Thursday, May 29, 2008

A Bad-Hair-Day For Aderans Management

After a long and bitter campaign, a Japanese wig-maker (I kid you not) Aderans Co. Ltd. (TSE Code #8170) has become the American activists financial Iwo Jima. This "victory", spearheaded by Steel Partners, occurs more than four years after initially accumulating a stake, and continuing its build to the current >25% (replete with large mark-to-market losses). The victorious battle plan consisted of a full-frontal attack by allied forces (the Dodge & Cox Brigade, assisted by the French Bleichroder battalion, and a large State Street contingent, presumably representing various guerrilla factions), in which the successful assault on Aderans HQ resulted in a capture of both the flag and incumbent management, followed by their burning and be-heading respectively.

So.."Congratulations!!" to all involved. You are now the proud owners of a no-growth wig company, suffering from major men's market declines due to changing demographics, and competition from baldness prevention, and pharmaceutical hair restoration products (ignoring the fact that the traditional "toupee" is seen as increasing vain and naff). Beauty is indeed in the eye of the beholder.

Now, in full command of the territory (or at least the front office and board-room), Mr Lichtenstein is free to pursue his as yet-detailed strategic initiatives to "prevent further value erosion", that (as Mr Lichtenstein has stated in the past) has so hurt stakeholders including shareholders, employees and pensioners. Presumably these value-enhancing initiatives include: paying out cash accumulated on the balance sheet to shareholders, raiding the pension fund, assuming more leverage, cutting the R&D and capital expenditure budgets, and raising dividends, and then auctioning the remains to a trade or PE buyer. I am sure the non-shareholding stakeholders will be thrilled at such prospects.

But is this really about Aderans Co Ltd (TSE Code #8170)?? Most non-Japanese analysts see this is an important milestone for Shareholder Rights in a country where Shareholders are seen as but another constituent...a minor stakeholder, maybe but even the owner, but NOT the Power Boss With the Ulitmate Say. And the milestone may be true, though only time will tell with certainty. But I have a rather different question about some other investors: those of Steel Partners Japan. For one would be remiss not to ask the question: "Did Steel Partners Japan Fund (and its managers) abuse their fiduciary responsibility granted to it by its investors in order to prove a point by throwing good-money-after-bad to achieve a victory with dubious immediate value?? "Cannon fodder" springs to mind.


Anonymous said...

Steel Partners=scumbags of the earth

Anonymous said...

you said it - not me.


bobo7874 said...

C: "Did Steel Partners Japan Fund (and its managers) abuse their fiduciary responsibility granted to it by its investors in order to prove a point by throwing good-money-after-bad to achieve a victory with dubious immediate value?? "Cannon fodder" springs to mind."

This might have been a good deal for fund investors. Establishing street cred for being willing to carry out takeovers might help an activist fund make better returns, by avoiding the transactional costs in actually having to carry them out. It might be like making a first investment in Russia, and carrying out a threat to turn over the company to a corrupt liquidator that would stick it to both management and shareholders. Afterward, people might believe you when you make threats.

Or maybe not, who knows how well Japan's regulators and politicians will take to threats?

Anonymous said...

Do the wigmakers own something else of value? It's my understanding that the holdings of many Japanese companies exceed their share price and that this is what has attracted Steel Partners to the Japanese market. There must be something else behind the takeover than just taking scalps.

Chris said...

So Steel, having syrupticiously built their stake, got the shareholder base to comb over to their way of thinking, then finally wigged out and decided it was time for management toupee for their ineptitude..

(Sorry, I had to get that out of my system - it was killing me in the taxi this morning)

It's hard to see the appeal of Aderans, or what they can do other than cut capex and divert whatever cashflows they can from the fast-dying wig business to shareholders. It's not overly capitalized, there's no growth, zero ROE and is at a blistering 30x forward and above book. Hard to see how it would attract a PE/trade buyer no matter how they mess with it. A pig in a dress is still a pig.

Anonymous said...

Q. What did Bulldog shareholders get for rejecting Steel?
A: A cut in the dividend and a decline in book value - don't ask about the profit.
C., I think you've been in Tokyo too long. You seem to be "going native."

MTC said...

chris -

Isn't point to buy a company when it looks like a total dog; clean it up; shave a little off here and there; get cash flow going; then send it on its way again? Despite its dowdy product line, Aderans has a the best-known brand name in its industry. If it focused greater efforts on hair enrichment strategies for women, rather than on the toupee, one might have something worthwhile.

I would not want to be betting against vanity purchases in a rapidly aging society.

Anonymous said...

steel partners' game is strip and flip.

by the way, how's wall street going these days?

"educate Japanese managers".


"Cassandra" said...

bobo - Yes there is a scenario/strategy that has a potential payoff where one sacrifices short-term to make more long. The thing is everyone KNOWS Steel doesn't want to/can't operate any enterprises in Japan despite the rhetoric. So they can pick-off a few small ones, or in concert a few mid-sized ones. But they can't eat too much so perhaps the best Japanese strategy would be safety in numbers. Let them have Sapporo or Nissin (or try) and like the Russians with Hitler & Barbarossa, a three-pronged approach of watching them bite off more than could chew, a scorched-earth policy, and the onset of Winter will save them in the end.

Anonymous 3:45pm - In Aderans case, there is no secret "hidden asset". ev/ebitda was attractive (particularly relative to growth) when they started their campaign. But the business has tanked, so while no hugely o/v, it is no longer the cheap growth w/under-leveraged balance sheet, but a no-growth co. with good capital structure at pedestrian valuations. Rather than cut their losses and-run and admit they got snookered by their lack of fundamental research on this, Steel has behaved like Cap'n Ahab, and while finally succeeding in its hunt for the White Whale, will (along with its investors) regret its obsession.

Chris - I agree with you, and might have even used the same analogy.

Anonymous 5:25 (re: going native). I am no apologist for stupidity. I respect Hermes, but Steel is not the real deal. But do not get me wrong: What Bulldog did is shameful. However, in their defense, it was a reaction to an unprovoked ambush. They were sitting there minding their own 0.5x 20x earnings business making Tonkatsu that people liked, employing folk, paying a 2% (175bps over nearZIRP!!) when Warren shows up and says "Fork it over!" We can argue over whether it was deserved or not, but these were not abusive execs taking shareholders for a ride. They were just driving the ship like they'd always done, and they weren't stealing or wasting shareholders money. And though I have a bottle of Tonkatsu (8000 miles away from Japan) in my refrig, its not a growth business. OK they could sell the HQ or put up condos on it. But what happens when inflation (and rents rise?). As a shareholder with a long-view, would you want Warren-prudence or Japanese Mgmt Prudence?

AS I say, what Bulldog did in reaction was shameful, but I am sympathetic to Rappaport-esque long views, and stability, and conservative balance sheets, and corporations that cater to broader interests than simply short-term profit (and that includes a number of different constituents). Proponents of shareholder-only capitalism may fault this. They may demonize Germany's employe rep on the board and greater transparency. But it does work in Japan. And Germany. And we (anglo-saxons) might wisely think long and hard about our own house and economy before wagging fingers over how they should organize themselves. They [the Japanese] don't need our capital (as the largest creditor nation), and as such shouldn't care what we think unless they think there is something [societally] to be gained from it.

The other thing that bugs me is that while egalitarian Japan with their parsimonious management and narrow disparities between line workers and boardroom has attracted activist attention, surely there is no lower hanging fruit than US executive compensation and the bogus scams and rubber-stamped packages that pay CEOs (and assocs) for beta, and give away triple-figure millions in free inflation & econ growth options. And I think that this reflects an element of bullying - big hedge fund picking on little defenceless company, but I rarely see them challenging lopsided pay-for-nothing deals, or rallying shareholders to insist upon more symmetrical incentive deals, with clawbacks, risk-sharing, no freebies with OPM.

MTC - Nice to hear from you! I have been on both sides of Aderans trades over the past two decades. I'd tried a few times to pick bottoms - sometimes succesfully in the medium term - but its much harder to pick a bottom in a deteriorating business than a share price movement. Good luck to them in Aderans. My guess (to reiterate) is Aderans is Ahab's Whale to Steel. And maybe they had no choice: there are few buyers for 25% of the shares of a deteriorating no-growth company at 25 or 30x forward earnings north of book. Considering there are a great number of growing companies substantially south of book and trading at far more attractive multiples in the market, one can only imagine what average price Steel might achieve in liquidating their holdings. Scylla and Charybdis indeed!

Anonymous said...

U.S and Britain should be the last ones lecturing anyone about financial systems.

By the way, how are Bear Stearns and Northern Rock doing?

Enjoying your great financial meltdown, err, i mean prosperity out there?

The fact is, western investment banks have lost all credibility and prestige in Asia.

Jun Okumura said...

Do the executives have large equity stakes in the business? If not, the best strategy for them would be to say, Mr. Lichtenstein, we'll perform our fiduciary duties while you go looking for new management. Good luck, sir, then go back to their offices and watch the stock price go down and wait for Steel Partners to come looking to work out a truce.

So Steel made a killing on its "failed" Bull-Dog bid but will likely lose money on its "successful" Aderans bid. Quite an irony.

5:45 Anon said...

There are scores of listed small Japanese companies, like Bulldog and Aderans, that are facing declining sales in saturated markets. In the long-term these businesses are terminal if they carry on doing things the same way (inflation won't save them). If Steel doesn't knock on the door, somebody else will. If managers don't want this distraction, they should become owners and take the business private, as for example Pokka has.

"Cassandra" said...

5:45 anon -

Ther are more companies with ensconced positions in stagnant markets. These are NOT terminal. Bulldog - before its rape adn subsequent self-mutilation - and Aderans too, was NOT what you describe, but what I describe. They are pedestrian businesses, providing BOTH dividend yields and earnings yields far in excess of money markets nad/or long term bonds (in addition to their social function of providing products people consume, a destination for their suppliers and service providers, jobs for workers, revenue for local and national authorities). It is likely they will continue to do so. Aderans DOES (as MTC who IS in Japan) have a wonderful world -class womens business. Bulldog will still be the #! Tonkatsu maker and be profitable, irrespective of prevailing p/b. But just because it is not growing doesn't mean it deserves a buggering from anglo-saxon activists.

There IS an argument for stable no growth companies with conservative balance sheets to evolve different forms of organization - say for example something - like Candian style Income Trusts - which might suit capital AND an ageing population that might favor income over capital gains and growth potential. But this is a large political issue perhaps, and financial thuggery is probably not the best route in any event. When Japanese themselves, in large numbers are ready for the change, then I will subscribe to your Hegelian view of the universe. This shows no signs of emerging at present. Jun? MTC? You're on the ground there....fingers on the pulse in policy-making central...what you say?

bobo7874 said...


Your proposed tax regime sounds intriguing. It would cool the jets of folks whose only idea for generating shareholder value is to erode the target's corporate taxes by levering up the target.

Janne Morén said...

Without actually knowing all the facts (and since when has that ever stopped somebody on the internet), but based on other commenters assertion that this is not a very good deal for the fund, I sort of suspect that this amply illustrates that people are human.

I mean, we tend to reason about companies and their management as if they are automatons (or Klingons), plugged into their macroeconomic models, sales forecasts and checking off events on their strategic planning documents as reality unfolds.

But the people in the corner office are fully as human - as distractable, competitive, as social - as anyone. They get scared, frustrated, overfocused, elated, distracted and so on. If anything, I'd expect those who get to the top in a management fund to be almost terminally competitive and willing to "win over the other guy" no matter what the actual monetary cost.

They lost Bulldog because the Bulldog management, just as humanly, preferred the pyrrhic victory of spiting their opponent over an economically rational but humanly humiliating surrender. And they have this badly performing takeover attempt as a constant sore. So they lash out, just to show the world and themselves that they're strong and they don't have to take this kind of stuff from anyone. Whether this was the absolute optimal course of action is completely beside the point.

Anonymous said...

steel partners has been generating 25% annual returns to its investors since 1993 as a long-only fund. No down years, as a long-only fund. Average hold period for an investment in the main fund is 5 years -- japan is shaping up to be longer than that. Quintessential graham and dodd value fund. The amount of research they do on each investment is tantamount to the amount of diligence a PE firm does before buying an entire company.

You are very trigger happy to criticize steel, but the reality is that they are neither quick buck artists nor bad for japan, or themselves, in the long run. Furthermore, steel has people who can run companies in japan better than the aging, entrenched incumbents... should it come to that. There is no "stripping and flipping," pension fund raiding, etc. Do your research. What the media says about steel japan is 98% bull shit.

"Cassandra" said...

Anonymous "The amount of research they do on each investment is tantamount to the amount of diligence a PE firm does before buying an entire company."

And that doesn't absolve them from making mistakes. And that is not setting the bar very high, as there is no shortage of pathetically researched PE deals - especially when capital is flush. Given the size and breadth of their portfolio, and single-factor common feature (net cash) I actually find that assertion very hard to separate from a pitch-book platitude. And as for "ripping and stripping" one has to nail one's quarry before eating it. And since this is the closest thing they've come to a "success". their fun with Aderans may be only just beginning.

Furthermore, it's been rare to see them sell things - even when through their own purchases they've ramped the price to un-graham&dodd-like levels. And where they have, it's only been the most liquid ones. I find this curious, and begs the question: Why? Perhaps because there is "no exit" from their portfolio, but obvious liquidity haircuts don;t appear to be taken into account when deriving performance fees. If it is the case that with such large and illiquid positions , incentive fees are collected only on a cash-out basis or upon realization events of disposition, I will apologize and admit my misunderstanding

Anonymous said...

"You are very trigger happy to criticize steel, but the reality is that they are neither quick buck artists nor bad for japan, or themselves, in the long run. Furthermore, steel has people who can run companies in japan better than the aging, entrenched incumbents... should it come to that. There is no "stripping and flipping," pension fund raiding, etc. Do your research. What the media says about steel japan is 98% bull shit."

-like i said before, how's the "highly sophisticated U.S financial system doing?

to most people in the world now, the U.S financial system has been exposed as a house of cards based on a pyramid scheme of forever rising home prices and never ending debt.

oops, U.S housing prices are dropping like a brick!

funny how things work out in the real world.

Karma is a bitch.

Steel Partners is so transparent, there's nothing on their website. How about publishing all their holdings, trading strategies...etc?

Japan should attract more Sovereign Wealth Funds, they are the patient, long term portfolio investors.

Good riddance to those bloody sucking leeches aka "shareholder activists".

I hope J Power destroys TCI.

Anonymous said...

the team at steel puts in hundreds, if not thousands of hours of work before making an investment. Fees are, like every other hedge fund, taken at the end of the year, not at the liquidation of investments. despite steel's investment style, they are not a private equity firm, and as such do not take fees like one.

There is a reason that Warren Lichtenstein manages nearly $10 billion and you don't. It's because he's a better investor than you. Just because you don't think his investments are cheap on a trailing ev/ebitda basis, doesn't mean you have any idea what he's looking at.

If you were an investor in steel, you would A.) Be happier and richer than you are, and B.) have access to their website, which has a comprehensive presentation about the firm and its strategies, as well as old investor letters.

yes steel makes mistakes. but those mistakes, again, have yielded a 25% annual return since inception over 15 years ago. generally those "mistakes" are because of unexpected changes - there is both systematic or unsystematic risk in their portfolio, essentially.

Steel does exit positions, but usually after a very long hold, or when the investment thesis changes. While on a PV basis an investment they hold might be overvalued at time 0, it might be 50% undervalued at time 3, and as such they will simply hedge their position in the short term instead of selling out of it. They are frankly the ultimate long term investor - not green mailers or quick buck artists in any way shape or form, and in fact take care to avoid situations that could become that way to protect their reputation. This will largely not be reflected in what you as an average schmoe trying to track their movements can see in public filings.

"Cassandra" said...

Sir, I would be grateful if you could kindly ask Mr Lichtenstein how he hedges illiquidity and market-impact risk. The answer may yield a Nobel Prize in the making.

6 months of volume, however sliced, in a small-cap name for even the best of traders, generates a reasonable amount of idiosyncratic risk.

5:45 Anon said...

What you seem to be advocating, The Permanent Rights of Socially Useful Companies in the Oligopolies of Cassandria, is absurd (though it might partially mirror the realities of Japan). It also sounds like a nightmare from the 1970s. Markets, warts n' all, generally do a good job of identifying the economically useful, which in the long run also tend to be the most socially useful. The majority of stockholders at Aderans now have an opportunity to make it a more economically useful enterprise. We should be cheering them on.


Anonymous said...

one doesn't "hedge" market-impact risk. One simply builds a position slowly. it can take over a year for steel to build even a toe-hold position in a target company.

There are a lot of ways to partially hedge out a lot of the risk of holding an overvalued security that you think is undervalued over a longer period. However, idiosyncratic risk is hedged out through diversification... trust me this is basic portfolio management, not nobel prize winning stuff!

Also, please see 5:45's comment. Logically, you should be a steel cheerleader, not a critic. you should objectively research primary sources going back to the late 90s... not news articles. the reality of steel's work is much different than you currently believe

Richard said...

I can't speak for Steel's overall record, but I did see how his "victory" at BKF, a NY based asset manager, worked out. He won a proxy fight, and all the money and people left the firm due to his "management". He got the stock up from the mid-teens to the mid-thirties, more or less, during the fight. Now it's a 2 dollar number, trading OTCBB, with few employees. No cash distributions, just dead loss.

"Cassandra" said...

Anonymous 12:34 said:
There are a lot of ways to partially hedge out a lot of the risk of holding an overvalued security that you think is undervalued over a longer period

WTF kind of doublespeak is a presently "overvalued security that is undervalued in the long-term???" I would love to be the fly on the wall during your marketing presentations when you pull THAT one out of the hat.

It is my belief that in Japan, Steel's initial acquisitions were made at attractive prices. So were mine, as were most almost everyone's small and mid-cap names bought from the depths of (particularly) gaijin capitulation between late 01 and and early 04. This certainly wasn't rocket science. Without seeing Steels numbers (in Japan) directly, my guess (purely on the basis of their reported portfolios, the way I see them trade them in the market, and the subsequent price action) is that following these initial accumulations, the coincidence of a robust market for small and mid-cap - particularly value, combined with the further weighty market impact of Steels own buying (which you would love to call alpha - but in reality isn't) in their portfolio led to a monster mark-to-market value change upon which the Investment Manager collected large fees. And, even though the large position sizes and illiquidity resemble private equity, the fees are near-criminally applied to the non-liquiidty adjusted mark-to-market which you justify by calling it S.O.P., which was the same defense the mutual fund timers and the reinsurance bid-riggers employed to justify what they did. So with all due respect, just because "others are doing it" doesn't make it right. The performance on what was an initially smaller asset base (again in Japan, for this is what I know) drew the moths to the flame, and additional inflows permitted further purchases of the same securities at yet higher and higher prices that I suppose by this point we both call overvalued, though you suggest this is short-term and only temporary and entirely sympathetic to the investment strategy, though I am still trying to fathom this. From this, I conjecture the historical record in japan is "lumpy" with a mondo year or two - almost all unrealized mark-to-market with a number of subsequent pedestrian years still buying more of the same illiquid securities, with portfolio sacrifices from the more liquid names. Some less-than charitable observers might call this "good money after bad" though I personally see it as playing the best one can with bad hand in a rotten game.

But most importantly: YOU ARE STILL HOLDING MASSIVE POSITIONS IN MOSTLY ILLIQUID SECURITIES IN ESSENTIALLY PEDESTRIAN NO GROWTH COMPANIES THAT IF SOLD INTO THE MARKET COULD - PROBABLY WOULD - RESULT IN A 50% discount OFF PRESENT MARKET VALUES. For an investor - up 100% (net) followed by down 50% (gross) only makes the investment manager wealthy. At the end of the day, profits (particularly where the illiquidity haircut is massive) HAVE TO BE REALIZED or his investors are the "saps". All this is before the vagaries redemption spirals, predatory trading and front running of liquidation prices, and unforeseen tail events (like Aug 07) where a similar investor with similar positions pukes causing YOU to draw down, and your investors to redeem; which in the extreme could reasonably leave investors to be "paid-in kind" with a pro-rata share of an illiquid portfolio.

In principal, I am not against activism, nor am I in any way against "value-investing" of numerous flavours. I AM against what I believe to be stupid or disingenuous pursuits, whether the perp be Bulldog or a Hedge Fund, or as my record on this blog will show, the MoF or BoJ. But make no mistake, I cheer-lead no one. And for the record, it is my opinion that in the grand scheme of things, Japanese management is more honest, better fiduciaries, and more socially useful than Steel. Not all of them, but most.

Please feel free to post your monthly quarterly and annual Japanese performance numbers here. Breakouts by position indicating quarterly change in position (and derivative if applicable) and associated price change would also be highly informative to dispel any notions that your alpha is any way self-fulfilling. And your estimates of impact to unwind your positions in good and bad markets. And it would also be interesting to Blue-sky the Fund's trading "time-and-sales" records to disprove any notions a critic might have regarding the possibility of ill-timed month-end or quarter-end performance-enhancing trading. And a list of those Japanese charitable contributions that the Fund and Investment manager have made might help dissuade those who might think Steel merely a carpet-bagger.

Please prove me wrong. I remain sufficiently open-minded to change my opinion should the facts prove otherwise.

etc said...


Given your criticisms of MTM and illiquid securities, you might like the article in yesterday's Barrons criticizing Florian Homm. Marketwatch posted it:

I can't help but wonder if David Mamet wrote the script for the movie "Redbelt" after hearing about Homm's dealings with ProElite.

Anonymous said...

Thanks, I will look at it. Just think Lancer and the actual script writes itself in the extreme.

IF you want to own a portfolio of small companies, and they are great bargains, then don't buy 25% -= buy them ALL and operate them as Leucadia -type holding company, with all the attendant compliance, accounting, economies of scale. But greenmail, large illiquid stakes in tiny companies in the public markets just smacks of opportunist gaming of a structure. There are plenty of other guys who buy stakes in business they think cheap to hold for the long term even if they think the business is pedestrian. Marathon, Silchester, even Dalton do the same thing with fiduciary honor and discipline. When they don;t like something, they vote with their feet. When something gets expensive - they sell it. IF you're position too big, and there is no one to sell it too, and you;ve got to buy more to keep the price up, then you;ve made a severe business miscalculation that will eventually come out in the Michael Lauer wash. To Steel's credit, their portfolio companies are nowhere near as small and pathetic as Lauer's, but there is a degree of similarity in principle (IMHO)...


muttonlamb said...

Steel Partners Japan Strategic Fund has unfortunately not delivered such bountiful returns... sub 9% pa is closer to the mark.

I would doubt those punters that are subject to the 3yr lockup now will get that.

Banzai indeed.

trillion dollar meltdown said...

the likes of steel partners is interested in Japan for one thing: the mountains of cash Japan Inc is sitting on.

in other words, they are interested in LOOTING Corporate Japan's hard earned cash, and loading them with mountains of debt using the company's balance sheets, and let's not forget "special dividends" for their brilliant work.

of course Team Japan won't tolerate those scam artists-I mean, financial engineers.

Anonymous said...

Anonymous 7:28 & 7:34

Aside from how you say it, agreed w/you.

Steel is now being sued. Together w/TCI, where everyone left except Hohn, they will go down into the dustbin of the history.

How's Niedermeyer doing nowadays? No one believes it's Lichtenstein behind SPJ.

Btw a local fund (but probably bigger than SP now) made a counter TOB to Aderans and sending a credible management team (not just another english teacher-cum finance professional in tokyo). Financial Times here in US does not even mention it as of Thursday. Their bias is obvious. It has to be a "westerner reforms old guard" story. How racist.

>>steel partners' game is strip and flip.

by the way, how's wall street going these days?

"educate Japanese managers".


Anonymous said...

Correction to my 8:18

Add "seemingly" to "credible management team".