But Sony’s glory days didn’t last forever. The company failed to recognize new consumer trends and their leadership mismanaged the business. So how did this consumer electronics giant go from being an industry leader to industry laggard? And why did we see Sony’s decline as an investment opportunity?
Digital: The Power of Evolution
As investors, we find growth in different places. The Global Equity Team here at OppenheimerFunds is mostly known for discovering growth in areas benefitting from a rising, emerging market middle class, new technology, and an aging population around the world. But another area of fertile ground for us is restructurings, which don’t sound as exciting as cool new technology, but are just as important in contributing to our goal: generating long-term returns for clients.
Sony is a prime example of a recent restructuring. Through the early 2000s the company got stale. It missed the new trend in music consumption and distribution: digital. Meanwhile, consumer electronics went into a permanent state of price deflation. Sony’s sales stalled as the proliferation of digital music benefitted the likes of Apple. Sony’s leadership also mismanaged the way it allocated shareholder capital and how it ran its businesses. Following negative sales growth and net profit losses from 2009-2012, the company realized it needed a change.
Restructurings: A Dirty Job, But Sure Beats the Alternative
Restructuring a company, particularly one with the size and complexity of Sony, requires difficult decisions. Cutting costs comes at the expense of shedding business lines and jobs. But what shouldn’t be overlooked is the alternative of what could have been. Without restructuring, there could have been more lost jobs and ultimately more value lost for shareholders.
Restructuring was especially critical in Sony’s case because in the world of technology, if you aren’t the one creating the trends, the world passes you by. Consumer behavior and preferences change and products become obsolete overnight. Fortunately, Sony was a business with the balance sheet and brand to withstand this hiccup. They also had the fortitude to promote a new CEO, Kaz Hirai. The management team of a company is important and a key part of our research process. For Sony, Hirai was the right person for the job. He was a long-time Sony executive and had already been successful restructuring a division within Sony.
Returning to Growth and Profitability
Restructuring required a major shift in the way it ran its business. The company needed to transition away from the overly complex and complacent conglomerate it had become. Ten thousand people, representing less than 10% of Sony’s workforce, had to be let go as part of a cost-cutting initiative. Business units were realigned, including major changes to an ailing and unprofitable TV-panel segment. And the management team started examining each individual division separately. For the first time, Sony assigned key performance indicators by division, such as Return on Capital Employed relative to its cost of capital.
From the outside looking casually in, the Sony of today doesn’t look all that different than it did during its glory days. The company still produces many of the popular consumer electronics and gadgets we use every day. The paradigm shift occurred internally.
This is often what a restructuring is all about. A company may look okay on the outside. Its heart may still be beating, but if the organs that make it function over the long term are failing then it is only a matter of time before the business may collapse. We look for the restructuring opportunities where a trusted management team can take a company and surgically fix it from the inside out. This is where opportunity often lies. As in the case of Sony, we like to buy future growth and increased profitability that the market is heavily discounting.
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As of 12/31/17, Oppenheimer International Equity Fund had 2.3% of its assets invested in Sony
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