Steel Partners Japan Calls on Ishihara Chemical to Reduce Non-core Assets

TOKYO--(BUSINESS WIRE)--Steel Partners Japan Strategic Fund (Offshore), L.P. (“Steel Partners”) today sent to Ishihara Chemical Co., Ltd. (OSE:4462) (“Ishihara” or the “Company”) a letter raising concerns about the Company’s failure to reduce the size of its investment portfolio, including cross-shareholdings in Japanese companies with which it has no apparent synergies, and stating concern regarding the adverse effect its significant investment losses have on Ishihara’s corporate value.

Steel Partners highlighted that it had met with Ishihara’s management team on several occasions from August through October 2008 to provide suggestions on how to improve Ishihara’s corporate value. In those presentations, Steel Partners stated concern regarding Ishihara’s significant non-core assets, over 60% of which were investments in various securities, including cross-shareholdings in two companies with which Ishihara has little synergy.

“We questioned how these investments furthered Ishihara's corporate philosophy, highlighted the significant decline in the value of these investments, and reminded you that management is responsible for running a chemical company, not an investment portfolio,” wrote Warren Lichtenstein of Steel Partners.

Steel Partners noted that the Company’s long-term investments lost 476 million yen in value over the twelve months ended March 31, 2008, while the Company’s investment portfolio has been in a decline for a number of months and continues to be a significant drag on Ishihara’s value. Over 88% of Ishihara’s recent reduction in its net income forecast for the first half of the fiscal year ending March 31, 2009 is due to investment losses.

Steel Partners urged management to seriously consider proposals it made earlier in 2008, including an organized divestiture of marketable securities and a return of capital to shareholders either through share repurchases or special dividends.

Steel Partners has been an investor in Ishihara since July 2003 and, together with its related parties, is the largest shareholder of the Company, holding 505,600 shares, or approximately 6.8% of the Company’s outstanding shares.

Full text of letter to Ishihara follows:

November 6, 2008

Ishihara Chemical Company, Ltd.

5-26 Nishiyanagiwara-cho Hyogo-ku

Kobe, HYG 652-0806 Japan

Attention: Kanji Takemori

Steel Partners Japan Strategic Fund (Offshore), L.P.

P.O. Box 2681 GT, Century Yard, 4th Floor

Cricket Square, Hutchins Drive

George Town, Grand Cayman

Cayman Islands, British West Indies

Dear Mr. Takemori:

As you know, Steel Partners Japan Strategic Fund (Offshore), L.P. ("Steel Partners"), together with our related parties, currently owns approximately 6.8% of the outstanding shares of Ishihara Chemical Company, Ltd. ('Ishihara" or the "Company").

We have owned shares of Ishihara since July 2003, in line with our philosophy of being long-term, patient shareholders. During that time, we have met with your management team on several occasions and, from August through October 2008, we discussed suggestions that we believe could help improve Ishihara's corporate value. In our presentation, we stated our concern regarding Ishihara's significant non-core assets, over 60% of which were in various securities, including cross-shareholdings in two companies with which Ishihara has little synergy. We questioned how these investments furthered Ishihara's corporate philosophy, highlighted the significant decline in the value of these investments, and reminded you that management is responsible for running a chemical company, not an investment portfolio. We noted that the Company's long-term investments lost 476 million yen in value over the twelve months ended March 31, 2008. The Company's investment portfolio has been in a decline for a number of months and continues to be a significant drag on Ishihara's value.

The Company recently lowered its forecast for the fiscal year ending March 31, 2009; first, on October 17, in respect of Ishihara's first half performance, and then, on October 29, in respect of Ishihara's full year projections. The Company should divest itself of its money-losing investments, which tie the Company's (and its shareholders') fortunes to the misfortunes of unrelated companies. We continue to believe that holding a portfolio of marketable securities in unrelated companies is harmful to Ishihara's shareholders, especially as over 88% percent of Ishihara's recent reduction in its net income forecast for the first half of the current fiscal year is due to investment losses.

We are not alone in believing that it is inappropriate for an operating company to invest its capital in the marketable securities of unrelated companies with which it has little or no synergy. The Asian Corporate Governance Association, in its "White Paper on Corporate Governance in Japan" published in May 2008, was highly critical of companies holding excessive cash and positions in marketable securities. Holding marketable securities represents an extremely poor use of corporate funds, as it bloats balance sheets and diverts capital away from a company's core businesses. If there is no further need to reinvest a company's earnings into its core operations, the surplus cash should be returned to its shareholders, who are not only the owners of the company but also the owners of its residual earnings. Furthermore, holding marketable securities of unrelated companies is a risky and unnecessary diversion of management attention. Sound financial practices require that excess earnings not being efficiently utilized by a company should be returned to its shareholders.

When a company holds marketable securities of other companies, it increases its asset base, which drags down its return on equity and undermines its corporate value, even where there is potentially strong operational performance. As illustrated by recent market activity, committing significant corporate assets to other companies' securities exposed the Company's shareholders to unnecessary market risks because declines in the share prices of the companies in Ishihara's investment portfolio adversely affected Ishihara's overall financial performance. According to our calculations based on the figures referenced in Nikkei newspaper's October 9, 2008 article regarding a survey of 2,273 Japanese listed operating companies whose fiscal year ends on March 31, those Japanese companies' aggregate impairment due to cross-shareholding is 3.1 trillion yen for the first half of the fiscal year ending March 31, 2009, a significant increase over their aggregate impairment of 0.3 trillion yen for entire fiscal year ending March 31, 2008. Write-downs by companies for investment losses have a very real impact on shareholders, including pensioners, and should not be ignored. We once again suggest that management seriously consider the proposals we made earlier this year, including an organized divestiture of marketable securities and a return of capital to shareholders either through share repurchases or special dividends.

I am available to meet or speak with you at your convenience. Please feel free to contact me anytime.

Sincerely,

Warren G. Lichtenstein

Copy to: Thomas J. Niedermeyer, Jr., Managing Partner

About SPJSF

Steel Partners Japan Strategic Fund (Offshore), L.P. is a long-term relationship/active value investor that seeks to work with the management of its portfolio companies to increase corporate value for all stakeholders and shareholders.