TOKYO--(BUSINESS WIRE)--3D Investment Partners Pte. Ltd. as investment manager of 3D OPPORTUNITY MASTER FUND (together “3D,” “we” or “us”) today issued an open letter to shareholders of Fuji Soft Incorporated (“Fujisoft” or “the Company”) (9749.T) encouraging Fujisoft shareholders to support 3D’s proposal to add two independent outside directors – Kanya Hasegawa and Keiji Torii – to the Fujisoft Board of Directors at the Company’s 52nd Annual General Meeting of Shareholders to be held on March 11, 2022.
By supporting 3D’s proposal, shareholders would be following the recommendation of Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”), leading independent providers of proxy research and vote recommendations to the institutional investment community, as both providers recommended that Fujisoft shareholders vote “FOR” 3D’s proposal. In its report, Grass Lewis pointed out the importance of addition of these two candidates to the Board by stating “…a short slate of shareholder-centric director nominees could serve as a reasonable counterbalance to the potentially outsized influence of the Company’s longstanding directors, particularly that of Mr. Nozawa.” Further, ISS in their report noted Fujisoft’s “obvious issues, including suboptimal capital structure, inefficient operations, and unfocused strategy that management has not fully addressed.” ISS commented favorably on the finance, accounting and capital allocation experience of 3D’s nominees and stated that their election would “help [Fujisoft] reevaluate current and future investment plans and decide the right path forward.”
3D urges shareholders to read the full text of its letter below, and to follow the recommendation of ISS and vote “FOR” its proposal to add two new directors to provide fresh perspectives and enhanced oversight to the Fujisoft Board.
March 1, 2022
Dear Fellow Fujisoft Shareholders:
3D Investment Partners Pte. Ltd. as investment manager of 3D OPPORTUNITY MASTER FUND (together “3D,” “we” or “us”) currently owns 9.28% of the outstanding shares of Fuji Soft Incorporated (“Fujisoft” or “the Company”) (9749.T), making us the Company’s largest institutional shareholder.
On January 13, 2022, we submitted a shareholder proposal to appoint two independent and highly qualified outside directors to the Company’s Board. Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”), leading independent providers of proxy research and vote recommendations to the institutional investment community, published their recommendations that Fujisoft shareholders vote “FOR” our two director nominees – Kanya Hasegawa and Keiji Torii – at Fujisoft’s 52nd Annual General Meeting of Shareholders to be held on March 11, 2022. In its report, Grass Lewis pointed out the importance of addition of these two candidates to the Board by stating “…a short slate of shareholder-centric director nominees could serve as a reasonable counterbalance to the potentially outsized influence of the Company’s longstanding directors, particularly that of Mr. Nozawa.” Also, ISS in their report, pointed out the problems with the management of Fujisoft by noting that 3D had “pointed to some obvious issues, including suboptimal capital structure, inefficient operations, and unfocused strategy that management has not fully addressed.”
We firmly believe Fujisoft has an opportunity to create significant corporate value, but we believe that misguided capital allocation, an inefficient corporate structure having four listed subsidiaries, a poor payout ratio, weak profit margins and the lack of a focused growth strategy are preventing the Company from realizing its full potential. As a result, Fujisoft’s return on equity and valuation are much lower than its peers.
This underperformance on key business and financial metrics has resulted in poor shareholder returns. In fact, total shareholder returns (“TSR”) have been meaningfully lower than the returns generated for shareholders by the Company’s peers, as sown in the table below:1
|
1-Year |
3-Year |
5-Year |
Fujisoft TSR vs. Peer Median |
-3% |
-11% |
-27% |
To enhance corporate value, we believe the Company needs fresh insights and independent oversight from outside directors. We have proposed adding two new directors to the Board to ensure the Company deploys its capital efficiently, considers how best to organize the group, improves its payout ratio, enhances margins and focuses on the best opportunities for growth.
In particular, the new directors we are proposing would aim to:
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Improve capital efficiency by rationalizing real estate holdings and reducing office space: Unlike its peers, Fujisoft allocates a significant amount of capital for tangible fixed assets by buying office buildings from which it operates. We do not believe that buying office buildings generates sufficient returns to justify this enormous use of capital. Moreover, the appraised value of Fujisoft’s real estate is greater than the market capitalization of the entire Company, indicating that investors are not assigning value to Fujisoft’s real estate holdings. We believe the Company should reconsider this unusual use of capital.
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Optimize ownership of listed subsidiaries: Fujisoft should determine if maintaining these listed subsidiaries or engaging in full acquisitions or full divestitures of those subsidiaries can create corporate value. These subsidiaries are not fairly valued by the market because of weak governance and scandals.
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Improve the payout ratio: Over the past five years, Fujisoft has returned only 17% of its net income to shareholders, while allocating 107% of its net income to investments in real estate. The Company should calculate the cost of equity and evaluate existing and future investments based on the cost of equity, and, as applicable, return excess capital to shareholders.
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Enhance margins and evaluate cost savings opportunities: With Fujisoft’s profit margin below the industry average and productivity per employee below that of peers, we believe Fujisoft is overstaffed and is too focused on low-margin, low-value projects. Based on our detailed analysis, we believe there is a potential profit upside of JPY7 – 17 billion if Fujisoft takes certain actions to streamline its operations and seek higher margin projects. We are advocating that the Company engage consultants to evaluate and right-size the organizational structure and modify management plans with a view to increasing margins.
- Develop a focused growth strategy: Fujisoft has been adding employees aggressively and pursuing growth across a wide variety of technology areas. However, this plan lacks focus and discipline. There is no indication that management is focusing on higher growth, higher margin, higher value opportunities, or areas in which Fujisoft has a competitive advantage. Instead, we believe Fujisoft should narrow its focus to the most compelling opportunities: DX and cloud services, automotive, license business, machine control system and social infrastructure. We are encouraging the Company to engage an external consultant to conduct an in-depth analysis of future growth opportunities so that the Company can develop a defensible growth strategy and allocate resources accordingly.
As a large and committed shareholder, we have sought to engage constructively with the Company for two years to address these issues. We have shared our in-depth analyses and provided detailed proposals aimed at increasing corporate value. Fujisoft, however, has refused to meaningfully engage, repeatedly ignoring our suggestions (the medium-term business plan published on February 10, 2022 did not adopt any of our recommendations) and denying our requests to speak with independent directors. Most recently, the Board decided to oppose the appointment of our two candidates without having spoken with either of them.
We strongly believe Fujisoft needs new, independent directors to exercise oversight and provide fresh perspectives in the boardroom. The strategy and management of the Company has been set by its founder Hiroshi Nozawa. Although Nozawa-san has retired from management, he continues to have enormous influence over corporate policy. After many years of underperforming its peers, Fujisoft needs two new independent directors to review management practices and corporate policy with a goal of enhancing corporate value. Our candidates, Kanya Hasegawa and Keiji Torii, bring significant expertise in capital allocation, investments, finance and technology. As representatives of Fujisoft’s largest institutional investor, their interests are aligned with those of other shareholders. We applaud both Glass Lewis and ISS recommendations to support the proposal to appoint our candidates, and we believe that, with a refreshed and independent Board, Fujisoft can reach its full potential.
We encourage our fellow shareholders to review the backgrounds of our candidates, along with our presentation and the other meeting materials, and to support our proposal for enhanced Board oversight at Fujisoft’s forthcoming 52nd Annual General Meeting.
Sincerely,
3D Investment Partners Pte.
Presentation:
https://www.3dipartners.com/engagement/presentation-on-shareholderproposal-en.pdf
Website link:
https://www.compoundfujisoft.com/home-eng
About 3D Investment Partners Pte.
3D Investment Partners Pte. Ltd. is an independent Singapore-based Japan focused value investing fund manager founded in 2015. 3D Investment Partners Pte. Ltd. focuses on partnering with managements who share its investment philosophy of medium- to long-term value creation through compound capital growth and a common objective of achieving long-term returns.
Disclaimer
This press release is provided for informational purposes only and does not constitute an offer to purchase or sell any security or investment product, nor does it constitute professional or investment advice. This press release should not be relied on by any person for any purpose and is not, and should not be construed as investment, financial, legal, tax or other advice.
3D Investment Partners Pte. Ltd. and its affiliates and their related persons (“3DIP”) believe that current market price of Fujisoft does not reflect its instinct value. 3DIP acquired beneficially and/or economic interest based on its own idea that Fujisoft securities have been undervalued and provides attractive investment opportunity and may in the future beneficially own and/or have an economic interest in, Fujisoft securities. 3DIP intends to review its investments in the Fujisoft on a continuing basis and, depending upon various factors including, without limitation, the Fujisoft's financial position and strategic direction, the outcome of any discussions with Fujisoft, overall market conditions, other investment opportunities available to 3DIP, and the availability of Fujisoft securities at prices that would make the purchase or sale of Fujisoft securities desirable, 3DIP may, from time to time (in the open market or in private transactions), buy, sell, cover, hedge, or otherwise change the form or substance of any of its investments (including the investment in Fujisoft securities) to any degree in any manner permitted by any applicable law, and expressly disclaims any obligation to notify others of any such changes.
No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness, or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets, or developments referred to herein. 3DIP expressly disclaims any responsibility or liability for any loss howsoever arising from any use of, or reliance on, this press release or its contents as a whole or in part by any person, or otherwise howsoever arising in connection with this press release.
3DIP disclaims any intention or agreement to be treated as a joint holder (kyodo hoyu sha) under the Financial Instruments and Exchange Act of Japan, a closely related party (missetsu kankei sha) under the Foreign Exchange and Foreign Trade Act with other shareholders, or receiving any power to represent other shareholders in relation to the exercise of their voting rights by virtue of its act to express its views, estimates, and opinions or otherwise to engage in dialogue with other shareholders through this press release.
3DIP does not have the intention to make a proposal, directly or through other shareholders of Fujisoft, to transfer or abolish the business or asset of Fujisoft and/or Fujisoft group companies at the general shareholders meeting of Fujisoft. 3DIP does not have the intention and purpose to engage in any conduct which constricts the continuing and stable implementation of business of Fujisoft and/or Fujisoft group companies.
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In respect of information that has been prepared by 3DIP (and not otherwise attributed to any other party) and which appear in the English language version of this press release, in the event of any inconsistency between the English language version and the Japanese language version of this press release, the meaning of the Japanese language version shall prevail unless otherwise expressly indicated.
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1 Source: FactSet as of February 18, 2022. Peers include DTS, ITOCHU Techno-Solutions, Nihon Unisys, NS Solutions, NSD, SCSK, Systena and TIS.
