a recap

During the summer, the newly appointed CEO of Olympus, Michael Woodford, followed up on an account in a Japanese magazine of severe financial irregularities at Olympus (TYO: 7733).  He discovered a number of failed M&A transactions involving gigantic payments to obscure companies that disappeared from existence soon after receiving the money.

He was fired for his pains.  He promptly left Japan, saying he feared for his personal safety.  Once in the UK, he disclosed everything to the world financial press.

An independent panel was appointed by the Olympus board of directors to investigate the situation.  The panel determined that Olympus had engaged in speculative “financial engineering (zaitech)“, presumably arranged for it by its investment bankers, starting in the late 1980s.  Like virtually everyone else who did this in Japan, Olympus lost its shirt.  It covered the losses up, again presumably using a service (tobashi) provided by its brokers.  This generated a cycle of progressively larger cover-ups and money-losing speculations that lasted over two decades.  The fake M&A was an attempt to get money to pay off creditors and end the cycle once and for all.

what’s new

Olympus has avoided delisting by providing the Tokyo Stock Exchange with accurate accounting statements by a mid-December deadline.  The “new” Olympus has book value of about a third of what it had previously claimed.

The stock lost about 60% of its value since the Woodford firing.

Two American funds managers appear to have held close to 10% of the company’s stock at the time the scandal broke.

The newest chairman of Olympus appears to me to be proposing that:

–the company’s board needs only a symbolic shakeup (where one or two members make a ritual expression of regret and resign), and

–Olympus should recapitalize by issuing stock to other members of the Fuji group, like Canon or Fuji Film.

my thoughts

Olympus is a typical Japanese technology-related company.  It’s torn between the need for constant innovation to keep up in  an increasingly complex and rapidly evolving world and its presence in a social/cultural environment where preserving the status quo is acknowledged as perhaps the highest goal.

Current management seems to be in the process of arranging a “traditional” solution to Olympus’s problems–one that doesn’t probe too deeply and where a new corporate direction launched by change of management is completely out of the question.  It sounds like other Fuji companies are willing to help this happen.

In other words, business as usual in Japan.

My guess is that this is the most likely outcome.  After all, except for what I think of as counter-culture companies run by younger Japanese, this has been standard operating procedure when companies get into trouble for the twenty-five years I’ve been watching the Japanese stock market.

Any signs that this time will be different should be studied carefully for potential to be a bellwether of change. (I’m not optimistic, though.)

I’m most curious about the foreign professional investors who  held large positions in Olympus.  Didn’t they know anything about Japan?  Did they really think that buying companies with low price to book or price to cash flow ratios would bring the same kind of success it does in the US?  Didn’t they see that this approach has failed time after time in Japan?

Apparently not.