Tuesday, June 12, 2007

Reprint of Bulldog Sauce Letter to Steel (in full)

Below is a copy of the text of the Bulldog Sauce Boards' reply to Warren Lichtenstein's Steel Partners Japan TOB for the infamous maker of Tonkatsu sauces:

Steel Partners Japan Strategic Fund
Cricket Square, Hutchins Drive
Georgetown, Grand Cayman
Cayman Islands, British Virgin Islands
Not their real address (-ed.)

Dear Scumbag(s),

Most people with manners in polite circles understand when their presence is unwanted. What is it you don't get?!?!

In response to your TOB, we would take this opportunity to inform you that everyone here, and their extended web relations would rather eat kimchee with butter for the rest of their living days than sell our beloved company to you.

(signed) The Board of Directors
Bull-Dog Sauce Company Ltd
11-5 Nihonbashi Kabuto-cho
Chuo-ku, Tokyo

P.S. - Fcuk you!

Hmmmm. It will be interesting to see shareholders and employees reaction. Balls' in your court SPJ...


Anonymous said...

Pardon the ignorance but could you expand upon SPJ and Warren Lichtenstein? What kind of nefarious activity has this group engaged in the past? Would you say their kind of game is unethical from Western point of view or Japanese point of view? If he's anything like Gordon Gekko, who by the way will reappear as a hedge fund manager in a new movie next year, he should be in jail.


"Cassandra" said...

I am not certain I am the right person to do this, but I'll try. I do not know the evolution of how Lichtenstein hooked up with Nishi & Tanaka, nor do I know how Steel enrolled ex-Fido folk Liberty Square into SPJ. Perhaps it was a Wharton connection. Until 2002, Steel in the USA was a two-bit player, typically harassing or green-mailing sub-$100mm co's into buybacks, capital-structure re-arrangement or marriage to a trade buyer or private -equity firm. It is unknown whether they colluded a-priori with both on a target, insuring a sufficiently significant stake (20%) to seal the success of a bid by a trade-buyer or PE firm. This is not beyond the scope of imagination, though is more difficult to prove, in fact. Some accuse him (in the USA) of wrecking firms with his antics. I have insufficient knowledge to pass judgement on this.

Japan has a long-history of hostile green-mail (Boone Pickens even made a foray there in the late 1980s), though it waned in the 90s following the bubble pop, though often I am told it was Yakuza-related, since few, or rather no one in the establishment would undertake a hostile take-over.

Steel's first forays were low-hanging fruit. You didn't need a complex financial model to know that a company at Yushiro (TSE COde #5013) at 10x depressed earnings, 0.5x book, and 0.4x sales with a "net cash" whistle-clean balance sheet was very cheap indeed. But most were low-growth to no-growth companies with good balance sheets, and hugely undervalued to assets, and typically illiquid. Lots of other portfolio managers and mutual funds have targetted or held these companies over the prior decade, but the bear market, deflationary uncertainty, and zaitech scandals meant sufficient unknowns to deter bona-fide hostile bids from foreigners.

But being in the right place at the right time often helps determine success, and in 2002, cross-holdings were being unwound, and after 12 years, the puke-out occurred and Japanese were willing to countenance foreign shareholders on the heels of Ghosn at Nissan, and the fact that they needed help to make changes that were impossible in their cultural context. Think of it as a "Financial Nanny-911". Following China's WTO accession and the US tech-puke bottom, things reversed, marginal capacity and china exports firmed prices, profits returned, and the gaijin were no longer needed. But the Genie was out of the bag. Foreigners bot lots of stock, in lots of companies trading cheaply. And they bought more and more, elevating prices, causing more hot-money inflows chasing returns. This was coincidental to the increasing popularity of activist strategies in the US. The moons had aligned, and WL (and his investors, it must be said) made lots of money (ona mark-to-market basis)

So what do they do? They buy a large block in a "broken or out-of-favor company" at a "good price". Ostensibly they see something that can be improved (more leverage, sale of underperforming units, curtailment of investment, raiding the pension plan, share buyback, firing management, sale of company as a whole, etc. All these effectively favor short-term realization strategies at the expense of either longer-term returns, or other other political economic constituents(workers, workers rights, web of suppliers & customers, financial prudence, the community etc.).

Is it "Nefarious"? Oh gosh. Some certainly is. For example: ramping shares by buying more and more and higher and higher prices as they get new inflows. This limits the volatility of "the strategy" but throws away good money since after buying a lot, the share price would naturally tend towards entropy and drift lower, but it is in their interests to not let this happen and especially to lift the price at key valuation periods (for example performance fee time). They might deny this, but I am of the firm opinion that time & sales would bear out this point of view.

Is forcing a company to knife-edge leverage nefarious? Hmmmm. Not if you know liquidity will forever be plentiful and increase ad infinitum. I think there is prudent man-rule that should say it is incumbent upon managers of public companies to insure a margin of safety for bad times. This means NOT too much debt, and some slack. I understand the conflicting incentives between agent managers (of shareholders) and the other constituents, and this shows my leftist leanings in believing that a shareholder-ONLY form of capitalism is to coarse, creates unecessary uncertainty and stress, and that one which enforces the rights of other constituents and the obligations of managers to serve a number of masters yields a better (more humane relative to any consequential efficiency slippage) overall result.

So what would they have done with Bulldog? Sell the property, raid the pension fund, fire the tea-ladies, cut the entertainment budget, take on lots of leverage (long-term debt) to pay the "owners" a large one-off dividend recouping initial investment and keep a carried interest
in an ugly and highly leveraged company with little growth prospect, and pray pray pray for inflation . Hell, if their wrong, so what, the company is merged or sold to Kikkoman or Nestle or whoever for whatever the receivers can get. If their right, they've made a great trade. Oh, but how this disturbs relations between management, workers, suppliers, customers and other service providers. They become pariahs. Financial Burakhamin (sic?).
But IMHO they do not want to take it over, despite the TOB. They want someone else, a white knight to take it over at the high price, to allow them to exit their interest. For otherwise, there is no exit for them, and whatever IRRs they might claim they are looking for, they are left with an illiquid interest in a pedestrianly-valued enterprise, which would need to be leveraged ungodly to achieve what they claim they are looking for.

Is it immoral or unethical? It is certainly against the spirit of the way the Japanese organize themselves, and play the game. Is this immoral? No probably not, but harmony and "wah" has a price, and the Japanese willingly accept lower returns throughout their economy in exchange for more egalitarian and harmonious system. WL & SPJ is merely trying to game or arbitrage this Japanese desire, and hoping that, like Myojo, someone will pay to make the gaijin disappear.

There is no way I would invest NOW (and in fact, would probably liquidiate any positions I had), in SPJF since he has ALREADY acquired the stakes AND ramped the positions in his portfolio, so an investor is now buying an overvalued portfolio of pedestrian companies at HIGH prices with a not terribly encouraging prospect for forward-looking value realization in the face of fierce opposition from team Japan. The Japanese, it seems, ARE willing to use a scorched-earth policy to deter the likes of carpetbaggers like WL & SPJ, but presumably employees and the affiliated web of interested parties would, in the end, do better under a Japanese scorched-earth policy, than an American scorched-earth policy.

I spent far too much time on this PI,than I wanted, so you owe me one...


Anonymous said...

Yes, I owe you one. So here are my two picks. Take it with grain of salt.

Put positions on DRYS(Nasdaq). What's with the Greeks and their ships?!!

Second pick is obvious. If you don't like REITs you'll like SRS(Amex). Just watch out for the gaps.


"Cassandra" said...


I cannot bring myself to short the high-beta, real asset portions of "the liquidity trade". I can choose not to be long them, but continuation of the status quo till lord-knows- when will mean assets ratchet up....again. At this stage I'd rather sell the speculative portions and buy the value bits yielding 10% downside bu say 30% upside than go for 40% or 50% upside with the same on the downside. But thanks all the same.

Charles Butler said...


% of float short - 48.33

"Cassandra" said...

CB - What is the Liverpool FC song relevant here...."You;ll Never Walk Alone" ?? The distribution of outcomes of highly shorted stocks has very fat tails AT BOTH ENDS. On one hand, the shorts get it very right, but they often get it very wrong BEFORE they get it right. Academic research shows high short-interest as an inverse short-term indicator but a useful long-term return generator (if you can borrow the stock in and for the longer-term). Also, there is no way of knowing whether at least some short-interest is tied to structured forward sales of non-floating stock (i.e. range-forwards, put-call combos that are effective forward sales). Price action on squeezey days usually speaks volumes...

Anonymous said...

Shorting is an unusual game. Rather than shorting inflated stocks for the sake of inflation, I look for stocks that are heavily shorted and then add in some detective work. I agree with Cassandra that the result of heavily shorted stock can be higher than normal binary outcome. No doubt I have been wrong before, so I am ready to hedge if necessary. The only thing I'm expecting is an extreme outcome one way or the other.


Charles Butler said...


--The distribution of outcomes of highly shorted stocks has very fat tails AT BOTH ENDS--

I guess that would be expected of any investment that is leveraged, fear/greed being multiplied by x (probably an exponent, actually). The fat tail 216 S&P low in October '87 became 181 for the future - a 35% difference.

It would be interesting to know, however, if there is anything inherent to short trades, being positions held with much more conviction, behind this.

Anonymous said...

To give a bit more detail on the Liberty Square involvement: the Fido partner @ LSAM quit the business in 2005 (John Hickling). Timing is everything. LSAM got into the deal because Tom Niedermeyer (ex MS and Teton with completely rational- really- George Noble) met at a conference in the 90s, became pals, invested in each others funds. Tom "knows" Japan (except that they don't do well with demands from Gaigin) and Warren "knows" activism. Drinking buddies translated into business partners and the creation of SPJ. Claire Walton is the CFO/ risk manager who allowed/ designed/ supprted the shenanigans.

Now, even after redemption requests from 90% of the investors in 2009, they're still holding onto one position because they think they can get a better price, really. Still collecting a management feee, too. No plan to exit even though the stock is publicly traded.