Olympus - Caught in the Act

Teves, Dwight Sebaztian M.

 BSA 4

SYNTHESIS

Export prices rose sharply, decreasing level of competition and profits of many exporters in Japan during 1985 after the signing of the Plaza Accord by the G-5 countries. It eventually created a bubble economy, in which real estate and stock market prices were greatly inflated because Japanese businessmen were using “Zaitech” strategy or also known as financial dealings technology to spare cash to compensate dwindling earnings.

President Toshiro Shimoyama(January 1984 – June 1993)  pursued the zaitech strategy together with Hideo Yamada, the assistant manager of finance group in accounting department, and Hisashi Mori, who led the investment department.

The company were using the mark-to-market basis, a measure of the fair value of accounts that can change over time such as assets and liabilities, instead of acquisition cost in valuing the financial instrument to hide the losses. They manipulated the balance sheet using the “Tobashi” schemes which means “to fly away with losses”. President Masatoshi Kishimoto and President Tsuyoshi Kikukawa were aware of such schemes, though Kikukawa instructed Yamada and Mori to continue that fraudulent accounting practices. They were able to hide the losses for 13 years.

The Board of Directors consisted of 15 male members including Kikukawa (Chairman & CEO), Woodford (President & COO) and Mori with the three non-executive director (a member of the board of directors of a company or organization who does not form part of the executive management team). The director itself was the only one on the board who has general knowledge about finance and accounting practices.

Management Committee (MC) and Board of Managing Directors (BOMD) were the other corporate bodies relating to the Board of Directors. MC consists of Board of Directors and Board of Audit. Directors may voice in the Board meetings but Kikukawa has always the final to say. The corporate culture in Japan is that they put their trust and their dependence in their superior.

Olympus had three funds set up in different countries in the form of bonds at Europe, Singapore, and Japan. Olympus will deposit the funds in various banks in these countries then the bank will extend the duration of the loan. Thereafter, it will erase the bad assets off the company resulting to an overpayment of acquisition deals to cover up the missing values or losses.

The company bought Gyrus for $2.2 billion equivalent to 5 times the turnover and 27 times earnings before interest, taxes, depreciation, and amortization. The acquisition cost of $687M were allocated to the two small companies namely Axes America and Axam Investments with the amount of $17M and $670M respectively which were incorporated in USA and Cayman Islands afterwards. It has the highest Mergers and Acquisition (M&A) fee disbursed ever. Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing with purchasing and/or joining with other companies. In a merger, two organizations join forces to become a new business, usually with a new name. The company also bought three unprofitable small venture firms namely Altis, Sumalabo, and NewsChef with the acquisition cost of $773M.

In 2011, Woodford were appointed as the CEO of the Olympus because Kikukawa said that he would be “easy to control” though it is unusual in the Japanese companies to have a foreign CEO. Few weeks after he was appointed, his German colleagues notified him about the company’s suspicious activities based on the magazine called Facta Magazine. Woodford then assigned the PwC to investigate the company’s necessary documents and previous activities. Several days later PwC reported to Woodford that it is possible that improper acts took place in Olympus. Hence, Woodford sent letters to Kikukawa, Yamada, and Mori regarding that matter.