Terrie's Take 638 -- Olympus - What Happens Next? ebiz news from Japan

Mon Nov 14 08:30:09 JST 2011

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, November 13, 2011, Issue No. 638

+++ INDEX

- What's New -- Olympus -- What Happens Next?
- News -- Geiger counters made in Fukushima
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback -- Correct price of nuclear power
in Japan
- News Credits

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+++ WHAT'S NEW

Normally we don't comment on the same topic in quick
succession, the last time being the earthquake. But given what
is happening to Olympus and the ripples this incident is
casting on the corporate reputation of Japan, in a way
Olympus is the magnitude 9 earthquake of the commercial
world.

Today, we speculate on what will happen to Olympus over the
coming weeks and months.

It's been interesting following the media coverage of
Olympus, because on one hand you've got the Western media
deciding that a felony has been committed and that it is
only a matter of time before Kikukawa and the other senior
management for the last decade get their's. Then you have
the Japanese press saying oh so carefully that maybe what
Kikukawa and the others did was to protect unfortunate
losses of a previous administration and so maybe they were
in a sense honorable men trying to keep the a leaky ship
afloat.

Certainly it appeared for a few days last week that the
legal and regulatory bodies in Japan might not take action
and instead sit back and let the new (old) management in
Olympus ride the storm out. If this had been the case,
there would have been only a superficial investigation, and
at worst, Kikukawa and several others would have to fall on
their swords in an honorable way. And in fact this might
still happen.

[Continued below...]

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[...Article continues]

However, the powers that be have decided to act, and since
no one wants to be seen to be left out, the Tokyo District
Public Prosecutors Office, the Tokyo Metropolitan Police
Department and the Securities and Exchange Surveillance
Commission have all decided to pile in and investigate
possible fraud. It would be interesting to know who gave
the green light for them to suddenly move.

Our take, for the record, is that this is a massive case of
investor fraud, of the "window dressing" variety -- similar
to the misdeeds of Seibu's Tsutsumi, who received a 3-year
suspended sentence, and Livedoor's Takafumi Horie, who
received a 3-year prison stretch. The only difference is
that this case is about 1,000 times bigger -- so will that
earn Kikukawa a 3,000-year prison sentence? Unlikely. We
think he will do the same time as Tsutsumi: i.e., a
suspended sentence. All he has to do is to hold his tongue,
as Horie was unable to do. He will probably be held in
detention for a while though.

But before Kikukawa gets dragged away by the police,
another interesting event will happen, and probably is
happening already -- that of risk-oriented investment funds
jumping in to buy Olympus shares at rock bottom prices.
Corporate Japan and large pension funds love to invest in
bedrock companies like Olympus. However, any time such a
company is tainted by scandal they drop its shares like a hot
potato, without any consideration as to whether there will be
residual value after the storm is over. So it was that
Olympus shares were "limit down" for several days and
continued to lose value even on Friday.

This rather predictable behavior by big domestic
shareholders is something that contrarian (largely foreign)
investors love and can be a huge source of profits. A
recent example of a similar case would be LiveDoor in 2006.
In the month or so after Horie was taken into custody until
the company was actually delisted, its shares dropped a
massive 98%. Despite the huge pending lawsuits, alleged
underground related companies, and other risks, the
opportunity was too good to pass up, and foreign funds
bought almost 60% of Livedoor's outstanding shares. Then,
once the company was delisted, they set about cleansing the
company of senior managers and illicit assets, settling law
suits, and reconditioning the remaining assets. In the end,
they salvaged almost a billion dollars on an investment of
15% of that amount. Not a bad return, although stressful
for those involved at the front line.

Now, Livedoor was an Internet company with assets of
uncertain value and not much other substance. Olympus on
the other hand has manufacturing, patents, 34,000
employees, and a global sales/service network. Since the
Olympus management are calling in the auditors to redo the
financials for the last five years, and possibly for the
last ten, we cannot calculate what the actual value of the
company is. But the smart money out there is thinking that
it's something north of JPY124bn. We say that because the
selling stopped at JPY440 per share and bounced back up
to JPY460 on Friday.

We think that a delisting of Olympus is highly likely,
since it is hard to see the auditors being able to work
back through at least five years of financials and have
them ready before the TSE deadline of December 14th.

Therefore, once the investment funds have control, which
will occur when 4-5 of them have sufficient stakes to push
changes at management level, they will require a change at
the head of the company and resignation of the board in
its entirety. At that point, a lot will depend on the
government and its stance over a possible foreign takeover.
If PM Noda, in an effort to show that Japan is worthy of
involvement in TPP, decides to take a back seat, then the
investment funds will logically invite Michael Woodford
back in to run the business, but they will probably look
to keep him on a short leash, giving him with a lucrative
mandate to bridge the corporation to an M&A, rather than
to continue running the business long-term -- incompatible
management styles and all that. At the same time as
Woodford comes in, the funds will put a Japanese senior
person in at a COO level, and this person will wind up
running the business after it is sold off.

As far as the sale of assets is concerned, probably the
company will be broken up. Acquisitions like Gyrus will be
put back out on the block early, so as to pay down some of
the massive debts the company now has, while the core
businesses will be split up. Cameras will get sold off, but
the endoscope business will be held back since this is the
jewel in the crown and makes JPY69.3bn of operating profit
annually. That business will be either refloated or held
until global economic conditions fetch a much higher price.

Now, we mentioned the Japanese government. They may not
take kindly to "vulture funds" tearing apart a bedrock
company, especially one that supplies the medical sector.
Therefore, they will either set some operating requirements
for any funds owning the business, OR, they will step in
and direct that the funds only sell to another Japanese firm
-- someone such as Terumo or Matsushita.

...The information janitors/

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+++ NEWS

- Geiger counters made in Fukushima
- Japan becomes largest market for Viet plastics
- September current account surplus slumps 21.4%
- Believe it or not, Japan No. 1 as tourism brand
- Japan commits to participating in TPP

-> Geiger counters made in Fukushima

A company called Sanwa is making low-cost, high quality
personal Geiger counters in Fukushima. The company is
actually based in Fukushima, and the President was fed up
with seeing people around him worried about radiation and
not being able to trust government radiation surveys. The
new Geiger counters costs just JPY18,800 and will measure
0.04uSv/hr to 440uSv/hr. The comapny is also working on
producing its own Geiger-Muller tubes, so that it can bring
the pricing and device sizes down even further. (Source: TT
commentary from mainichi.jp, Nov 7, 2011)

http://mdn.mainichi.jp/mdnnews/news/20111107p2a00m0na020000c.html

-> Japan becomes largest market for Viet plastics

Reinforcing the fact that Vietnam and Japan have close
relations, the Vietnamese Ministry of Industry and Trade
reported that the nation's plastics exports for the first
10 months of 2011 to Japan reached US$1.1bn, a 31%
increase over the same period in 2010. October shipments
surged almost 35% ahead of the same period last year.
***Ed: We will see an increasing shift to Vietnam from
manufacturing in China, as Japanese companies seek to
diversify and also to reduce costs now that Chinese coastal
wages are climbing. Still, US$1bn is just 10% of the value
of plastics shipped from China to Japan in 2009, indicating
this is still an emerging trend.** (Source: Vietnam News at
google.com, Nov 12, 2011)

http://bit.ly/s5Vt3d

-> September current account surplus slumps 21.4%

One of the reasons the Japanese yen is seen as a haven
currency in the FX markets is because Japan runs an ongoing
current account surplus and therefore is theoretically able
to trade its way out of its public debt hole. However, this
happy state of affairs may soon come to an end, as Japan's
current account surplus continues to tumble. The Ministry
of Finance says that the surplus in September fell 21.4%
from JPY2trn in 2010 to JPY1.5trn. ***Ed: Nonetheless, the
drop was less than forecast, especially after a miserable
64.3% drop in August y-o-y, and so the markets perked up
at the news.** (Source: TT commentary from reuters.com, Nov
8, 2011)

http://reut.rs/tnMsic

-> Believe it or not, Japan No. 1 as tourism brand

FutureBrand calls it the "paradox of bad news" as it
explains the results of its 2011 - 2012 Country Brand Index
(CBI). The company says that as a country brand globally,
Japan has strengthened its standing to no. 4, behind
Canada, Switzerland, and New Zealand. What is completely
surprising, though, is that Japan came out top as a
preferred tourist destination amongst the focus groups
tested. ***Ed: This should perk up the JTA and the travel
industry in general -- indeed, 2012 could be a strong year
for travel to Japan if this study is any indication.**
(Source: TT commentary from futurebrand's website, Nov 8,
2011)

http://www.campaignbrief.com/2011/11/futurebrand-releases-results-o.html

-> Japan commits to participating in TPP

In a move that may spell the end of his short spell as PM,
or will in time be seen as a brilliant counterstrike
against China that secured him a much longer term, PM
Yoshihiko Noda has taken the step of committing Japan to
the Trans-Pacific Partnership (TPP) talks. TPP will require
Japan to open up its agricultural and other markets, and is
creating a huge backlash by conservatives. ***Ed:
Personally, we think TPP will be a huge tonic for Japan.
While it will certainly damage the nation's food
 self-sufficiency and upturn a number of commercial
sectors, it will force change on the nation and speed up
the realignment of power from 6m farmers and 1m doctors, to
the public majority. Nothing like a bit of "Gaiatsu" to
bring about changes that domestic politics is unable to
achieve... :-)** (Source: TT commentary from e.nikkei.com,
Nov 12, 2011)

http://e.nikkei.com/e/fr/tnks/Nni20111111D1111A08.htm

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

***------------------------****-------------------------***

+++ CANDIDATE ROUND UP/VACANCIES

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***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors at terrie.com.

*** In TT-636 we reported that the Japan Atomic Energy
Commission has released figures estimating that the cost
of Japan's nuclear power has risen about 20% due to the
Fukushima accident, and now costs consumers around
JPY1.1kW/hr. This was a mistake by us as a reader points
out.

=> Our reader comments:
That estimated cost figure seemed way too low (even for
the AEC, which has a record of providing low figures for
the costs of nuclear power.) So I went to your source (the
Yomiuri), and to be fair to the AEC, found that what it
announced is that it has calculated the costs needed to
prepare for future major accidents at nuclear power plants
as JPY1.1 per kWh, a sum which they claim is about 20% of
the cost of generating nuclear power under the current
system.

The AEC's estimates of the cost of generating nuclear
energy in Japan (about 5JPY/kWh) are still less than half
what some independent academic experts say it is (about 12
JPY/kWh). But even using the AEC's own numbers, this
announcement is interesting as it acknowledges for the
first time that nuclear accidents can happen (previous
calculations have been based on the assumption that they
could not) and creates a means for those costs to be
factored in.

***********************************************************
END

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+++ ABOUT US

STAFF
Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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