Opportunities and Challenges of Activist

¶ … opportunities and challenges of activist investing in Japan?

The opportunities are the following:

As exhibit 1 shows, the Japanese stock market is gradually opening up to more individual and foreign holders. They cumulatively took up around 30% of the ownership in 2008. This is an opportunity for foreign holders to engage more actively in the market.

Secondly, an activist fund might help Japan to improve its corporate governance and create positive impact on the society.

On the other hand, challenges exist too. They are the following:

Firstly, activist investing has been especially controversial in Japan since it is considered as an imported practice which employs U.S. techniques that are often confrontational with target firm management.

Then again, not all activist activities in Japan are successful. Past failures include T. Boone Pickens' case, Mr. Murakami's proxy battle with Tokyo Style and Steel Partner's hostile takeover of Yushiro Chemical.

Many activist funds also take a hostile approach in their activities, but hostility is generally not well-received in Japanese culture where it emphasizes more on harmony and less on confrontation. This might make activist funds not popular in Japan.

Finally, the recent financial crisis has led many foreign activist funds to withdraw their investment.

1. What is the fundamental value of Nicera shares?

If you assume an estimated cost of debt of 2%, a cost of equity of 6.8%, a 30% tax rate, the estimates made by Nomura Securities research contained in the Exhibits, the conclusive value will approximate a growth rate of 3%.

Since the assignment asks for a market share valuation, I only used equity FCF to calculate the value. I don't know what the use of cost of debt is.

My calculation, to the best of my ability, shows that the market significantly undervalues this company by around 30 billion JPY.

2. What should the Taiyo team bring up in its next meeting with Nicera management?

There are several requiremetns that the Taiyo team should voice at its next meeting. These include the following:

How to increase the market's valuation of its stock is one of their most significant requirements. They would also like to be able to expand into the Asia market with controllable volatility and risk, especially in China. Another dream would be to expand outside Asia in the long-term and the Taiyo team should go into specifics (or at least into rough outline) about how to achieve this.

The Taiyo team should also discuss strategies for future competition

A related subject would be how to further increase shareholder value and improve company's operation

Finally, the Taiyo team should brainstorm ideas on how to improve cash flow and increase the value of the firm by changing the firm's placement of orders and terms of payments and receipts

3. What should Taiyo do about its position in Nicera?

I think Taiyo should increase its ownership in Nicera since Nicera has a quite positive future prospect. Moreover, Taiyo seems to be versed in the complicities of Japanese firms savvy and goes for the "smart guys who have good businesses, whose companies are not well-known, and we will work with them in a friendly way to make good companies even better." (p.7)

Nicera seems to have good business. It doesn't seem to be particularly well-known and Taiyo, reputed to be a company well skilled in understanding Japanese businesses can possibly help Nicera become even better.

Before they conclusively make their decision, another condition has to be taken into consideration. Tiayo has described their investment strategy as the decision "… to invest in (1) an under-valued company with (2) a quality business and (3) honest, competent and open management." (ibid.) Nicera may be an under-valued company. Taiyo still has to assess whether its management is honest, open, and competent . It seems so, but no clear descriptions are mentioned on this issue.