Is a Slimmer Sony Coming?


By Brian Bremner Memo to new CEO Howard Stringer: Do something -- anything -- to rekindle the killer instinct for innovation inside Sony (SNE). All sorts of unsolicited advice have been coming fast and furious at Stringer, ever since news broke he would take management control of the $67 billion consumer-electronics and entertainment colossus back in March.

Few doubt that Sony, a much diminished force and brand, needs some shock therapy to revive itself. After all, its core electronics division, which accounts for 70% of sales, has lost money on an operating basis for the last two years.

Sony's cost structure is bloated, and it has plenty of noncore businesses that could be sold off to raise cash for the main event at Sony: Turning out ultracool gadgets and must-have content that will wow global consumers once more.

IPO IN '06. Stringer is slated to roll out his restructuring plan on Sept. 22. In recent months, market chatter and the CEO's comments have made pretty clear Sony has been looking into ways of streamlining its electronics product lineup, reorganizing its global plant network, and instituting some pretty painful layoffs.

Now comes word of some potential asset sales. On Sept. 16, a report in the Nihon Keizai Shimbun indicated that Sony may sell off its massive life insurance and finance unit, as well as part (or all) of Sony Communication Network, which operates the So-net Internet service provider service, and its 12.5% stake in satellite broadcaster Sky Perfect Communications. Sony quickly threw cold water on the report in a statement released on its Web site.

Sony Financial Holdings, which sells life insurance policies and operates an online banking service, is likely to go forward with an IPO in 2006, yet the parent company says it has no current plans to sell its entire stake in the unit. Ditto for SkyPerfect, though Sony declined to comment on Sony Communication.

KEY CASH ENGINE. Of the three assets, though, the 800-pound gorilla is the financial services unit. It's a surprisingly huge operation and could raise the kind of money Sony needs to refocus on what it does best. Plenty of analysts think Stringer needs to unload those businesses at some point. They really have little to do with Sony's core mission to fuse gadgets with Sony films, music, and games software.

The dilemma Stringer faces is this: Sony Financial is a key cash engine for an outfit best known for its high-tech gizmos like its Handycam video recorders, Vaio laptops, and PlayStation2 game machines. The unit delivered $519 million in operating income in Sony's fiscal year that ended in March.

That was less than $597 million Sony Pictures (supercharged by the Spider-Man 2 smash hit film) hauled in, but well above the operating earnings in the game ($404 million) and music ($82 million) divisions. The core electronics business lost $321 million.

IT'S ABOUT CROSS-SELLING. Stringer has hinted in the past that business lines without clear cross-selling potential may not ultimately fit into the Sony pantheon, regardless of how much cash they throw off. Several years back, Sony CEO Nobuyuki Idei explored selling off the life-insurance operation to Dutch insurer Aegon (AEG

) and Prudential Financial (PRU

) as a way to improve return on asset performance -- and hence the stock price.

Sony Financial boasts roughly $30 billion in assets, or about one-third the consolidated assets of the Sony group companies. However, Idei was forced to abandon the move after the unit's workforce rebelled at the idea of falling into foreign hands.

The new crew may well decide to go slow in selling off chunks of Sony Financial, given the need for cash flow short-term, as Stringer tries to execute his restructuring plan. But at some point, Sony will likely will spin off the unit.

SHAKE IT UP. Merrill Lynch analyst Hitoshi Kuriyama in Tokyo estimates Sony Financial could be worth $7 billion or so, based on multiple of five times operating cash flow. That money could be put to far greater use investing into Sony's development of chips, flat-screen TVs, and future must-have gadgets.

Sony's stock has been a lackluster performer this year amid a bullish run in the Japanese Nikkei index. In July, the giant took a machete to its profit forecast for this fiscal year ending next March, as a result of disappointing TV sales.

No doubt Stringer needs to shake things up -- and fast. Making a call on what to do with Sony's financial businesses will be one of the toughest of them all.

Bremner is BusinessWeek's Hong Kong based Asia bureau manager


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