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Japan's Small Companies Offer Both Pain and Gain

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NEW YORK (–Bargain hunting in Japan has been good for Dalton Investments’ James Rosenwald, whose Japanese Management Buyout Fund is up 78% since its inception in April 2003.

But while he has profited from the initial stakes he takes in companies, which typically represent an interest of around 5%, he has not been able to achieve the buyouts indicated by the name of the fund.

Although Mr. Rosenwald describes his overtures as friendly, he typically is snubbed and disappointed by the companies. For instance, in late December Teikoku Hormone Mfg. Co. Ltd. rejected his second offer of US$12.50 per share for all outstanding shares.

The offer was at 40% or more over market price, and with 24 million shares outstanding represented a total of about US$300 million. According to Mr. Rosenwald’s estimate, the business is worth closer to half a billion dollars.

Teikoku Hormone is undervalued because for a number of reasons, he said. Very few people know anything about the company, and there is no coverage of it by analysts. Small- and medium-size companies in Japan tend to be overlooked–a condition that makes them highly attractive for a value investor.

Drawing Board

On the other hand, top executives have other agendas. Teikoku’s management plans to merge with Grelan Pharmaceutical Co. instead of espousing Mr. Rosenwald’s buyout offer. Mr. Rosenwald says his offer would give shareholders a better return and Teikoku’s price for Grelan is too high.

The market may agree with him–Teikoku shares fell when the merger was announced.

But Teikoku said in a statement that the merger would increase shareholder value in the mid term and long term. It is expected to put the proposal to a shareholder vote in February.

As for Mr. Rosenwald’s buyout offer, “We have to go back to the drawing board,” he said.

Los Angeles-headquartered Dalton Investments has approximately US$730 million under management. Other members of the firm run long/short global equity and distressed securities-capital structure arbitrage portfolios.

Contact Bob Keane with questions or comments at: [email protected].