SANTA MONICA, Calif. & TOKYO, Japan – Dalton Investments issued the following letter to the directors of Toyota Industries Corporation (6201.T) regarding the withdrawal of Dalton’s shareholder proposals and highlighting areas of improvement for the firm’s “Corporate Value Enhancement Initiatives.”
Dear Board of Directors,
We have carefully reviewed the “initiatives to enhance corporate value” recently announced by your company and have concluded that they are broadly consistent with the ideas in our shareholder proposal. In addition, the announced scale of shareholder returns, and the sale of strategic shareholdings assure us that your management team and board of directors are serious in their efforts to enhance corporate value. We respect the sincere consideration and courageous decision by the Board of Directors. Based on the above decisions, we will be withdrawing all of our proposals for this year’s General Meeting of Shareholders.
At the same time, we would like to take this opportunity to share with the Board of Directors our views on the “Corporate Value Enhancement Initiatives” in a more in-depth manner. We believe there are three areas for further improvement.
- Translating “Awareness” of cost of capital and stock price into quantitative terms. The most important aspect of the TSE request is for listed companies to analyze and have an opinion on their cost of capital and stock price. As far as we can tell, your company does not currently have a clear idea (at least quantitatively) of its cost of capital or what its stock price should be. The TSE request places two-way communication with the stock market at the core of the corporate value enhancement process, and awareness of cost of capital and stock price is a prerequisite for this process. We would like to see your company recognize a cost of capital of approximately 8%, and then analyze and accumulate the value of each of your businesses and assets to understand the gap between your internally calculated corporate value and the market’s evaluation. This will make the dialogue between your company and the market more constructive and valuable.
- Adopting and committing to a return on invested capital (ROIC) target as the basis for investment decisions. In principle, evaluation and decision-making for individual investment projects should be based on whether ROIC exceeds the (weighted average) cost of capital. Investments that do not cover the cost of capital are a detriment to corporate value. While your “Initiatives to Enhance Corporate Value” shows commitment to the ROE improvement target, we understand that the improvement of “R” will be driven mainly by existing businesses. We are concerned that if these investments are less than the cost of capital, they may lead to a long-term loss of corporate value. We hope that your company will adopt the 10% ROIC target and discipline that Aisin Seiki set for themselves.
- Further enhancing opportunities for top management to engage in dialogue with shareholders and investors. Dialogue between top management and investors/shareholders drives the corporate value enhancement process, and we hope that this dialogue will be held at least once a quarter.
Thank you very much for your consideration of the above. We would be happy to hear your company’s perspectives on the above proposal during our next visit. The fact that your management team and the stock market have shared the goal and framework of increasing corporate value is a valuable first step, and we hope to be a part of the process of increasing corporate value through continuous dialogue.
Sincerely yours,
James B. Rosenwald III
Co-Founder and Chief Investment Officer
Dalton Investments
Please note that the above is an English translation of the letter that Dalton Investments sent in Japanese, provided as a courtesy. In the event of any inconsistency between the English language version and the Japanese language version, the meaning of the Japanese language version shall prevail.
IMPORTANT INFORMATION
This letter has been prepared by Dalton Investments and its affiliates (collectively, “Dalton”) for the benefit and use of the original recipients. It does not constitute, and should not be construed as, an offer or solicitation to enter into any transaction regarding any financial instrument, nor should it form the basis of or be relied on in connection with any such transaction. This letter does not constitute, and should not be construed as, tax, legal, regulatory, accountancy or other specialist or technical advice, or investment advice or personal recommendations, any trading strategy or advice (from an investment perspective) to any person on the suitability of any transaction.
The information in this letter is based on information that Dalton considers reliable, but which Dalton did not verify any of the information. No representation or warranty is made as to, nor should reliance be placed on, any of that information contained herein being accurate or complete. Neither Dalton nor any of Dalton’s directors, officers or employees accepts any responsibility or liability for any losses or damages that may result from the lack of accuracy or incompleteness of this information. Such persons also do not accept any responsibility or liability for assumptions on which any statements, views, valuations or opinions expressed by Dalton in this letter may be based.
This letter speaks of its date and opinions and views expressed are Dalton’s opinions and views as of such date only. Dalton assumes no obligation to notify or inform any party of any developments or changes occurring after the date of this document that might render its contents untrue or inaccurate in whole or in part.
Any possible transaction or investment referred to herein may involve significant risk. This document has been prepared without regard to the individual circumstances and objectives of persons other than the original recipients who receive it. Other recipients should, without relying on this document, make their own independent decisions regarding to any possible transaction or investment and, if necessary, seek professional advice.
Dalton accepts no liability whatsoever for any reproduction or redistribution, in whole or in part, of this document, by any person other than Dalton.
The distribution of this document in certain jurisdictions may be restricted by law, and recipients into whose possession this comes should inform themselves about, and observe, any such restrictions.