Here is an excerpt’s from Dan Loeb’s Q3 2014 Letter to Shareholders regarding Sony (SNE). Enjoy!
Dan Loeb’s (Third Point’s) Comments On Sony:
In May of 2013, Third Point announced a significant stake in Sony and suggested to the company’s CEO, Kazuo Hirai, that he should seriously consider spinning out 15‐20% of the company’s undervalued, American‐based Entertainment business. At the time, we explained that partially listing the Entertainment segment would have three positive effects: 1) highlighting its profitability; 2) increasing investor transparency, thereby allowing the market to properly benchmark the company against its global media peers; and 3) incentivizing Entertainment’s management to run the company more efficiently by engaging in cost cutting and laying out clear earnings targets.
While, regrettably, the Company rejected our partial spin‐out suggestion, they made some changes that were consistent with our goals.
In the Entertainment business in particular, Sony has cut costs, improved its dialogue with investors, and undertaken key management changes. In Electronics, Mr. Hirai’s team deserves credit for transitioning away from personal computers this year and improving television profitability in 2015. They have also improved investor transparency. Still, they have a long way to go and we continue to believe that more urgency will be necessary to definitively turn around the company’s fortunes. A key tenet for us in making constructivist investments is our margin of safety.
While we are most focused on the potential upside available to shareholders if management undertakes changes, we are unlikely to make a significant investment in a situation where constructivist‐driven change is the chief catalyst unless we see minimal downside. Sony was exactly the type of investment where the risk/reward ratio was skewed in our favor. Thanks to this investment principle, despite enduring profit warnings nearly every quarter we were invested, incurring worse news about Electronics than we expected, and suffering from market disappointment at the pace of Japanese macroeconomic reforms, we still managed to generate nearly a 20% return on this investment before exiting.