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Olympic record breaking

21 October 2011 By Quentin Webb

Olympus’s approach to acquisitions seemingly mixed the unorthodox with the downright crazy. The Japanese camera and endoscope maker has ditched chief executive Michael Woodford, who is querying odd-looking deals in Britain and Japan. Olympus says it is to investigate his claims. But as things stand, the gulf between Olympus’s manner of deal-making and conventional M&A practice makes its executives look foolish.

Like many large companies, Olympus went looking for growth by acquiring in new sectors. According to Woodford, it contracted Axes America, a little-known U.S.-registered outfit, to scout for appropriate deals. And Axes insisted on being paid mostly in shares. That’s fairly unusual. One might have expected a big-name investment bank or consultancy to have been hired for such a task. Moreover, equity is a costly currency, so blue-chips with cash to spare wisely avoid squandering it.

Still, Axes’ appointment wasn’t totally out of the ordinary. Even big firms can use tiddly boutiques or even lone bankers to source and arrange deals. Lafarge, for example, has used Michael Zaoui solo, while fledgling companies in Silicon Valley and elsewhere sometimes pay fundraising fees in warrants.

When Axes identified Britain’s Gyrus as a target, Olympus hired Perella Weinberg to execute the transaction. There’s no suggestion that this was anything other than a straightforward M&A mandate for Perella, which received a standard fee for handling the transaction. But Olympus drifted further from orthodox practice, according to Woodford, in granting Axes preference shares with perpetual rights to 85 percent of Gyrus dividends and some veto over key decisions. That’s corporate finance nonsense: the reason for buying a firm is to get hold of its cashflows and exert strategic control. Olympus has not commented on the details, but has denied wrongdoing.

While there may be logic for advisers to be paid in something other than cash – paying fees in the bidder’s stock is a disincentive to recommending the pursuit of a bum deal – this twist went way beyond any standard notion of non-cash remuneration. The adviser was, Woodford claims, due $18 million in the first year. A simple rule for valuing steadily rising income streams, Gordon’s growth model, suggests that with 5 percent growth and an 8 percent discount rate, the capitalised value of the income from the pref shares was $600 million. Olympus says it eventually bought back the securities for $620 million. In effect, it was merely crystallising that colossal liability.

Other payments disclosed by Olympus brought the total bill to $687 million, or about one third of the acquisition price. That’s more than double the $275 million that 13 banks split over ABN AMRO in 2007, the largest fee in Thomson Reuters M&A database. Olympus has set an unfortunate record, and one that could stand for some time.


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