Judgment day for Japan Inc
A little-known Japanese financial magazine called Facta deserves congratulations for raising questions about possibly shady financial transactions at the camera, optical and medical equipment maker Olympus.
Olympus itself has tried to shrug off the questions even as its share price fell by half and wiped US$4 billion off its value. But the real key is how Japan Inc reacts, and that will raise questions about whether Japan is a sensible place to invest.
Some of the claims concerning Olympus are large, including questionable purchases of almost US$3 billion of overpriced companies whose values were subsequently written down, payments of US$697 million, or 36 per cent of the value of the deal in question, to mysterious entities incorporated in the Cayman Islands and New York, which no longer exist, losses of up to US$1.3 billion on the deals, the sacking of the foreign chief executive and rumours that gangsters may be involved.
In most self-respecting countries, almost every aspect of the affair would have dominated the news. There would have been speculation about how long the chairman could survive, and whether the company would recover from the shock. The financial authorities would have de-listed the stock to investigate. Yet in Japan, none of this has happened, although Olympus' chairman Tsuyoshi Kikukawa has withdrawn from a forum tomorrow where he was scheduled to speak on 'Global social responsibility from Japan to the world'.
In Britain, the sacked chief executive, Michael Woodford, has asked police to investigate because one of the companies acquired, Gyrus, a maker of non-invasive surgical technologies, is based in the country and payments went through British banks. The US FBI is investigating the connections of two US-based bankers with the Gyrus deal.
In Japan, however, the financial services minister declined to comment and the Tokyo Stock Exchange has not declared Olympus 'a security under supervision', although it has asked for more information.
Only after the outcry did the company's largest shareholder, Nippon Life with about 8 per cent of Olympus' stock, press Olympus to explain itself, and the company has promised a third-party committee to investigate. Media coverage is muted.
The February appointment of Woodford, who was head of the company's European operations and does not speak Japanese, as president of Olympus raised eyebrows, not least because he by-passed Japan's seniority system. But Woodford had turned around the firm's European business, so that today it accounts for 40 per cent of profits.
Kikukawa also told a press conference that he wanted Woodford to change the company and cut costs after Olympus lost money in 2009 and was failing to reach its potential as a world leader in optical and medical equipment.
In light of these comments, Woodford's sacking on October 14 for his alleged failure to master Japanese business ways seems a poor excuse. This is especially so when Woodford claims he was sacked at a board meeting that lasted 10 minutes and he was not allowed to speak.
The reason for the parting of the ways is clear enough, according to Woodford. Articles in Facta had alerted him to questionable transactions by Olympus, possibly involving criminal gangs. He did not get satisfactory answers, so he asked PricewaterhouseCoopers to do an audit.
When this raised more questions, he wrote to Kikukawa calling him to account for 'a catalogue of calamitous errors and exceptionally poor judgment ... which has resulted in the destruction of shareholder value of US$1.3 billion'.
PwC noted that the US$687million fee paid to the two US entities was 36.1 per cent of the value of the deal against a normal 1 per cent. It was seven times Olympus' net profits last year, and three times bigger than the previous record fee for mergers and acquisitions advice. PwC was 'unable to confirm' improper conduct, but unable to rule it out, and listed 'other potential offences to consider, including false accounting, financial assistance and breaches of directors' duties by the board'.
Whether or not there was wrongdoing, the acquisitions of three small companies in Japan with very different operations - making microwaveable cookware, recycling medical waste, and online cosmetics - none of which fit Olympus' traditional business seem highly questionable. Gyrus was a better fit, but the price was high and the fee for advice extreme. Woodford was right to ask the questions. Did Kikukawa take him for a patsy?
The immediate questions are for Olympus, but the bigger problem lies with Japan Inc. Unless the authorities insist on an urgent, full, independent and vigorous investigation, questions will remain for the country as well as for the company. Coming hard on the heels of the nuclear disaster at Fukushima and the obfuscation by Tokyo Electric Power, Japan's reputation is on the line.
Kevin Rafferty is author of Inside Japan's Powerhouses, a study of Japan Inc and internationalisation
of the transaction is the normal fee that is paid for corporate M&A advice, yet Olympus paid 36% to mysterious foreign companies