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Chapter12   The Road to Direct Financing

"How Could Sony Do It ?"


  • A product planning meeting in 1960
The completion of the Atsugi plant and construction of the research lab had all of Sony astir. Soon after, however, Sony was the center of a sensation that rocked all Japan. The Japanese government had certified Sony to issue ADR stock---a first in Japan.

Simply put, the ADR, or American Depositary Receipt, was a system in which Japanese stocks could be bought or sold on the American securities market. Naturally, eligible companies had to have sound finances, ample growth potential, and possibilities of providing big earnings for future American investors.

The problems involved in selling foreign-based stock, however, were awesome. First, it was troublesome and time consuming to send stock certificates overseas, not to mention the danger of theft, rate fluctuations and currency exchange risks during transport. Second, American holders would not understand the contents of certificates written in Japanese or be able to check their authenticity. The payment of dividends and execution of other rights would also be difficult. And finally, differences between Japanese and American business practices and systems had to be resolved. The ADR system, which stipulated that an American bank would issue ADR against Sony stock deposited at their banks, would do away with all these problems and allow for foreign stock to be smoothly floated in the American market.

The general trend toward trade liberalization in progress at the time was in part behind Sony's decision to issue ADR stock. In fact, in response to this movement, Foreign Exchange Control Law regulations had been eased. Encouraged by these signs, officials from Morgan Guaranty Trust Co., the Chemical Bank of New York, and Irving Trust, among others, visited Japan one after another to try to drum up a Japanese securities investment market. These moves were welcomed by the Ministry of Finance, and in the autumn of 1960 Japan was swept up in an ADR whirlwind.

Many Japanese companies were anxious to get their stock floated in the American market via the ADR system as, needless to say, it was a powerful means of promoting their companies and product lines. In fact, over 100 companies responded to the government survey which probed for interest in the ADR program. Those selected had to be absolutely trustworthy. Corporations that might cause problems for American investors were ruled out. Only Sony and 15 other companies passed the rigorous screening by the Ministry of Finance. With a mere 900 million yen in assets, Sony was the smallest and youngest of the 16. The remaining companies, which included Toshiba, Hitachi, Yawata Steel Co., Mitsubishi Corp., and Mitsui & Co., Ltd., were all giants dating from the prewar days.

Naturally, the public reaction was "Just how could Sony do it" Apparently Sony's past achievements and phenomenal popularity in the U.S. had given its future potential a higher premium than its current size. Moreover, the strong ardor with which Morita and the rest of the Sony management approached the ADR issue put an end to all doubts.

At a special board meeting on February 1, 1961, Sony's directors decided to increase capital by issuing new stock. Of this, 2 million shares would be ADR stock issued in the United States. This decision was prompted by the fact that Sony's American market was second only to its domestic market, accounting for 30% of total exports, which comprised 42% of gross sales. Additionally, the year-old Sony Corporation of America was strengthening its distribution network in this market of growing importance. The ADR venture then, would be an important means to raise awareness of Sony in the U.S.

The Road to Direct Financing

One of the reasons behind Sony's determined push to issue ADR stock was the company's financial situation. By this time, Sony was no longer pressed with worries like raising money for day-to-day operating expenses. Money for R&D or plant and capital equipment investments, however, was another story.

Japanese banks would not easily lend money for reasons of their own. The rapid growth in Japanese industry in the postwar period throughout the Korean War led to a scarcity of money on the open market. Japan was chronically short of funds. Banks were the only place to which people could turn, but the high demand for loans only aggravated things, creating a Catch-22 situation. Moreover, from prewar days most of the large business concerns had aligned themselves with certain banks. This made fund-raising even more difficult for a newcomer like Sony with no affiliations.

Through their long association with Bandai, Sony had dealt exclusively with the Mitsui Bank. The Mitsui Bank was a relatively new institution, created just after the war along with the Dai-ichi Bank as a result of the Teikoku Bank split-up. Naturally then, Mitsui's small capital holdings made it a second-class bank. Furthermore, since it gave precedence to its old Mitsui group affiliates from the prewar days, it did not have the margin to lend funds to Sony.

Noboru Yoshii, a former branch manager of one of Tokyo's largest Mitsui offices who had joined Sony the year before, suggested that Sony should conduct business with all the major banks. As he was a long-time bank employee, he was well aware of the situation.

At the time, not a single financial institution held major shares of Sony stock. Mitsui Bank and the Nichido Fire and Marine Insurance Co. together held a mere 8%. In comparison, Japanese banks owned 23% of all industrial stock, making it clear how low Sony was rated in their eyes. Yoshii visited Mitsubishi, Fuji and other leading banks to ask them to do business with Sony and become stockholders. He hoped to increase the share of stable, large shareholders to 14 or 15%.

In the meantime, Morita and Yoshii began considering alternative ways of financing the company that would provide more growth potential.

"We have to put an end to our current indirect financing --- we must stop depending on borrowed money and break free from the banks. To do so, we should move into securities and not just in the Japanese market, but markets throughout the world as well." Bearing this in mind, Sony switched from indirect to direct financing. And Morita committed himself and Sony to the ADR.

The Ministry of Finance ordered potential trustee banks, including Mitsui, to choose ten companies initially. Needless to say, the Mitsui Bank endorsed its Mitsui group affiliates, who did not think Sony belonged among the candidates in the first place. The Bank of Tokyo, however, agreed to act as Sony's trustee. As it turned out, Yoshii's visits to the banks were partly in anticipation that Sony would need a trustee when it began issuing ADR stock. Ultimately, 16 companies --- from giants Mitsui & Co., Ltd., and Hitachi to Sony --- were chosen for ADR certification.

The next hurdle, however, was thoroughly absorbing all the procedures involved, which were far too complex to understand with only brief study. Morita, acting as ADR project manager, had a mere six months to absorb every detail of this complex undertaking before Sony was to make its debut on the U.S. securities market.

Sony's First Day on the NYSE


  • From left, A. Morita, E. Schwartzenbach(Smith Barney) and Kurata(Nomura Securities).
A 1933 U.S. disclosure law had been enacted as a safeguard against fraudulent securities trading. It required companies to disclose all pertinent information on their overall financial standings to potential investors. In addition, first-time issuers were required to file a multitude of securities registration statements with the SEC (Securities and Exchange Commission).

Meeting these requirements was a formidable undertaking. Morita was shouldered with the task of preparing all the necessary papers and, more importantly, straightening out all problems arising from the different legal and accounting practices, forms and even language differences between Japan and the United States.

The whole process began by translating the pertinent Japanese business laws into English. Next, all the materials needed to prepare the required reports had to be assembled.

In accordance with American accounting practices, securities reports were required to include consolidated statements of earnings, balance sheets and other detailed information of Sony and all its subsidiaries. Then, independent American CPAs audited Sony's financial position over the previous three years and four months. At the time, however, the concept of "consolidation" did not exist in Japan. Morita had to first figure out what "consolidation" actually meant. This was followed by a continuous stream of American lawyers and accountants visiting Japan to help, and Sony's Accounting Division staff spent days and nights preparing required documents and consolidating all their statements for the past few years.

One task arose after another. English translations were needed for the articles of incorporation, corporate register, regulations governing the board of directors and the handling of stock, and the minutes of all board and shareholders' meetings as related to the upcoming issue. Sony's board of directors and lawyers had to certify the accuracy of these translations. Moreover, the Japanese legal restrictions imposed on American investors were subject to investigation by American lawyers, and all important company regulations, contracts and patents were reviewed. Morita and his staff worked desperately to prepare everything within the short time they were allotted.

It was not all desk work. February 28 was set as an early account settlement day for the purpose of filing reports with the SEC. For that purpose, a complete inventory was conducted throughout the company. CPAs from Price Waterhouse and Robingan & Thomsons attended the physical inventory at the Sony head office, the plants in Atsugi and Sendai, the main Sony Shoji office, branch offices in Tokyo, Osaka and Nagoya, and the Sendai sales office. The inventory included all raw materials as well as partially finished and finished products. Due to the lack of preparation time, personnel were extremely busy in preparing for the audit.

Managing underwriters Smith Barney of New York and Nomura Securities handled the final procedures. Finally, after receiving the approval of the Ministry of Finance, at 1:00 p.m. on June 6 (2:00 a.m. on June 7, Japan time), the SEC officially accepted Sony's application for an ADR issue on the New York Stock Exchange. Sony's ADR issue and listing was thus finally authorized.

At the opening of trading, Sony's ADR, the first of its kind (in blocks of ten shares each) was offered at $17.50. In just one hour, however, Sony's two million shares had been completely sold. The booming popularity of the shares, which were bought at $23.00 and sold at $24.00, brought a sigh of relief from all concerned.

Finally the closing or due date arrived. On June 15, the underwriters' lawyers received delivery of the original stock certificates, examined them and transferred payment to the Bank of Tokyo. After confirmation by international telephone and telex, the issue was closed in New York without mishap. With this, Sony's ADR issue was official. At this point, Sony capital stood at 2.1 billion yen.

Sony's strategy to introduce foreign capital by actively seeking new shareholders in the United States through ADRs was an overwhelming success not only for Sony, but for other Japanese corporations which were to later follow suit.
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