TT-635 -- Roller Coaster of Olympus Meltdown, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, October 23, 2011, Issue No. 635


- What's New -- Roller Coaster of Olympus Meltdown
- News -- Suntory to buy out Evian & Volvic?
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback -- Right wingers with too much time
on their hands
- News Credits

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An amazing story is unfolding before us here in Japan
involving over a billion dollars of potential fraud. At the
heart of the scandal is an autocratic Chairman, who may or
may not have bilked investors in his public company of that
huge sum. The company we're referring to is Olympus, and
the ruler of that fiefdom is Tsuyoshi Kikukawa.

The way the events have unfolded, well you couldn't write a
better fiction novel.

Olympus was founded in 1919 and early on in its existence
decided that microscopes and scientific optical gear would
be its domain. It's had a number of corporate captains
since the passing of the founders and the current one is
Chairman Kikukawa. He is a product of Japan's golden age,
entering Olympus straight out of law school in 1964 and
rising gradually through the ranks until he was running the
show in 1998. Around him are similar directors and
managers, all of whom are loyal and eager to please, and
like their boss they have mostly risen up through the
ranks by being generalists and playing the corporate
game well.

[Continued below...]

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[...Article continues]

In 2006, Kikukawa realized that the Japanese domestic
market was grinding to a halt, dragged down by politics and
a declining economy, so he contacted an acquaintance named
Hajime 'Jim' Sagawa, an ex-Nomura banker living in New York
since 1980, to start looking for foreign acquisitions.
Sagawa apparently quickly identified Britain's Gyrus as a
takeover target and Olympus bought the company in 2008 for
the impressive sum of US$2.2bn. Sagawa appears to have had
two companies involved in taking commissions from the Gyrus
deal, one, AXES in New York, which received a modest fee
income of US$7m, and the other AXAM, which eventually
received US$620m and was based in the Cayman Islands, well
outside the reach of the U.S. taxman. AXAM was
de-registered shortly after the transactions were
completed. How convenient.

After acquiring Gyrus, a major company in its own right,
Kikukawa got to see how a top-rank western company is run
and no doubt realized that the future lay in competitive
practices that relied less on corporate politics and more
on information, cost-control processes, and IT. To make
sure that the acquisition went well, he offered a rising
star in the Olympus Europe business, Michael Woodford, a
senior position in Japan. Woodford quickly settled into the
new position, and within 6 months, Kikukawa had kicked
himself upstairs (to Chairman) and installed Woodford as

What Kikukawa hadn't counted on, however, was the fact that
he was hiring a tiger into his team of Tokyo-based donkeys
-- hard-working donkeys, yes, but in the end men who would
say yes when required to. Woodford, though, was the product
of a cut-throat corporate culture in Europe, and upon
landing the top job at Olympus Head Office apparently
started setting about making sure that his position was
secure from outside (or inside) attack. From what Woodford
says, it very quickly became clear to him that not only was
there a lack of competency in the senior management on the
board, but that some troubling financial transactions had
occurred as well.

He started digging, bringing in PwC to audit the
transactions, and what he found shocked him enough that he
must have realized he was sitting on a powder keg and had
better cover his back. Survivor that he is, he moved
quickly and confronted Kikukawa and the Olympus board with
the evidence. It was a personal broadside they couldn't
handle, perhaps because they were involved in the fraud or
perhaps because they realized they would be cast as being
incredibly incompetent. Either way, Woodford's evidence
would cost them their jobs. So they moved first and
unanimously fired Woodford for "not understanding the
necessity of drawing on the corporate and Japanese culture
in running the business."

But you don't want to corner a tiger, and what they didn't
know is that Woodford had plenty of resources to fight
back, including the smartest move of all -- he went to the
Serious Fraud Office in the UK, since the Gyrus acquisition
happened there, and provided evidence of suspicious
payments between Olympus and the advisors of the Gyrus
deal. We're not talking about the typical 1%-2% fees that
most brokers would receive on a US$2.2bn transaction, but
instead a whopping 30% -- which Reuters has since reported
is the largest M&A fee ever made anywhere! As a point of
contrast, the largest fee paid up until then was a US$217m
commission paid by RFS Holdings (Royal Bank of Scotland)
for a EUR70bn takeover of ABN AMRO in 2007. Puts things
into perspective doesn't it?

Woodford also found out about 3 other unusual and hugely
expensive transactions here in Japan as well, which we
believe pretty much prove that Kikukawa and co. were up to
something shady. PwC found out that Olympus had paid about
JPY80bn (at that time around US$773m) for 3 tiny, privately
held companies in Japan, which between them weren't making
more than JPY3bn in revenues and which were in areas
totally unrelated to the Olympus core business. Just the
year after the three deals were done, Olympus quietly wrote
down the purchases by more than 70%, or around US$586m in
impairment losses.

It is unbelievable that the management of such a major public
company would make such terrible purchasing decisions
repeatedly and allow themselves to lose such a huge amount
of company money. One mistake could be considered
incompetence, but four times running implies something much
more suspicious and deliberate. No one knows at this stage
whether Kikukawa was the beneficiary of these deals or not,
but as the old saying goes, "follow the money". Now that
the British SFO is on the case, the Japanese financial
authorities really have no choice but to take up the matter
and we think this will most likely wind up with Kikukawa at
least being charged with negligence and being deposed from
the company.

What is most disturbing is that if there wasn't a foreign
transaction, and if no foreigners had been involved in the
deal, then the Olympus scandal probably would have never
seen the light of day. Kikukawa "owns" the Olympus board,
with only 3 outside directors, and at least one of them a
personal friend, it is unlikely that they would have
challenged the Big Boss over the losses. Indeed, they never
did challenge him in the 3 years following Gyrus and the
other losses.

In the longer term, this episode also means that hiring a
senior foreigner into a major Japanese company can spell
big trouble for existing management. Transgressions can no
longer be kept in the family when there are prying outsiders
looking at the books, and so the potential for things to blow
up increases dramatically. We believe that Japanese firms
who might have been thinking to promote foreigners up
through the ranks will be watching the Olympus scandal
with trepidation and will be pulling back from any hiring plans
they may have had.

The reader who commented in TT-634 last week about a
certain major Japanese investment bank that has similar
"sacred cows" and entrenched management cliques, has turned
out to be very prescient.

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+++ NEWS

- KDDI going international?
- Tepco to sell portion of Eurus to Toyota
- Suntory to buy out Evian & Volvic?
- Odiferous gas yields oncology clues
- Japan surpasses France for 3-star restaurants

-> KDDI going international?

An innocuous acquisition by KDDI may indicate that the firm
is finding a way into the international markets, without
having to do a massive M&A like NTT Comms did with Verio
years ago (much to NTT's subsequent regret). KDDI is buying
out for JPY12.8bn 85.5% of Korean company CDNetworks.
CDNetworks technology speeds up the delivery of content to
mobile users in 31 countries around the world -- from what
we can tell, a sort of "Akamai" for the cell phone world.
***Ed: This seems like a great niche business to be in, and
one that is sufficiently upstream that it will be somewhat
impervious to user vagaries.** (Source: TT commentary from, Oct 13, 2011)

-> Tepco to sell portion of Eurus to Toyota

Well, it looks like the "Great Tokyo Electric Power Co.
(TEPCO) Asset Sell-off", to partly cover the costs of its
nuclear victim compensation pay-outs, has started. Although
somewhat modest, TEPCO is said by Nikkei to be selling a
20% stake in wind power producer Eurus Energy to Toyota
Tsusho (who already owns 40%) for JPY20bn. ***Ed: TEPCO has
plenty more assets to sell, and we're surprised, actually,
that they are only selling 20% of Eurus to Toyota. A true
commitment to making good on the victim damages done so far
should have been much more. We wouldn't be surprised if
they draw more flak for this point.** (Source: TT
commentary from, Oct 22, 2011)

-> Suntory to buy out Evian & Volvic?

Just why they are doing it, we're not sure, but Danone of
France has apparently asked Suntory if the Japanese firm
would like to buy out its mineral water business, starting
with Evian and Volvic in Asia. The Nikkei is saying that
the asking price is around JPY500bn for a business that has
sales of around EUR2.87bn (JPY300bn). ***Ed: What we don't
understand is that Danone's water business rose 5.3% last
year and is expected to continue growing strongly in
emerging economies such as Indonesia, where they have top
market share. We can only imagine that either they are
having problems elsewhere in the business and need the
cash, or that they don't see a lot more growth due to
competition. Either way, this can't be wonderful news for
Suntory -- although we are sure they will still jump at
the chance of buying such prestigious brands.** (Source:
TT commentary from, Oct 21, 2011)

-> Odiferous gas yields oncology clues

Believe it or not, researchers at Nagoya University have
created a method of testing wind passed by patients to
assess their likelihood of having colorectal cancer. No
laughing matter, especially when the current alternative is
a colonoscopy (ouch!), the scientists have found that
colorectal cancer patients have a higher measure of methyl
mercaptan, a sulfur compound produced by later stage
cancers. The gas samples are collected in special bags that
absorb the methyl mercaptan, and which are then are tested
with a sophisticated machine at Hiroshima University.
(Source: TT commentary from, Oct 22,

-> Japan surpasses France for 3-star restaurants

Not sure how the French feel about it, or if they even
care given the current Euro turmoil, but nonetheless it
is a sign of the times that Japan now officially has more
3-star Michelin Guide restaurants than does France. The
tally is 29 in Japan versus 25 in France. Tokyo came in
first with 14 3-star establishments, then Kyoto with 7,
Osaka with 5, and Kobe and Nara with the other 3. There
apparently has been a lot of controversy over the new 2012
rankings, which include a Korean-food restaurant called
Houba in Osaka. (Source: TT commentary from

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.



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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

*** We often get general reader comments, and here is a
good one expressing surprise that the right wingers still
have a quorum when it comes to anti-Korean protests.

=> Reader says: A few weeks ago in one of your Terrie's
Take's you commented on Korea phobia by some parts of the
community. Not so long ago I went to Odaiba for a few
hours with my family, and when I arrived at Daiba Station
around noon, there was one of those uyoku trucks parked
across the street from Fuji TV (in front of Aqua City or
thereabouts), and a number of people scattered about the
area holding Japanese flags in the air. By sometime after
2 pm, I was at the other end of the block coming out of
the Joypolis side when we came upon a group of several
hundred protesters in an organized march. There were
police all around them and manning other parts of the
street as well. A number of pedestrians stopped for a photo
opportunity...I didn't bother, but it was quite a

Thought you might be interested to know this is still
going on. I was a bit surprised myself about the longevity
of it all. Rather than worry about it though, the only
thought that crossed my mind was "Yoppodo hima da ne...!"
It always amazes me that so many people have nothing better
to do.


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