Activist Investor Daniel Loeb Blasts Sony's Summer Flops as Latter-Day 'Ishtar' and 'Waterworld'

Daniel Loeb Headshot - P 2013
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Daniel Loeb Headshot - P 2013

UPDATED: The hedge fund manager calls Sony Corp.'s entertainment businesses "poorly managed" in his regular newsletter to investors, adding that Michael Lynton and Amy Pascal's unit is “characterized by a complete lack of accountability and poor financial controls.”

In his regular newsletter to investors in New York-based hedge fund Third Point LLC, Daniel Loeb on Monday slammed Sony Corp.’s entertainment businesses as a “poorly managed” operation with a “famously bloated corporate structure, generous perk packages, high salaries for underperforming senior executives, and marketing budgets that do not seem to be in line with any sense of return on capital invested."

Loeb, who has called for Sony to spin off its entertainment businesses since May, described the studio’s summer releases After Earth and White House Down as box-office flops comparable to historic bombs Waterworld and Ishtar.

Loeb’s fund Third Point manages about $4.5 billion. Since earlier this year, the fund has accumulated 70 million shares of Sony, nearly 7 percent of the company’s common stock.

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The Culver City-based unit, managed by Sony Entertainment CEO Michael Lynton and studio co-chair Amy Pascal, is “characterized by a complete lack of accountability and poor financial controls,” Loeb wrote to his shareholders.

If those entertainment assets were a separate company, Loeb argued, it would spur a more focused, accountable management -- and such a spinoff would provide capital and increased profits, with which Sony could invest in electronics.

“Drastic -- rather than incremental -- action is required," wrote Loeb.

While Loeb praised Sony CEO Kazuo Hirai for his moves to improve the results from electronics, including  Sony’s Xperia Z smartphone and the PlayStation 4, he expressed disappointment that in recent conversations with analysts, Hirai has been too easy on Sony’s entertainment and music businesses.

Entertainment and music are leaders in their industry, Loeb says, but they are not achieving the same levels of profitability as their competitors.

Loeb praised the performance of the international cable TV networks and TV production businesses but called profits from the film unit “negligible”:

“This makes apples-to-apples comparisons with peer film studios (which lack the benefit of cable networks in those segments) even more unflattering. Nevertheless, we believe the film unit possesses considerable library cash flow value, currently masked by poor new production profitability, as well as significant asset value in its Culver City lot."

Monday afternoon, Sony issued the following statement in response:

“Sony is focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the entertainment and financial service businesses, which generate stable profit.  The Sony Board of Directors, as previously noted, is reviewing its proposals.  Sony looks forward to continuing a constructive dialogue with our shareholders as we pursue our strategy."

Sony Corp. shares closed in U.S. trading on Monday at $21.24 each, down about 1.6 percent from the Friday close.