If it's a massive conglomerate, a company has many options for generating additional funds when it's feeling a bit pinched. Sony (NYSE:SNE) plans to sell shares of its financial services unit, Sony Financial Holding, in a massive October IPO that will occur primarily in Japan.
The IPO is expected to bring Sony about $3 billion. The buzz is that these funds should help the company improve some of its other divisions. First and foremost on everybody's mind is the company's still-unprofitable PlayStation game unit, which is still having tough times because of competition not only from the usual suspect (Microsoft (NASDAQ:MSFT) and its Xbox) but also from an unexpectedly hot competitor, Nintendo (OTC BB: NTDOY.PK), with its low-priced Wii console. There's also talk of how the extra funding should help Sony's TV business.
Earlier this month, news broke that this IPO was coming. The rumor and speculation before then had been that Sony would break up the company or spin off units as it turns around, so an IPO of a minority percentage of its financial unit isn't a shocking development. The financial unit was a nice ancillary business at times, but it represented only 7.5% of sales in Sony's most recent fiscal year results, and the segment's revenues decreased 12.6% year over year. (However, last quarter, the financial unit had a 49% increase in revenue.) Furthermore, it's arguably an awkward fit into Sony's overall entertainment and consumer electronics focus. (And of course, some of us, like Tom Gardner, do like to see focus in our companies.)
This could be good timing, too. In June, in its latest 20-F filing (the equivalent to a domestic Form 10-K) with the SEC, Sony disclosed in its risk factors that its financial services segment "faces increasing competition in Japan due to ongoing deregulation that is eliminating barriers among the insurance, banking, and securities industries." Sounds like its moats might become shallower in a changing regulatory climate. Sony also disclosed that Japan's Financial Services Agency required all insurance companies to report on non-payment of insurance claims, and the company said that might result in additional regulations for the industry.
The disclosed risk factors also discussed the importance of Sony continuing to plow money into R&D to boost profitability, especially into electronics and games segments.
Another interesting regulatory filing tidbit was Sony's obligation in a joint venture with Samsung to invest 100 billion yen (about $882 million) in eighth-generation thin film transistor LCD panels by the end of the current fiscal year, March 2008. In late August, the two companies said they have agreed to increase their investment in LCD technology. And since Sony's game segment isn't profitable, it certainly can't slack off with its technology if it wants to guard -- and improve -- market share.
While it's positive that Sony can get its hands on some additional funds, I can't see this as a major catalyst for the stock. The electronics giant still has a lot of work ahead, and current shareholders should hope Sony will use the capital to make significant improvements in its growth prospects. But the competitive landscape and costliness of keeping current shouldn't be underestimated in the company's list of challenges.
