Sony’s chief executive had a few numbers on his mind when he formally rejected a proposal by the activist hedge fund manager Daniel S. Loeb to partially spin off Sony’s entertainment unit.
Among them was the number of times that a company has listed part of a subsidiary on the public markets, only to regret the decision.
In a letter sent late on Monday, Sony’s chief, Kazuo Hirai, dismissed much of the rationale for a partial initial public offering of the business. Much of his argument revolved around keeping the Japanese icon together, reaping the benefits of having both an electronics and an entertainment arm under one roof.
“Sony’s entertainment businesses are critical to our corporate strategy and will be important drivers of growth, and I am firmly committed to assuring their growth, to improving their profitability and to aggressively leveraging their collaboration with our electronics and service business†Mr. Hirai wrote.
But advisers to Sony have also told the Japanese company that subsidiary initial public offerings have rarely succeeded. Over the past decade, 37 so-called “sub I.P.O.’s†took place, these bankers told the company’s board. Only six of them remain.
Of those six, some of them, like Clear Channel’s outdoor advertising business, are still publicly traded because their parent companies lack the capital to take them private again.
Listing a subsidiary is meant to raise capital, as well as break out the financials of that subsidiary and hopefully convince investors that there is more value in the business than previously believed.
But the problem, Sony’s advisers argued, is that sub I.P.O.’s ultimately create more headaches for the parent company. First, it creates potential conflicts, since the newly public subsidiary has its own board and own responsibilities to its shareholders. And the spinoff’s shares often trade above the parent’s, defeating the purpose of the separation in the first place.
Perhaps the most pertinent example for Sony was the News Corporation’s experiment with a sub I.P.O. In 1998, the media conglomerate announced plans to float nearly 19 percent of its Fox Entertainment unit in the public markets. Seven years later, News Corporation agreed to buy back that stake.
“The move underscores the simplification process: Mr. Murdoch’s drive to make News Corp. a simpler and more shareholder-friendly U.S. company,†Mario Gabelli, the well-known fund manager, said in 2005.
There’s also the case of Time Warner, which had spun off an 18 percent stake in its American Television and Cable subsidiary, only to buy it back in the early 1990s.
Sony did make one concession to Mr. Loeb, agreeing to disclose more information about the entertainment unit’s financials. A person close to Sony said that such a move would essentially remove the need for a more drastic step like a sub I.P.O.
In a statement late on Monday, Mr. Loeb’s Third Point hedge fund said only, “Although we are disappointed the board decided not to pursue a public offering of the entertainment business at this time, Third Point welcomes Sony’s commitment to greater transparency and expects this will foster a culture of accountability.â€
