant incoming cash company could figure out how to do something with its resulting large net cash position and the fact that it has a five-year average ROE of 4.7% which will go lower on an implied basis after the sale of its Nuflare position.The plan to be put in place here is indeed, as described in the announcement, different than the old poison pill, and it is admirable that the Board would seek to put this decision to shareholders, but in the next breath they say that if there is not sufficient time, it shall be decided by the board. And while this looks a little This show has played out before.And it did not work well for minority shareholders. There is reference to a plan which appears to look like it is taken from a previous event, and Toshiba Machine makes references to the Takeover Defense Measures in Light of Recent Environmental Changes report by METI's Corporate Value Study Group, published in summer 2008. I remind investors that report included the delicate phrasing...“corporate value and the shareholders’ common interests” is referred to as “shareholder interests”... and this report will follow this usage of the term. In relation to this, “corporate value” appearing in the “Guidelines” and in this report is conceptually assumed to be “the discounted present value of future cash flow of the company”. This concept should not be arbitrarily stretched in the interpretation of the “Guidelines” or this report.That tells you that if "corporate value" is deemed to be the DCF value of the company, it is up to the company to explain how the DCF of the company would be impaired to the detriment of shareholders through such a takeover event. It should be noted that if there IS a takeover event, the shareholders hurt by such a takeover would be the shareholders doing the takeover. This should make the entire process a very tricky one legally, but this being Japan, it is clear the arguments will get muddied.
HINT:  If you as institutional investor would sell to the Tender Offer at that cash price if it were friendly, but would not sell at the same cash price if it is not friendly, you are not doing the right thing by your own investors.
If you sell when it is friendly, you only sell if the price is above what you think it is worth. And then you let go because you no longer own it. You have chosen cash over the potential future of that company for the right reason. It is now someone else's problem. And management and the board works for the new owner. 
If you would sell that price, but would not do so if hostile because management asks you not to sell, you are choosing company management over your own investors. You are making a different economic decision. Why? Of course, if you would not sell even if it were friendly, that is a different story, but be honest with yourself (far too many tender offers go through at too-low prices in Japan because the tender offers have 'management support' or 'board recommendation').
If there were a friendly takeover with exactly the same terms except for the fact that the cash price were 5% lower than the hostile takeover attempt, would you accept the lower bid? If so, think VERY carefully about why you would. In either case, you are out, and no longer own shares, and management and the directors and employees owe you nothing in either case. 
If it is a cash offer against scrip, or scrip vs scrip, the calculus changes, and that is OK. But if it is cash deal vs cash deal or cash deal vs no deal, you as investment manager have a fiduciary duty to do the right thing by your own investors - a duty unaffected by the opinion of management's opinion of the would-be buyer of your shares. 
There is considerable attention paid in the Document to the Murakami group of companies, and their history. The idea appears to be to paint the companies as opportunistic. I would agree they are opportunistic. Historically, they have found companies trading at a discount to their value and have tried to reap that value for themselves and for other shareholders. They have used tactics which have tended to favor their exit over the exit of other shareholders. I find this objectionable. But I can guarantee that EVERY SINGLE TIME that a company has implemented a buyback or tender offer, takeover, MBO, or other capital action in response to the "Murakami Fund" entities owning shares and being activist, the companies have done so with the approval of their Board of Directors, and have done so with all appropriate guidance and advice, with the intention of increasing corporate value for all shareholders. There will not be a single contrary case. It may be that the Boards are not wise to the differences in method which offer advantage to the Murakami entities over other shareholders, but their bankers are. And shareholders who have seen the events pass them by can make it clear to Murakami-invested companies that the appropriate course of action should not include methods which favor a Murakami exit over other shareholders. There is a fundamental misunderstanding by Toshiba Machine and its directors in this particular case. They make every effort to sound like they are doing the right thing by shareholders by wanting to provide the time so that shareholders may make a decision using all appropriate information. There is some element of bread and circuses here. 
If delaying things to provide a forum for a far greater amount of information than you'd normally get is appropriate in this Tender Offer case, it is appropriate in ALL Tender Offer cases, including Tender Offers conducted by friendly parties. While the 2008 METI Guidelines are a strong document in support of shareholder rights and the importance of directors doing the right thing by shareholders, there is one element which is short-sighted. The requirement for adequate information and time for shareholders to make a decision does not ONLY come in the case of a hostile large scale acquirer. If it is appropriate for investors to have the extensive information to make a decision to sell based on a Price and an Offer, if the only difference is information about the post-sale disposition of the company, then that should be required of all deals - not just hostile deals. 

Furthermore, investor decisions to sell are made with information about the company's prospects and financials, and price. Information about the company's financials, and prospects are provided by the Company itself - that is part of the Board's Governance Code obligations. While it may sound insensitive, if I am being asked to sell my shares, I do not need to know what the buyer is going to do with them. The effect of the Cash Buyer's purchase on corporate value is NOT MY PROBLEM. Suggesting an investor should accept a lower consideration so that the board is happier with the outcome is tantamount to a request by the board for board and management entrenchment. 

A Tender Offer is, if for more than 50% of the shares outstanding, functionally equivalent to a Shareholder Meeting agenda item to approve the purchase of 50+% of the shares and transfer control over major board decisions to that Buyer. If 51% of shareholders do not agree, the Tender Offer will not succeed.
If a Buyer who buys a number of shares which is lower than all of the shares but does so at a premium has plans which include actions which may lower the Corporate Value of the target, the first to be injured will be the Tender Offeror. Other shareholders can make their decision. The Company can attempt to provide a more attractive alternative. It will be very easy for the Company to provide such an alternative in this case. The question is will they think of it?

More discussion below.

Murakami Vs Toshiba Machine: A Question of Shareholder Rights or Rights for Shareholders

Japan

BULL-DOG SAUCE CO., LTD. primarily produces and sells Worcester sauce.  The Company also produces commercial and household-use products, as well as processed food products.  Bull-Dog Sauce also operates restaurants and provides real estate leasing services.

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Murakami Vs Toshiba Machine: A Question of Shareholder Rights or Rights for Shareholders

I expected something, but I did not expect this thing, nor did I expect it this quickly, but there is exciting new news on Toshiba Machine (6104...

Travis Lundy

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