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Clouds over Olympus

19 October 2011 By Wayne Arnold

Olympus’ shares are likely to languish until it comes up with some answers. The Japanese instrument maker jilted its chief executive on Oct. 14, and has since admitted to effectively paying two M&A advisers a 35 percent commission for a UK acquisition in 2008. While its core business looks sound, the fear is that Olympus could be forced to take big writedowns, or even delist.

The company’s shares have fallen 44 percent since it dismissed Michael Woodford, wiping $3.9 billion off its market capitalisation. Woodford says he was given the heave after pointing out governance problems surrounding overseas acquisitions, in particular the $1.9 billion purchase of Gyrus. He accuses the board of violating British law against paying a purchaser for an acquisition, false accounting and breaching its fiduciary duties.

For all the chaos, Olympus is still profitable. But it needs restructuring: poor performance in digital cameras is dragging down its more profitable medical equipment business. Investors fear Woodford’s departure will scotch efforts to cut costs and rationalise, hopes for which had driven Olympus’ stock up 20 percent before August’s global market downturn.

There are three pressing issues. One is a credibility gap, after revealing a $687 million payment to two M&A advisers whose ownership is unclear and whereabouts unknown. As well as explaining who they are, Olympus needs to explain why it paid them $620 million for preferred shares it valued at $177 million when they were issued in 2008.

The second worry is that Olympus may face writedowns. It booked nearly $2 billion in goodwill after buying Gyrus. Goldman Sachs calculates that Olympus’ goodwill now exceeds the heavily indebted company’s net assets. If it were forced to write down that goodwill, it might have to take provisions or, if earnings didn’t cover the shortfall, raise additional capital.

Finally, Woodford’s accusations could prompt an investigation by the Tokyo Stock Exchange. At worst, that could result in the company being delisted. The clouds surrounding Olympus are so thick that parting them may require a third-party investigation, but its board can start by shedding some light on the questions that are driving investors away.


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