lessons from Olympus Corp (7733:JP)

the latest chapter in the Olympus story

In an earlier post, I’ve written about the events that led up to the firing of Olympus’s newly-appointed CEO Michael Woodford.

On Halloween, according to the Wall Street Journal, long-time Olympus executive Hisashi Mori revealed to replacement CEO Shuichi Takayama–who had been defending Olympus vigorously against Woodford’s accusations–the truth about the situation.

That is, the apparently bizarre investment banking activity Olympus had engaged in was a sham.  The excessive payments, the shell companies, the subsequent writedowns, were all designed to funnel hundreds of millions of dollars out of operations.  The cash was used to cover massive losses run up in speculative portfolio trading.   A small coterie of company insiders had kept them from public view for as much as twenty years through fraudulent accounting.

My immediate reactions?

Two of them:

Wow!   …like a bad novel.

–and–

Wow!  …welcome to Japan.

on further consideration

As to Olympus itself, I think there’s lots more to come.  You don’t need a half-billion dollars to fix inflated balance sheet entries.  Writedowns do that.  This isn’t about paper losses that haven’t been recognized.  It’s about active investment accounts that can’t be closed until debts are paid off.   Who are the lenders?  Was the debt collateralized by, say, Olympus plant and equipment?  How was this all hidden for years?

In general, Olympus illustrates how traditional Japanese companies have one foot–and perhaps both–firmly planted in a samurai-like world that’s governed by a rigid system of rights and obligations among insiders.  In this world, shareholder value has no place.

Companies like this can trade at far below the value of their assets.  But that doesn’t mean they’re cheap.  Nor is it, in my opinion, because investors think the books of such companies are as cooked is Olympus’s seem to be.

I think they trade at prices that make a Western value investor salivate because experienced market participants understand that the company won’t use its assets for the benefit of shareholders.  Managements are happy to destroy the assets, if need be, so they can preserve the jobs and relative status of management and employees.  Outsiders, including holders of the company’s equity, don’t count.

investment implications

One is to avoid these apparently asset-rich companies.

More important, it seems to me there has been a wholesale rejection of this modus operandi by younger Japanese citizens.  The “counter-culture” companies the latter run operate along profit-maximization, shareholder-friendly principles.  They also find their samurai-generation rivals easy pickings.  That’s where I think any investor interested in Japan should look.  Many are worth considering even for those with no need to be in Japan, because they then to be really good companies.

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