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Dan Loeb's Activism May Stall at Sony (Update 1)

Tickers in this article: SNE YHOO
Updated from 9:01 a.m. to reflect the fact Mr. Loeb met with Kazuo Hirai on Tuesday, May 13.

NEW YORK ( TheStreet) -- Sony makes everything from TVs to PlayStation 3, to movies and medical equipment. Now, it's going to have to "make nice," as it's under attack by top hedge fund honcho Dan Loeb, who wants break up the Japanese conglomerate. Loeb's battle may fall short, though.

Japanese companies have typically been resistant to change, particularly from outsiders, and previous attempts to target Sony have been unsuccessful.

In an emailed statement, Sony shot down the idea of a spin-out of its entertainment business. "Sony welcomes investment in the company. We are focused on creating shareholder value by executing on our plan to revitalize and grow the electronics business, while further strengthening the stable business foundations of the entertainment and financial service businesses," wrote a Sony spokesperson. "As President and CEO Kazuo Hirai has said repeatedly, the entertainment businesses are important contributors to Sony's growth and are not for sale. We look forward to continuing constructive dialogue with our shareholders as we pursue our strategy."

Loeb, who has fought battles in the past, including a high-profile tussle over Yahoo! , wants Sony to restructure and realign itself. This would involve focusing on high-growth areas and spinning out Sony Entertainment. Loeb wants Sony to spin out 15% to 20% of the entertainment division in an IPO, which he would then backstop with $1.5 billion to $2 billion of Third Point's money. "We believe existing Sony shareholders should be given priority to participate in the direct ownership of Sony Entertainment," Loeb wrote in his letter to Sony CEO Hirai. "Therefore, we recommend that rather than conducting a standard public offering, spin-off, or dividend, the Company offer subscription rights to current shareholders."

A spin-out of Sony Entertainment would provide Sony with liquidity to turn around its electronics business, which Loeb believes has tremendous value. Sony Entertainment has some valuable movie properties, including the rights to the James Bond movie franchise and the Spiderman series, a key Marvel property not owned by Walt Disney . Sony Music Entertainment is also one of the largest labels in the world, housing artists such as Michael Jackson, Britney Spears, Daft Punk, Justin Timberlake and others.

Loeb wants Sony to streamline its business lines and focus on high-growth areas, such as the aforementioned medical devices, and Sony Image Sensor. He believes structural reforms in Sony Electronics could mean as much as 25% upside in shares, and if the Entertainment division is unlocked, shares could see as much as 60% upside from current levels.