Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

NIPPO (1881) Tender Offer to Launch - May Not Be A Done Deal

ENEOS To Steamroll Nippo (1881 JP) Minorities

NIPPO (1881 JP) Gets Some Cowbell - It Probably Needs More

NIPPO (1881 JP) Gets MORE Cowbell as Oasis Objects

Quiddity Advisors

Event-Driven

A year-plus ago I wrote that <a href="https://www.smartkarma.com/insights/japan-needs-more-cowbell" target="_blank" rel="noopener">Japan needs more cowbell</a>(I personally think it worth a regular re-read for Japan investors - passive or active).<section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/240/379/original/more+cowbell.gif?1636370842" class="editor-image img-responsive" data-smartkarma-image-id="240379"></figure></section></section>The idea was that when the Japan-ness of corporate actions went against the economic imperative of shareholders, they need to speak up. This was in part a response to several lowball tender offers in then-recent months (FamilyMart, Nichii Gakkan, Sony Financial, Odelic, Showa Aircraft, Toshiba's deal for Nuflare, and others) where parent companies or founding families launched takeovers of companies at inappropriately low prices, without adequate safeguards to protect minority shareholder interests, despite METI urging companies in June 2019 - a full year before - to avoid conflicts and follow conflict-mitigation procedures by following the <a href="https://www.meti.go.jp/policy/economy/keiei_innovation/keizaihousei/pdf/fairmaguidelines_english.pdf" target="_blank" rel="noopener">METI Fair M&amp;A Guidelines</a>.In fact, I had also written a guest post in the FT about the <a href="https://www.ft.com/content/dd680521-a9cc-4b1c-922d-4787d2a314f6" target="_blank" rel="noopener">complexities of stewardship</a> as it relates to passive investing as a gentle rebuke of Hiro Mizuno at the GPIF who had looked at lending out shares and short-selling as a problem. My conclusions came in two parts. The first was that shorting actually helped improve stewardship, not because the issues around governance were brought to light by short-sellers but because when they sold, the idiosyncratic risk of the short-sold shares would be bought by active investors - not passive investors - and those active shareholders had more stewardship risk attached to their ownership than passive managers did. Allowing short-sellers in effect allows passive investors to outsource stewardship to those with more 'skin in the game.'That, however, was not the real crux. My concluding paragraphs were as below:<blockquote>
Finally, the GPIF should encourage its mandated managers to pressure companies about bad capital allocation decisions that destroy shareholder value. For instance, the Toyota Model AA preference share issuance four-plus years ago — bonds with above-market coupons, free-equity options, and voting rights attached — was a governance nightmare. However, a vast majority of domestic institutional investors voted to approve that issuance, as they also voted in 2018 to approve Alpine’s merger with Alps, an act which immediately destroyed their shareholder value.
Investors have also approved numerous takeovers in the past several years at substantial discounts to book value because the target company’s legal advisers have ticked the boxes which say “minority investors are not unreasonably disadvantaged”. And where was the domestic institutional fund manager outcry on Unizo which this past autumn effectively created a quasi-poison pill without shareholder authorisation?
Eliminating one of the root causes of undervaluation — a lack of active investor confidence that Japanese companies will do the right thing with the capital allocated to them — might be the best long-term investment the GPIF could ever make. That involves more owners with more financial incentives to engage with companies to do the right thing. Lending shares — even for free — is a great way to get more active parties to the table.
</blockquote>The point is that when investors see a problem in the valuation of a takeover, they should say something. Given so few do so, it is important that when such comments are made, they be public, so that others may learn and publicly agree. If several people make comments to the target company privately and their response is "Well, the Board decided to recommend the deal based on a variety of factors which would allow for medium-to-long-term growth of the company", it is the right of investors to say "That. Doesn't. Matter."It is important to remember that when a Board decides to recommend a takeover, they are recommending that investors no longer care about growth of medium-to-long-term corporate value, instead trading that long-term interest in corporate growth... for cash. But if you want a better result, you have to ask. Squeaky wheel gets the oil and all that. Or you have to be willing to show your interest by buying higher than the offer (my first insight just after the announcement suggested a fair price was north of ¥5,500/share, and days later a shareholder publicly suggested ¥5,600/share).As explained in a series of insights about the Tender Offer for <a href="https://www.smartkarma.com/entities/nippo-corp" target="_blank" data-smartkarma-citation="entities:2583:1" rel="noopener">Nippo Corp (1881 JP)</a> which is presented as <a href="https://www.smartkarma.com/entities/eneos-holdings-inc" target="_blank" data-smartkarma-citation="entities:638:1" rel="noopener">ENEOS Holdings (5020 JP)</a> taking over its subsidiary but which is really ENEOS net selling, and the merchant bank of Goldman Sachs buying the economics, starting with <a href="https://www.smartkarma.com/insights/eneos-to-steamroll-nippo-1881-jp-minorities" target="_blank" data-smartkarma-citation="insights:57299" rel="noopener">ENEOS To Steamroll Nippo (1881 JP) Minorities</a> and continuing with <a href="https://www.smartkarma.com/insights/nippo-1881-jp-gets-some-cowbell-it-probably-needs-more" target="_blank" data-smartkarma-citation="insights:58103" rel="noopener">NIPPO (1881 JP) Gets Some Cowbell - It Probably Needs More</a> followed by <a href="https://www.smartkarma.com/insights/nippo-1881-jp-gets-more-cowbell-as-oasis-objects" target="_blank" data-smartkarma-citation="insights:58486" rel="noopener">NIPPO (1881 JP) Gets MORE Cowbell as Oasis Objects</a>, the price here is wrong. Just wrong. It may have come at a decent premium, but some of that comes from market expectations of bad governance, and when an inadequate premium for transfer of control is exercised - for reasons I am having difficulty fathoming without assuming there could be some ulterior motive which does not benefit minority shareholders of NIPPO - it just cements that bad governance discount. This is something which deserves attention. More shareholders should make their opinions known. It could be anonymous, it could be a word to a journalist, or it could be a word to a central agent who then tallies all the complaints but does not suggest that shareholders work together.Sometimes it requires an overbid.So far, as described in previous insights, four shareholders have come forth publicly in somewhat unprecedented fashion. They have started clanging the cowbell. The stock has not traded below terms for a month. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/240/365/original/Screenshot+2021-11-08+at+6.36.12+PM.png?1636367874" class="editor-image img-responsive" data-smartkarma-image-id="240365"></figure></section>Which is why today's development (a website called <a href="https://www.protectnippo.com/" target="_blank" rel="noopener">www.protectnippo.com</a>) is interesting...More below the fold.

A year-plus ago I wrote that Japan needs more cowbell(I personally think it worth a regular re-read for Japan investors - passive or active).The idea was that when the Japan-ness of corporate actions went against the economic imperative of shareholders, they need to speak up. This was in part a response to several lowball tender offers in then-recent months (FamilyMart, Nichii Gakkan, Sony Financial, Odelic, Showa Aircraft, Toshiba's deal for Nuflare, and others) where parent companies or founding families launched takeovers of companies at inappropriately low prices, without adequate safeguards to protect minority shareholder interests, despite METI urging companies in June 2019 - a full year before - to avoid conflicts and follow conflict-mitigation procedures by following the METI Fair M&amp;A Guidelines.In fact, I had also written a guest post in the FT about the complexities of stewardship as it relates to passive investing as a gentle rebuke of Hiro Mizuno at the GPIF who had looked at lending out shares and short-selling as a problem. My conclusions came in two parts. The first was that shorting actually helped improve stewardship, not because the issues around governance were brought to light by short-sellers but because when they sold, the idiosyncratic risk of the short-sold shares would be bought by active investors - not passive investors - and those active shareholders had more stewardship risk attached to their ownership than passive managers did. Allowing short-sellers in effect allows passive investors to outsource stewardship to those with more 'skin in the game.'That, however, was not the real crux. My concluding paragraphs were as below:
Finally, the GPIF should encourage its mandated managers to pressure companies about bad capital allocation decisions that destroy shareholder value. For instance, the Toyota Model AA preference share issuance four-plus years ago — bonds with above-market coupons, free-equity options, and voting rights attached — was a governance nightmare. However, a vast majority of domestic institutional investors voted to approve that issuance, as they also voted in 2018 to approve Alpine’s merger with Alps, an act which immediately destroyed their shareholder value.
Investors have also approved numerous takeovers in the past several years at substantial discounts to book value because the target company’s legal advisers have ticked the boxes which say “minority investors are not unreasonably disadvantaged”. And where was the domestic institutional fund manager outcry on Unizo which this past autumn effectively created a quasi-poison pill without shareholder authorisation?
Eliminating one of the root causes of undervaluation — a lack of active investor confidence that Japanese companies will do the right thing with the capital allocated to them — might be the best long-term investment the GPIF could ever make. That involves more owners with more financial incentives to engage with companies to do the right thing. Lending shares — even for free — is a great way to get more active parties to the table.
The point is that when investors see a problem in the valuation of a takeover, they should say something. Given so few do so, it is important that when such comments are made, they be public, so that others may learn and publicly agree. If several people make comments to the target company privately and their response is "Well, the Board decided to recommend the deal based on a variety of factors which would allow for medium-to-long-term growth of the company", it is the right of investors to say "That. Doesn't. Matter."It is important to remember that when a Board decides to recommend a takeover, they are recommending that investors no longer care about growth of medium-to-long-term corporate value, instead trading that long-term interest in corporate growth... for cash. But if you want a better result, you have to ask. Squeaky wheel gets the oil and all that. Or you have to be willing to show your interest by buying higher than the offer (my first insight just after the announcement suggested a fair price was north of ¥5,500/share, and days later a shareholder publicly suggested ¥5,600/share).As explained in a series of insights about the Tender Offer for Nippo Corp (1881 JP) which is presented as ENEOS Holdings (5020 JP) taking over its subsidiary but which is really ENEOS net selling, and the merchant bank of Goldman Sachs buying the economics, starting with ENEOS To Steamroll Nippo (1881 JP) Minorities and continuing with NIPPO (1881 JP) Gets Some Cowbell - It Probably Needs More followed by NIPPO (1881 JP) Gets MORE Cowbell as Oasis Objects, the price here is wrong. Just wrong. It may have come at a decent premium, but some of that comes from market expectations of bad governance, and when an inadequate premium for transfer of control is exercised - for reasons I am having difficulty fathoming without assuming there could be some ulterior motive which does not benefit minority shareholders of NIPPO - it just cements that bad governance discount. This is something which deserves attention. More shareholders should make their opinions known. It could be anonymous, it could be a word to a journalist, or it could be a word to a central agent who then tallies all the complaints but does not suggest that shareholders work together.Sometimes it requires an overbid.So far, as described in previous insights, four shareholders have come forth publicly in somewhat unprecedented fashion. They have started clanging the cowbell. The stock has not traded below terms for a month. Which is why today's development (a website called www.protectnippo.com) is interesting...More below the fold.   

NIPPO (1881 JP) - Belated Cowbell, Worth Getting Involved.