Livedoor shock tests recovery in
Japan By David Macdonald
TOKYO - In the Japanese business world,
Tokyo-based Internet firm Livedoor was always
different from all the rest. This was demonstrated
dramatically last Wednesday when a financial
scandal at the company, which has come to be known
as the "Livedoor shock", forced the Tokyo Stock
Exchange (TSE) to call
a
halt to trading for the first time in its history,
amid a glut of sell orders that overwhelmed the
bourse's computer system.
Both Livedoor
and its scandal-hit affiliate Livedoor Marketing
are listed on the TSE's Mothers (Market of the
High-Growth and Emerging Stocks) market for
startups. The 3% drop in the Japanese market on
Wednesday, its largest one-day fall in nine
months, was followed by a 2.3% bounce the next
day. The market fell by 1.45% on Monday morning
amid continuing nervousness over Livedoor. It
seems unlikely that confidence in Livedoor, which
lost about 100 billion yen (about US$870 million)
in value last Tuesday, will recover any time soon,
and the repercussions of the affair may be
far-reaching.
Authorities raided
Livedoor's offices on January 16 on suspicion it
had violated securities trading laws, with the
Tokyo District Prosecutor's Office saying it
suspected the company of issuing false information
to inflate the value of an affiliate. The
allegations center on Livedoor Marketing's October
2004 announcement of the acquisition of publishing
company Money Life. Prosecutors say this was a
ruse, and that the purchase had already been
completed six months previously through an
investment fund that was part of the Livedoor
group.
After the October 2004
announcement, Livedoor chief financial officer
Ryoji Miyauchi is supposed to have encouraged
company president Fumito Okamoto to execute a
stock split, and the firm took advantage of a
subsequent sevenfold increase in its stock value
to realize a profit of some 800 million yen.
Livedoor has denied any wrongdoing, and company
executives are cooperating with the investigation
by voluntarily meeting with prosecutors.
Role of CEO Horie remains
unclear The precise role of Takafumi Horie,
Livedoor's founder and chief executive, has yet to
be established, but by the end of last week the
Japanese media were shifting blame toward CFO
Miyauchi. A former Livedoor executive told media:
"Miyauchi may have been the one who gave
instructions to the affiliate. He told Horie he
didn't need to be involved in such minor
acquisitions."
Horie, a brash
entrepreneur, has carefully cultivated a playboy
image that is the antithesis of the stereotypical
anonymous salaryman. His casual clothing and
speech, regular TV appearances, disdain of
protocol, and audacious - though ultimately failed
- bids for a baseball franchise, a TV station, and
a seat in parliament have made him a household
name in Japan.
Horie's profile seemed to
rise right along with Livedoor's success in the
business arena. Employing an aggressive strategy
using stock splits to make a series of
acquisitions, Livedoor has rapidly expanded from
its origins as a website design firm and Internet
portal to build a network of more than 40
businesses that posted pre-tax profits of $55.2
million in 2005 and was valued at $6.3 billion
early this month.
Despite these impressive
figures, some market watchers had felt unease at
Livedoor's expansion strategy, saying that
although the stock-split tactic was technically
legal, it was both risky and against the spirit of
Japanese business culture. Concerns were also
expressed about Livedoor's fundamentals, echoing
stories from the technology-stock boom of the late
1990s. One former Livedoor executive, interviewed
by Japan's public-service broadcaster NHK, said:
"Only the finance people [at Livedoor] know how
money is being made. Most people [working there]
don't know how they are helping the company's
business. Usually Horie stirs things up and then
Miyauchi reaches some kind of settlement."
The daily stream of allegations, denials
and rumors surrounding the firm shows no sign of
abating. Further claims of financial misdoing
emerged late last week, hitting the value of
Livedoor affiliates such as mail-order company
Cecil, data-processing firm Media Exchange and
property developer Dynacity Corp.
Then, on
Wednesday Hideaki Noguchi, vice president of HS
Securities and a former employee of Livedoor
predecessor Livin' On The Edge, committed suicide
in an Okinawa hotel. Japan M&A Management, a
subsidiary of HS Securities, apparently assisted
Livedoor in planning its contentious stock splits,
and HS Securities' offices were among those raided
by prosecutors.
On Sunday, the Yomiuri
Shimbun, citing unidentified sources, reported
that Horie had instructed executives of a Livedoor
affiliate to "cook the books" in July 2004. It was
the first time Horie had been reported to be
personally involved in the scandal.
In the
latest developments, Horie said on his personal
blog on Sunday, "I am innocent of the
allegations," adding that he "did not remember
100%" what exactly a warrant received earlier from
prosecutors had said. He also alleged inaccurate
press reporting on the scandal, saying, "As for
the stories in the press, I have no idea who
researched them, or how." But on Monday,
prosecutors finally interrogated Horie, according
to a report by NHK. Livedoor only said that Horie
had "stepped out of the office". Earlier in the
day, yet another Livedoor executive, Fumio
Okamoto, former president of ValueClick Japan, had
also been questioned.
Changes afoot at
the TSE Whatever the result of the current
investigations into Livedoor, it seems certain the
affair will precipitate changes at the TSE. Among
the first may be the delisting of Livedoor stocks.
They will be automatically delisted if the
allegations of financial misconduct are proved
true, but TSE chairman Taizo Nishimuro took the
unusual step of giving the company a January 20
deadline to disclose more financial details and
bolster confidence or run the risk of being
delisted anyway. The TSE may see this as an
opportunity to reassert its authority after recent
setbacks.
Beyond the delisting issue, the
TSE is set to boost trading capacity in a bid to
avoid a repeat of last Wednesday's closure.
Although stock exchanges worldwide are facing
similar requirements to increase trading limits,
the TSE has long been criticized for its slow
movement and lack of planning. It is currently
equipped to handle a maximum of only 5 million
trades a day.
This represents a typical
day's trading in New York, where the NYSE can
theoretically deal with 50 million trades daily.
Trading on the Dow Jones has increased by a factor
of 16 in the past 10 years, and a policy of
ensuring capacity is at least 10 times as high as
average trading levels means the NYSE will soon
increase its trade limit by a further 50%. By
contrast, the TSE seems to be dragging its heels
and to have failed to adapt quickly enough to the
rise in the number of online and day traders who
favor Internet and tech stocks such as Livedoor.
Japan recovery reassessed On the
back of a stock-trade error that saw Mizuho
Securities lose almost $350 million last month,
the problems at the TSE and Livedoor, one of the
icons of Japan's recent upturn, may cause
investors to pause for thought and reconsider the
basis for recovery.
Initial reports of the
investigation into Livedoor saw shares in other
Internet and technology-related firms hit
particularly hard as the market lost more than
$300 billion in value in just three days. The
fundamentals of these firms will now be
scrutinized more closely, and the TSE has also
said it will conduct more checks on new firms
wanting to be listed on its Mothers market, making
it harder for startups to raise money.
Corporate-governance rules may also be
strengthened to improve investor confidence, and
this could restrict or slow down companies'
expansion plans.
Much of the rise of
Japan's markets has been driven by increased
shareholder value and supported by foreign
investment, so it remains to be seen whether
events at Livedoor are merely a blip in the
nation's economic recovery or a sign that further
reforms are needed before stable growth can be
achieved.
David Macdonald is a
freelance writer based in Japan. He can be
contacted atfreelance@filtereast.com.
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