Bloomberg News

Olympus Stock Surges as Kikukawa Quits, Woodford Goes to FBI

October 27, 2011

(Updates with goodwill in 12th paragraph.)

Oct. 27 (Bloomberg) -- Olympus Corp. shares surged the most in at least three decades after Chairman and President Tsuyoshi Kikukawa resigned amid allegations over acquisitions that caused $1.2 billion in losses.

Kikukawa quit yesterday following his Oct. 14 axing of Chief Executive Officer Michael C. Woodford, whose subsequent questioning of advisory fees and writedowns in four takeovers over the past three years led investors to dump the Tokyo-based company’s stock. Olympus rose 23 percent, paring losses that had wiped out more than half the camera and medical-equipment maker’s value in the past two weeks.

There was nothing illegal about the takeover of Gyrus Group Plc, a U.K. medical-equipment manufacturer, and the purchases of three Japanese companies unrelated to its main businesses were part of an expansion into new areas, the Tokyo-based company said in a statement to the city’s exchange today. A review of all the takeovers was under way, it said.

“Olympus had sought M&A as part of its efforts to accelerate growth in medical equipment as well as to reduce dependency on endoscopes,” new President Shuichi Takayama told reporters in Tokyo today. “The acquisition of Gyrus and the three Japanese companies were part of such a plan.”

In axing its first foreign CEO and president, Olympus cited differences over management style. Woodford says he was fired for challenging $687 million of fees paid in the $2 billion takeover of Gyrus in 2008.

PwC Report

After he was dismissed six months into the post of president, Woodford made public a PricewaterhouseCoopers report he commissioned that said the company may face regulatory and legal scrutiny because of the payments made in the acquisition of U.K.-based Gyrus.

Olympus stock dropped so much because of Woodford’s disclosure of company secrets, Takayama said, adding that there was also a “governance problem” at the company. Regaining trust will be the top priority, he told reporters yesterday.

“The company’s shares have fallen so much since October 14, so yesterday’s announcement was a good trigger for a rebound,” said Masaru Hamasaki, chief strategist at Toyota Asset Management Co. in Tokyo.

Olympus rose 23 percent to close at 1,355 yen, its biggest one-day gain since at least Sept. 11, 1974. The stock has lost 45 percent of its value since Woodford’s dismissal.

Kikukawa’s resignation failed to address the core issue of the payment of fees and 55 billion yen ($721 million) of writedowns within 12 months of making three other acquisitions, Toshiya Hari and Kenya Moriuchi, Tokyo-based analysts at Goldman Sachs Group Inc., wrote in a note published before Olympus’ statement and briefing today.

‘Not Unreasonably High’

The fee was “not unreasonably high,” according to Olympus. The company chose Axes America LLC as a takeover adviser for the deal because of its ability to negotiate and select targets, it said. Olympus said it adopted a system that decides the size of advisers’ fees based on the size of the deals.

Olympus issued a statement last week disclosing that the $687 million fees to the advisers included a $443 million buyback of preferred shares. The statement was made in response to media reports on the PwC investigation, Olympus said Oct. 19. The accounting firm said the structuring of the fee payment, including the use of share options, and the eventual cost to the company of more than a third of the transaction value was unusual.

Goodwill

Olympus booked 168 billion yen of goodwill at the time of the Gyrus purchase. The company added 41 billion yen of goodwill when it bought back the preferred shares from Axam, Axes’ Cayman Islands-based fund, the company said today.

The Gyrus-related goodwill value totaled 135 billion yen as of June 30.

“We were unable to confirm that there has been improper conduct,” said the report, a copy of which was given to Bloomberg News. “However, given the sums of money involved and some of the unusual decisions that have been made, it cannot be ruled out at this stage.”

Advisory fees in takeovers usually range from 1 percent to 5 percent of the transaction cost, two people with knowledge of such deals said, declining to be identified as they weren’t authorized to talk to the media.

Woodford will meet with the U.S. Federal Bureau of Investigation and submit documents related to the fees, he said from New York. Woodford earlier said he asked the U.K.’s Serious Fraud Office to investigate.

The FBI is investigating payments by Olympus to advisers related to the 2008 acquisition, said a person familiar with the inquiry who declined to be identified because they weren’t authorized to speak publicly about it.

Japan Regulators

In Japan, it will be up to the financial services minister to decide whether an investigation is warranted, ruling Democratic Party lawmaker Tsutomu Okubo said in an interview yesterday.

The Securities and Exchange Surveillance Commission will monitor the findings of the independent committee created by Olympus to probe acquisitions, Mario Takeno, a commission official, told lawmakers in Japan’s upper house of parliament today. The Financial Services Agency is keeping a close watch on reports about Olympus, Manabu Morimoto, head of the agency’s planning and coordination bureau, said at the same session.

Failure to act on investor concerns over the Olympus allegations risks increasing doubts about Japan’s corporate governance and the nation’s stock markets, Tokyo Stock Exchange Senior Executive Officer Masaki Shizuka told the lawmakers.

M&A Criticism

Kikukawa, 70, joined Olympus in 1964, becoming president in 2001. He was “instrumental in the company’s early move into the digital still camera market” while his “aggressive M&A strategy has met with criticism from some investors,” Goldman Sachs Group Inc. wrote in a report Oct. 12, upgrading its rating on the stock to “buy.” Goldman suspended its coverage after Woodford’s dismissal.

During Kikukawa’s tenure, Olympus’s sales grew 82 percent to 847 billion yen while operating profit remained almost unchanged at around 35 billion yen. Kikukawa oversaw about $4.3 billion in 31 acquisitions of companies including Gyrus and ITX Corp., according to data compiled by Bloomberg.

Takayama, a 61-year-old electrical engineer, joined Olympus in 1970. He held various positions, including head of the technology development planning unit and personnel chief, before taking the helm at the camera business in April.

The imaging systems unit turned to a loss of 15 billion yen in the year ended March 31. The unit’s profit fell to 3 billion yen in the previous year, a 10th of the 33 billion yen it earned in the year ended March 2008, Bloomberg data show.

Cayman Islands-incorporated Axam Investments Ltd., which received $670 million of the advisory payments, was removed from the local company registry in June 2010 for non-payment of license fees, three months after receiving its final fees from Olympus, according to the PwC report.

--With assistance from Go Onomitsu, Takashi Hirokawa, Kyoko Shimodoi, Masaaki Iwamoto, Jason Clenfield, Yuki Yamaguchi, Takashi Amano, Dave McCombs, Chris Cooper, Naoko Fujimura and Kazuyo Sawa in Tokyo and Ben Richardson in Hong Kong. Editors: Ben Richardson, Frank Longid

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Peter Langan at plangan@bloomberg.net


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