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Can Sony Afford To Get Focused?


Sony is a name that's almost interchangeable with high-tech gizmos -- from its Handycam video recorders and Vaio laptops to the PlayStation 2 game machines found in nearly every family room. But few know that what's paying many of the bills at the company these days doesn't run on batteries. One of Sony Corp.'s (SNE) chief cash generators is its thriving business in Japan selling insurance policies and online banking services. (Sony also markets a credit card in the U.S. issued by JPMorgan Chase & Co.) Life and auto insurance policies, plus Internet savings accounts, grouped under Sony Financial Holdings will earn Sony an estimated $509 million in operating profits this year, figures Merrill Lynch & Co. (MER). That's almost as much as Sony's motion pictures will earn and well above a projected $288 million loss in consumer electronics.

Incoming Sony Chief Executive and Chairman Sir Howard Stringer faces enormous pressure from shareholders to improve Sony's profitability and spin off businesses that don't fit into the core strategy of fusing gadgets with Sony films, music, and game software. That's because the current mix isn't working. Sony's group operating profits are expected to fall 31%, to $1.05 billion, in the fiscal year ended in March, and its 1.5% overall operating profit margin is something of a joke. Under Stringer, business lines without clear cross-selling potential may have a hard time justifying their place in the Sony pantheon, no matter how much cash they throw off.

Another issue is that despite its contribution to earnings, Sony Financial's $33 billion asset base, representing one-third of the Sony group's total, has pulled down the company's return on assets. Analysts forecast Sony's ROA for 2005 will be 1.7%, which is hurting its stock price. And some say that the finance operations can only distract management from its larger goals. "I just don't see a lot of synergies," says Naoko Nemoto, insurance analyst with Standard & Poor's (MHP) in Tokyo.

CASH COW

Losing the cash flow from Sony Financial could be a problem, especially if the turnaround of the entire company takes longer than planned -- or doesn't pan out, as some investors fear. But Stringer may want the money generated from a sale to plow into the ailing electronics business. Sony Financial is worth about $7.1 billion, based on a multiple of five times operating cash flow, estimates Merrill analyst Hitoshi Kuriyama in Tokyo. That could go a long way toward investing in the next generation of must-have gadgets. Sony already plans to take the finance holding company public in 2006 but retain a controlling stake.

This sideline dates back to 1979, when Sony set up a venture with Prudential Insurance Co. of America. The idea was that the Japanese would trust the company that builds their Trinitron TVs to sell them high-quality financial services. It worked -- and Sony later bought out Prudential's stake. Today, Sony Life Insurance Co. sells accident, medical, and life insurance policies under the tagline "Love and Trust." Last year it saw a 5% rise in premium income when the rest of the Japanese insurance industry contracted. And its balance sheet is cleaner than Nippon Life and Sumitomo Life, which have been burdened with bad debt. But those rivals are recovering and, as competition heats up, Sony may not have the wherewithal to combat them and well-capitalized foreigners like American Family Life Assurance Co. (better know as Aflac). "The industry is going through a lot of transition and is increasingly competitive," notes Jason Rogers, an analyst at Barclays Capital Inc. (BCS).

Sony has tried to shed this business before but failed. Departing Sony CEO Nobuyuki Idei explored selling off Sony Life to GE Capital (GE) in 2002, then last year with Dutch insurer Aegon (AEG). Idei backed off after the unit's 5,000-plus workforce rebelled at the idea of falling into foreign hands. Now that a foreigner is calling the shots, ceding control may no longer be such an issue.

By Brian Bremner in Tokyo


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