In late 2022, as US activist fund Elliott Management was quietly building a large stake in Dai Nippon Printing, the family-run Japanese conglomerate was searching for a new business plan bold enough to lift a stock price that had been stagnant for two decades.
Just two months later, DNP announced it would undertake the biggest share buyback in its 147-year history and set a return on equity target of 10 per cent. The company’s shares have risen more than 40 per cent since January 24, when the Financial Times first revealed that Elliott had accumulated a stake of just under 5 per cent.
“Through our conversations with shareholders, we realised that we had to do something drastic,” Hirofumi Hashimoto, DNP’s managing director, said in an interview. “We didn’t do it because Elliott told us to do it, but other investors had told us similar things and we realised that the direction they were seeking was not that different from ours.”
For Japan, the financial scale and speed of DNP’s announcement represent arguably one of the biggest victories in the country’s chequered and setback-strewn history of shareholder activism.
For Elliott, which has been applying behind-the-scenes pressure on DNP’s management since it built up a large stake, it marks the start of a new era of its investment in a market in which it will find some of the most undervalued businesses in the developed world.
In the past, Elliott’s team in Tokyo had focused on real estate investments, while its activist campaigns targeting Japanese companies such as SoftBank and Hitachi were mainly operated out of London.
The $55bn fund is now rebuilding its presence in the Tokyo market by expanding its Japan-focused team, with the implicit threat that, in theory, no Japanese companies are off its radar. The great question, say analysts, is whether Japan is quite as ready for change as Elliott assumes.
So far, and based on the response of DNP and the market, the evidence appears to back Elliott’s hunch.
The pay-off simply of emerging on DNP’s shareholder register with a global reputation for razor-edged engagement has already proved richly rewarding. Few other activists have been able to trigger such a sharp share price rise via reputation alone, but the fact that it has occurred, say other Japan-focused investors, could point to greater market confidence that companies can no longer afford to be complacent.
Senior figures at Elliott say the lead-up to the buyback was the culmination of incremental improvement in the quality of dialogue between companies and shareholders. From now on, according to its portfolio managers, the Japanese authorities look aligned with the demands of the activists, and Japanese companies will find it increasingly hard to brush aside the demands of their investors.
People close to Elliott said its portfolio managers now see Japan at an inflection point. Important milestones on the path to get here include the appointment of several activist fund managers to the boards of prominent Japanese companies. These include the 2022 appointment of Elliott’s Nabeel Bhanji to the board of Toshiba.
Elliott is now preparing for more substantial investments across corporate Japan — a process it sees as “normalising” its exposure to a country in which it has historically been underweight.
The timing of Elliott’s renewed interest in Japan coincides with a new wave of regulatory pressure on underperforming companies, which will in theory force them to pay greater attention to raising their corporate value.
JPX, the group controlling the Tokyo Stock Exchange, in December announced rules that would oblige companies that persistently trade below their book value to disclose plans to remedy that situation.
The rules would carry no regulatory punishment, but would instead rely on the supposed powers of “naming and shaming” to prompt action. According to analysts, 53 per cent of companies in the broad Topix index of Japanese stocks are trading below their book value.
“Unfortunately, the low valuations are generally explained by the low returns,” said Nicholas Smith, a strategist at CLSA. “All too often, the highest return on equity in Japan is lower than the lowest ROE in other markets.”
JPX in January published a summary of the discussions it held around market restructuring, which included a number of unusually blunt criticisms of the current situation. “In Japan, there are many cases where management is unaware of capital efficiency and stock price,” read one.
“Listed companies have made progress in their efforts to improve governance, but their awareness of the need to gain insight in order to improve their own management skills is still low,” said another.
Investors have since speculated that, whether or not the new JPX rules force companies to respond more fully to their investors’ concerns, they will create an environment where investors feel more emboldened to confront management on issues such as the disposal of cross-shareholdings and the inefficient hoarding of cash.
Beyond Elliott, other activist funds including ValueAct and Oasis have also engaged in successful campaigns, bolstered by the broader pressures on companies.
In a rare win at a tightly contested extraordinary meeting last month, shareholders in elevator maker Fujitec approved four out of six candidates for non-executive directors that were proposed by Oasis to strengthen the group’s governance structure.
“The value trap that was Japan is no longer,” said Seth Fischer, chief investment officer at Oasis. “What was a market full of companies continuing to hoard capital and happy with their market share [has become] one where management, for a whole host of reasons, is now focused on increasing profitability and shareholder return.”