The Olympus scandal

The Olympus scandal

IT TOOK a while. But this week Olympus attempted to answer a question that has been making investors jumpier than a man with a scorpion in his trousers. Why did the Japanese camera-maker shell out $1.3 billion in deals that had little to do with its core business and seemed unlikely ever to make a decent return?
Olympus paid a $687m advisory fee relating to its purchase of Gyrus, a British medical-devices firm, in 2008. The fee was more than 30% of the purchase price, when 1% would have been more normal. It went to a firm in the Cayman Islands and another in New York; both are now defunct. Olympus also paid $773m for three unprofitable firms (a cosmetics company, a maker of plastic containers and a waste-disposal business). It wrote off 76% of their value within a year.

Why did Olympus’s managers approve such unusual payments? On November 8th the company confessed that the deals were designed to hide losses on securities dating back to the 1990s. Olympus’s new president, Shuichi Takayama, said that three Olympus executives were implicated. Yet only one, Hisashi Mori, a vice-president, was dismissed by the board. (He chose to remain as a director.) As for the other two, Olympus said that the corporate auditor, Hideo Yamada, “expressed his intention to offer his resignation”, whatever that means. The other, Tsuyoshi Kikukawa, resigned as chairman after the scandal broke. But he remains on the board and, Mr Takayama says, still goes to work every day. Mr Takayama suggested that the three men “inherited” the practice of hiding losses from previous managers.

The scandal first hit global headlines on October 14th, when Michael Woodford, a Briton who had recently taken over as Olympus’s boss, was sacked. Mr Woodford had just told the board that the unusual payments merited investigation. The company says he was removed because of his inability to grasp Japanese corporate culture, despite his 30 years at the firm.

Mr Takayama said that Olympus might have uncovered the improper activity without Mr Woodford. He also said that “no money flowed out” of the company and that its value remained unchanged.

Investors are unconvinced. Olympus’s shares fell 29% on November 8th, their daily limit. They are now 80% lower than before Mr Woodford was ousted. The Tokyo Stock Exchange has placed the firm on a watch-list for delisting.

Plenty of questions remain. How did the loss-hiding actually work? Since when has it been going on? How much money was involved? The company refuses to say until an independent panel concludes its investigation, says Mr Takayama.

Mr Woodford calls on the entire board to resign, and for forensic accountants to be brought in urgently to do a thorough review. He says Olympus’s underlying operations, especially its medical-devices business, remain sound. But he believes that the company’s very survival is threatened by the ongoing uncertainty as to what has happened to its accounts. He also says he is concerned that the firm’s Japanese shareholders have taken no action, and that the Japanese authorities have not contacted him in relation to investigating the scandal.

Meanwhile, shares in Nomura, a big Japanese securities firm, plunged by 15% on November 8th after the firm said that Japanese media reports that it might have been involved in the loss-hiding were “based on speculation and not on fact”.

source: economist.com