Nihon Kohden is a prominent Japan-based company that specializes in the research, development, manufacture, and sale of medical electronic equipment. With a market value of $2.6 billion, Nihon Kohden is a significant player in the medical devices industry. This article will explore the company’s potential for value generation and its path to globalization.

ValueAct, a premier corporate governance investor, has been actively involved in the promotion of corporate governance for over two decades. The company has a track record of success, with its principals serving on the boards of half of its core portfolio positions. With 56 public company board seats over 23 years, ValueAct has gained extensive experience in activism.

ValueAct’s co-CEOs, Rob Hale and Mason Morfit, also co-manage the firm’s Japan fund. Notably, Hale serves on the boards of Japanese companies, which is a pioneering action for U.S. activist funds. With 26 prior international activist investments and an average return of 36.19%, ValueAct has proven its expertise in this field. Two of its most successful investments, Olympus and JSR, were Japanese companies where Hale held board positions.

Nihon Kohden is a leading medical devices manufacturer and distributor in Japan. The company has gained a dominant market share at home and has established an excellent reputation internationally for its reliable delivery, quality products, and exceptional service. With a focus on medical diagnoses, Nihon Kohden offers a wide range of devices, including electroencephalographs, electrocardiographs, and diagnostic information systems.

Notably, Nihon Kohden has the potential to follow a path to globalization similar to that of Olympus, another successful investment by ValueAct. While Olympus derives 80% of its revenue from outside of Japan, Nihon Kohden currently generates approximately 40% of its revenue from international markets. With innovative products and a desire to expand globally, Nihon Kohden has the opportunity to pursue a growth strategy that mirrors Olympus’ success.

To unlock its full potential, Nihon Kohden must focus on three primary levers for value generation. First, the company needs to improve its operating margins, which currently stand at 10%. Despite having a strong reputation and 60% market share in Japan, Nihon Kohden lags behind its competitors in terms of operating margins. By capitalizing on the U.S. market, where it has 10% market share and proprietary products, Nihon Kohden can quickly increase its operating margins to 15% and achieve incremental improvement in the following years.

Second, Nihon Kohden can create value by optimizing its revenue mix between hardware and consumables/services. Historically, the company has focused on hardware sales, with revenue evenly split between hardware and consumables/services. However, Nihon Kohden can increase its revenue from consumables and services, which offer higher margins and a recurring revenue stream. By pursuing this strategy, Nihon Kohden can drive a 20% growth in profits over the next three years.

Third, the company can benefit from disciplined capital allocation. Currently, Nihon Kohden holds net cash equivalent to about 15% of its market cap. By deploying this capital strategically, Nihon Kohden can create value through share repurchases or targeted mergers and acquisitions. Share repurchases, which have been increasing in popularity in Japan, can help Nihon Kohden achieve a higher valuation.

ValueAct is known for its collaborative and amicable approach to activism. Before building a significant position, the firm spends time getting to know the management team and engaging in dialogue with key stakeholders. In the case of Nihon Kohden, ValueAct likely developed a high degree of respect for CEO Hirokazu Ogino and the rest of the management team.

ValueAct does not aim to force its way into board seats but rather seeks organic dialogue and harmony with management. The firm only takes a board seat when both parties believe that ValueAct can add value. Similar to its experiences with Olympus and JSR, ValueAct had successful engagements that delivered significant returns. With a collaborative mindset, ValueAct and Nihon Kohden’s management are likely aligned on margin improvement and capital allocation strategies.

Nihon Kohden, a leading medical devices manufacturer in Japan, has significant potential for value generation and a clear path to globalization. With the support of ValueAct, a pioneer in U.S.-led international activism, Nihon Kohden can improve its operating margins, optimize its revenue mix, and make disciplined capital allocations. By following in the footsteps of successful companies like Olympus, Nihon Kohden has the opportunity to double its stock value in two to three years. With a collaborative approach to activism, ValueAct and Nihon Kohden’s management can work together to unlock the company’s full potential and achieve long-term success.


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