Hedge fund activist Daniel Loeb is taking on Sony Corporation (ADR) (NYSE:SNE), urging the company to break itself in two. That’s a stiff request of a Japanese-based conglomerate. And, the split doesn’t necessarily make strategic sense.
Media or Electronics
Sony Corporation (ADR) (NYSE:SNE) once had the cache that now surrounds Apple and Samsung. Where Apple made the portable music digital player mainstream, Sony Corporation (ADR) (NYSE:SNE) was the first to make music portable with is Walkman line. That said, Sony Corporation (ADR) (NYSE:SNE) hasn’t had a device “hit” for years.
Part of the division’s problem stems back to an aggressive move into televisions just as prices started to drop. That shift and the 2007 to 2009 recession have left the company’s top line flat, at best. And earnings have been non-existent, with red ink flowing in each of the last few years. Although the weak yen led to a profitable first quarter, the underlying business is still relatively weak.
However, hiding behind this division is a an entertainment arm that, According to Bloomberg, accounted for almost 50% of the company’s operating income last year. The company lays claim to such notable movie franchises as Men in Black and Spider Man, the television show The Client List, and musician Bruce Springsteen.
There’s clearly a great deal of value in the company’s media library, particularly as companies from Netflix to Amazon to Hulu look to bulk up their streaming offerings. That’s increasingly included exclusive deals, such as the one between Netflix and The Walt Disney Company (NYSE:DIS) for children’s content.
Although Loeb started out looking to liberate the value of Sony Corporation (ADR) (NYSE:SNE)’s media arm, he’s now praising the turnaround at the electronics division and panning the media group as “unaccountable.” Recent movie misses, including White House Down and After Earth, don’t help Sony Corporation (ADR) (NYSE:SNE)’s side at all. High priced movie flops, however, are part of the media game.
For example, The Walt Disney Company (NYSE:DIS) missed the mark last year with John Carter and followed that up with this year’s Lone Ranger. It wrote off $200 million for the first miss with estimates of a similarly large write off for the second.
Despite these mistakes, The Walt Disney Company (NYSE:DIS) remains a leader in the media world. In fact, even with the John Carter write off, The Walt Disney Company (NYSE:DIS)’s sales and earnings have moved higher each year since the 2007 to 2009 recession. With an around 20 price to earnings ratio, growth investors should find The Walt Disney Company (NYSE:DIS) appealing.
The owner of amusement parks, cruise ships, and television and cable channels can cross pollinate in ways that Sony can’t. For example, The Walt Disney Company (NYSE:DIS)’s movies usually make an appearance at the company’s parks. So there are more reasons to like Disney than a strong media arm. That said, synergies come in many forms.
For example, two disparate businesses can be run using the same accounting division. And, when one business isn’t doing well, a sister business can help fund turnaround efforts. That’s what’s been going on at Sony. And that offers notable long-term value that often gets overlooked by investors. Particularly those seeking quick gains, like hedge funds.