This piece explains activist investing in Japan—buying stakes in companies and pushing management to boost shareholder value. The author sees Japan in the 'second inning' of this trend: valuations have risen but over 600 small firms still trade below 6x EBITDA, and regulatory changes (like TSE reforms forcing companies to care about stock prices) are helping activists. Key holdings: Mitsuboshi Belting (stock doubled after activist pressure), Ihara Science (founder bought it out at a 47% premium), and Sakai Ovex (CEO bought a $200M company with just $500K of his own money, using extreme leverage).
At a Glance This edition of Business Breakdowns explores the opportunities for activist investment strategies in the Japanese market. The core thesis is that Japanese equities have long been undervalued (at historical lows), driven by cultural factors such as excessive corporate cash reserves and in
Masumi Nishida (Partner and Managing Director at Dalton Investments' Tokyo Research Office) engages in an in-depth discussion with host Matt Russell and Essential Partners founder Nick Bartolo on activist investment strategies in the Japanese market. Core thesis: Japan is currently in the "second inning" of activist investment strategy — although valuations have recovered from historically extreme lows, over 600 companies with market caps below $3 billion still trade at less than 6x EV/EBITDA, and institutional reforms (TSE reforms, new M&A guidelines) are systematically removing the barriers that previously hindered value realization.
Masumi Nishida argues that the root cause of the prolonged undervaluation of Japanese equities lies in three mutually reinforcing factors: cash accumulation in a deflationary environment, a lack of management equity incentives, and defensive barriers formed by cross-shareholdings.
Japan experienced 20–25 years of deflation, during which companies lacked the incentive for capital expenditure, leading to a buildup of massive cash reserves on their balance sheets. "Japanese companies have accumulated so much cash through 20 years of deflation that they appear cheaper today than they did 5, 10, or 20 years ago—even with the Nikkei at 20–25 year highs," Nishida noted. At the start of the year, approximately 40% of listed companies (about 40% of 3,500 firms) had a price-to-book ratio below 1.0, and 45%–50% of companies had an EV/EBITDA below 6x.
A deeper issue is the lack of financial literacy among management. "Japanese management has no concept of optimizing the balance sheet. In the U.S., every company optimizes its balance sheet, minimizing equity to boost ROE through leverage. Japan is the exact opposite—there is almost no leverage in the system, despite short-term interest rates being zero or even negative," Nishida emphasized. Management holds almost no shares in their own companies (except for founding families), and "a CEO might hold only $50,000 to $500,000 in equity," leading to indifference toward stock prices.
Nick Bartolo adds a historical perspective: "When I first studied Japan in 2008–2009, the most striking thing was how incredibly cheap valuations were—negative enterprise value or 2–4x EV/EBITDA was common. But the key was finding companies that weren't value traps." He proposes a four-dimensional risk model: balance sheet (Japanese companies are cash-rich and risk-free), business quality (stable industry structures, some with overseas growth), valuation (always cheap), and capital allocation—"If you give me a Japanese company that checks all the other three boxes but has terrible capital allocation, I wouldn't be interested. But if an activist investor steps in, that risk can turn into an opportunity."
Nishida believes that the Tokyo Stock Exchange (TSE) reform is a key variable that changes the rules of the game, as it is forcing companies to focus on shareholder value at the institutional level.
The reform proceeds in two steps. The first step (several years ago) reorganized the listing segments into "Prime" and "Standard," introducing delisting mechanisms based on market capitalization and liquidity—companies with trading volumes below a certain threshold or a market capitalization under $200 million may be delisted. The second step is the "TSE Request"—the TSE requires all listed companies to conduct self-analysis, evaluating ROE, ROIC, price-to-book ratio, and weighted average cost of capital (WACC).
"Historically, when you communicated with Japanese company management, they would talk about medium-term plans, revenue growth, and margin improvement. But if you asked, 'What do you think about the stock price?' the typical answer was, 'The stock price is not within my scope of responsibility; it is determined by market supply and demand,'" Nishida explained. "Now, with the TSE reform, we finally have a common language to discuss stock prices and paths for improvement with Japanese company management."
Cross-shareholding is another key obstacle. Nishida noted that among companies with a price-to-book ratio below 1.0, 40%–50% of shares are cross-held—including by suppliers, other listed companies, and financial institutions (insurance companies, banks). "Even if we submit shareholder proposals, these cross-shareholders already form a 40%–50% block of opposing votes. As a minority shareholder, it is much easier to be ignored in Japan than in the United States."
However, cross-shareholding is declining, and the new M&A guidelines introduced in the summer of 2023 have further changed the landscape. Previously, there were almost no hostile takeovers in Japan—banks would not provide financing for hostile takeovers, and there was no "market for corporate control." The new guidelines stipulate that if a company receives a seemingly genuine acquisition offer (including a letter of intent for financing), it must establish an independent committee to review it and, if the price is deemed inadequate, seek other buyers. "Previously, management could throw the acquisition letter directly into the trash without any consequences. Now there is a process." Nishida pointed out that while Japan previously saw about one hostile TOB per year, there have already been 5–6 cases within a year of the new guidelines' implementation, including instances where listed companies have bid against each other.
Nishida elaborated on Dalton’s standard operating procedure: submitting three “copy-paste” proposals at the annual general meeting each year, knowing they will not pass, but using them as a tool for pressure.
The three proposals are: ① management share purchases (via restricted stock/RSU); ② a majority of independent directors (currently only 12% of listed Japanese companies have a majority of independent directors); ③ changes in capital allocation (under Japan’s Companies Act, shareholders can decide the year’s buyback amount and dividends at the general meeting).
“Even if we propose a 10% share buyback plan, we might only get 20%-30% support from other shareholders. Cross-shareholdings are the main reason.” But the key is not winning, but forcing the company to take a public stance. “The company must hold a board discussion on our proposal, decide whether to support it, and then publicly explain the reasons for opposition—reasons that are often ‘as absurd as a sixth-grader not doing their homework.’”
Case Study 1: Mitsuboshi Belting
This is a century-old manufacturer of engine belts, with an EV/EBITDA of just 2x, an EBITDA margin of 12%-15%, and almost no capital expenditure. Dalton bought a 5% stake and submitted a 10% buyback proposal. The company rejected the buyback proposal (citing “insufficient stock liquidity”), but 4-5 weeks later announced a 100% dividend payout ratio plan—equivalent to ¥220 per share, turning the stock from around ¥2,000 into a stock with a 10% dividend yield. “The stock price rose to ¥4,500, doubling.” Nishida revealed that the company had actually been thinking about how to improve ROE, but knew that ROE would naturally decline as cash accumulated. Dalton’s proposal gave them a reason to persuade internal conservatives.
Case Study 2: Ihara Science
This company, which manufactures semiconductor valves and pipes, has an EBITDA margin of 25%, almost no capital expenditure, and trades at 2-3x EBITDA. Dalton accumulated a 10% stake, and after management rejected all proposals, directly suggested that the 85-year-old chairman take the company private. “We told him: You run the business well, but since you don’t want to return capital to shareholders, you should return control to yourself and your employees. You can complete an MBO with a loan at 6x EBITDA and a 3% interest rate, without even needing to put up any equity yourself.”
Within three weeks, the chairman appointed a financial advisor (SMBC Nikko), secured financing within a month, and launched an MBO tender offer three months later at ¥2,950 per share (Dalton suggested ¥3,000). “The stock was at ¥2,000 at the time, and we held 10%. We chose to support him and signed a shareholder agreement to ensure the offer succeeded.” Nishida noted that while other activist investors publicly demanded a higher price, Dalton stuck with the originally proposed price.
Extreme Case of MBO Financing: Nishida mentioned another company, Sakai Ovex, where the CEO acquired a $200 million company with ¥500,000 in equity—the financing structure was $180 million in bank loans plus ¥20 million in preferred shares. “The average loan term at major Japanese banks is less than five years, with an interest rate of 1%. If you can achieve a 200 basis point improvement in returns through LBO debt, that’s a home run for the bank.”
Nishida believes that Japan's aggressive investment strategy is still in the "second inning," with opportunities far from exhausted.
In terms of valuation, companies at 2x EBITDA are now hard to find, with the current level around 4x EBITDA. "There is still a long way to go to reach U.S. levels." Regarding the competitive landscape, "In the U.S. distressed asset market, there are roughly 200 funds eyeing 10 opportunities, five of which aren't even truly distressed. Japan is the complete opposite—only about five people are doing it, and there are over 100 companies we consider the cheapest, plus another 300 we could work on, but we simply lack the time and energy."
Nick Bartolo added a key timeline assessment: "On the surface, Japanese stocks have performed well over the past four years (up about 120% on a hedged basis, surpassing the S&P 500's 90%-100%), so you might think the opportunity is over. But digging deeper, small-cap stocks lag large-caps by about 50%, and there are still over 600 companies with market caps below $3 billion trading at less than 6x EV/EBITDA."
Nishida also acknowledged the risks: "I'm a bit afraid the market might accelerate faster than I'd like. Considering the USD/JPY exchange rate, valuations, and market changes, I believe this is the right place at the right time. Compared to the U.S. distressed asset market, I see this as 'half the risk, double the return.'"
| Position | Analyst View | Key Data |
|---|---|---|
| Mitsuboshi Belting | Bullish (success case) | 2x EV/EBITDA at entry, 12%-15% EBITDA margin; share price rose from approximately ¥2,000 to ¥4,500 after the proposal |
| Ihara Science | Bullish (MBO success case) | 2-3x EV/EBITDA at entry, 25% EBITDA margin; MBO tender offer price ¥2,950 (47.5% premium over the market price of ¥2,000) |
| Sakai Ovex | Neutral (MBO financing case mentioned) | CEO acquired a $200 million company with ¥500,000 in equity; financing structure: $180 million in loans + ¥20 million in preferred shares |
| Toshiba | Risk warning (governance failure case) | Approximately $20 billion in losses from Fukushima and Westinghouse; Westinghouse debt trading at 30 cents on the dollar |
| Olympus | Risk warning (governance failure case) | Accounting fraud |
1. Nishida believes the Japanese market is in the "second inning": Valuations have rebounded from extremely low levels (2x → 4x EBITDA), but over 600 companies still trade below 6x EV/EBITDA, and the competitive landscape is far less crowded than in the U.S. ("200 U.S. funds chasing 10 opportunities, while in Japan 5 people look at 100+ opportunities").
2. Nishida argues that "the TSE is Japan's No. 1 activist investor": The TSE requires all listed companies to conduct self-assessments of ROE/ROIC/PBR/WACC, providing for the first time a "common language" for investors and management to discuss stock prices—previously, management would say "stock price is not my responsibility."
3. Nishida reveals the extreme leverage in Japanese MBO financing: Japanese banks are willing to provide LBO loans at 3% interest with 6x net debt/EBITDA, and allow zero equity contributions—in the Sakai Ovex case, the CEO acquired a $200 million company with ¥500,000 (400x leverage).
4. Nishida points out that cross-shareholdings are the core reason for Japan's undervaluation: 40%-50% of shares in companies with P/B below 1.0 are cross-held, forming natural opposing votes. However, this structure is unraveling.
5. Nishida proposes the "three-item proposal" strategy: Knowing it will not win (only 20%-30% support), the tactic forces companies to publicly explain their reasons for opposition—"these excuses are as absurd as a sixth-grader not doing homework"—thereby arming other shareholders with ammunition.
6. Nishida believes Japan is replaying the U.S. in the 1980s: Following the implementation of new M&A guidelines, hostile TOBs have increased from 1 per year to 5-6, with listed companies now bidding against each other—"Japan today is the U.S. market of the 1980s."
7. Nishida presents the logic that "MBO is the natural endpoint": If management rejects all shareholder return proposals, it should be advised to go private—"You don't need to return value to us, but you shouldn't be listed."
8. Nishida created a "four-dimensional risk model" (citing Nick Bartolo): Balance sheet (Japan is risk-free) → Business quality (industries are stable) → Valuation (always cheap) → Capital allocation (the key variable, where activists can turn risk into opportunity).