Olympus Corporation Scandal & its aftermath ?

Olympus Corporation is a Japanese manufacturer of Optical equipment and is considered one of the leaders in the industry. It flagship products include Cameras and Endoscopes in addition to all other related products. For the year ended 31 March 2011 the consolidated net sales were US$ 10589 million. The total shareholders’ equity is US $ 3281 million. The group employs close to forty thousand people around the world. Its assets were estimated at US $ 13295 million. On the remarkable aspect is the good will of Olympus Corporation which is valued at US $ 2194 million. Another significant achievement until recent is the ability of the management to sustain the profit level relatively constant at 35 billion yen for several years.

PROFIT MAKING STRATEGY OF THE CORPORATION

Being a Japanese company, Olympus used to have a clear strategy in all the areas of operation. The management has come up with a new idea called FINANCIAL ENGINEERING where they look up the financial aspects from a different angle. The objective of the exercise is to maximize profits for the company from all departments. Olympus Corporation relied on investments to boost profits. There were instances that the investment arm of the corporation was inclined towards financial derivatives and other risky investments. The aftereffect of this strategy was very evident from the books. In 1991 Olympus lost 2.1 billion yen on the value of its investments. By 1998, it suffered sizable trading losses on derivatives. Share market responded unfavorably and the value eroded to a great extent. Score card says the shares plunge by 11% at that time.

In September 2011, Olympus announced it had written off a part of 45 billion yen investment in emerging market bonds. The company also revealed that it had lost a significant amount from interest rates and currency swaps.

PRESS REPORTS

Bloomberg reported that the annual financial reports of Olympus showed a US$ 201 million prior period adjustment entry for “loss related to the purchase of preference share from a third party”.

Financial Times commented that the equity ratio of Olympus is the lowest and at below 14% when compares against the peer group. Olympus is the only Nikkei 225 constituent whose intangible assets exceed net assets. Its goodwill was valued at 168 billion yen and the net assets were only 151 billion yen. This information sent wrong signal to the investors and market alike.

On 1 April 2011 Olympus came up with a big announcement.  Michael Woodford, a Brit, was promoted as President and CEO for the group. He was an Olympus veteran and was in charge of the companies European operation. He was the MD of Olympus Medical Systems (Europe). There were rumors that he was selected to head the company because he was an easy to control guy. Company picked a bottom ranked foreign executive director for some reasons. It was obvious that the company was overlooking other capable managers for this position and there were raised eyebrows from many quarters.

Woodford himself had a bitter experience with the top management when he was heading the European operations. The company went into acquisition of Gyrus Medical Equipment Company in UK without the actual involvement of Mr. Woodford. In fact, it should have come under his purview but got ignored for obvious reasons. The then president Mr. Kikukava pacified him and promised to compensate later. He was then given the overall in charge of European operations in addition to the inclusion as Board member of the main group.

While his stint with the main group, Woodford started noticing some discrepancies in the financial side of the company. He could see that there were significant irregularities in the 2008 acquisition of Gyrus Medical Equipment Company. Upon realizing that he sent few letters to the auditing firm Earnest & Young to get clarity but failed to obtain anything. He then sent the details to another accounting firm PwC and sought some clarifications. His assumptions proved right and the accounting firm confirmed certain facts which made Woodford to think in the line of accounting fraud happened within the company.

PwC examined the earlier write down transaction of US $ 600 million. It came evident that Olympus paid US$ 687 million as an intermediary fee (success fee) to a third party. There were two beneficiary companies on this list. Two US based small firms are involved here - Axes America LLC & Axam Investments ltd (Cayman Island based). Wood ford’s suspicion founds to be right. The success fee of US$ 687 million paid is an all-time record until that time and not heard of in the industry circles.  In fact there was no need for such an exorbitant amount to be released for any consultancy job.

Woodford raised his objections and sought more clarity from the then president Mr. Kikukava but found no avail. Sensing the danger, Mr. Kikukava asked Woodford to step out from the current role he enjoyed. Unrelenting to this, Woodford was removed from the post forcefully and he was stripped of his powers. He was not allowed to speak or vote in the board meeting. Woodform himself said that an junior level executive, upon the instruction from Mr.Kikukava, taken all his belongings including laptop and mobile phones which contain important documents. Kikukava got re appointed as the president and CEO for the group and Mr. Woodford was ousted with immediate effect.

Woodford then took a flight and reached London where he called for a press meet and exposed the whole affair at the Olympus. He produced the relevant documents and other materials with was enough to incriminate the directors at that time especially Mr. Kikukava.  Market responded negatively to this happenings and the share value plunged to a great extent. It almost lost 45-50% of its value hearing the irregularities with Olympus. The share was trading at US$ 38 and was found trading at US$18 after this incident.

WHERE DID THE MONEY GO?

Due to investors demand, the government constituted a committee and its finding were relevant to note. The fees paid as part of the M&A of Gyrus, were exorbitant. The excess money was used to cover up the losses incurred from the earlier investments in derivatives and other dubious investments. This was done to improve the financials in the records.

AFTERMATH

Recent development being, Mr. Kikukava was removed from the post of the president and CEO due to the pressure from the investors especially institutional investors. He apologized before everyone and promised to look into the whole affair by appointing an independent agency. The government was quick to take control of the situation and Mr. Kikukava was arrested and remanded in custody pending enquiry.

Khaleej Times, on 21 April 2012 reported in its business section that the security exchange authorities in Japan approved of the new board to take control of the company. Some of the investors insisted to re-instate Mr. Woodford as President and CEO but did not get much support from others. Woodford himself announced from London that he is not willing to fight a proxy war to take control of the company.

HOW THIS CASE IS IMPORTANT TO US?

Financial irregularities can happen with any company especially when their fundamentals are dubious. This may occur when there are people in the top management who keep their interest before their companies. It is important for any finance student to sense the smoke and be aware of the possibility of these kinds of irregularities or else they will be caught up unaware of the actual situation.

Antony Konnoth, Dubai

RACE FOR SPACE ( Khaleej Times v Gulf News - Some marketing facts)

RACE FOR SPACE (Khaleej Times v Gulf News)

Of late, there was huge media cry to find out who dominates the UAE news world. The focus was predominantly shifted to two major players in this region. Gulf News (GN) is the proclaimed leader with high readership and circulation figures. But things have changed ever since. Challenger Khaleej Times (KT) started giving Gulf News run for their money and territory.

To understand more, let’s dig the history and try to unearth some hidden facts. Khaleej Times is the first ever English daily to publish from UAE. It started in the year 1978 and was owned by Galadhari Brothers. Another publishing group Gulf News, formed a while later, took no time to sense the opportunity and started their’ own newspaper from the country. Two groups were in fact contemporaries if we apply the timeline principle here.

Market did not react favorably at the beginning. For various reasons, KT took the absolute dominance in the mind of readers and was the designated winner. GN was struggling to get customers at that point of the time. In one of the high profile event in 1984, Al Nasr Publications, a prominent business group took over the management of GN. New machinery, new technology and a brand new marketing team worked round the clock to put GN at the top of the mind of the intended readers. The formula worked pretty well. Gulf News attained the top spot in short time by clinching the maximum readers in UAE and gulf.  

Ever since they tasted the victory, there was no look back. It is official now – as per the available stats GN claims a print run of 109 thousand per day in UAE. Khaleej Times was no were near to it. Guessing game continued for a while and the media estimated the KT figures below 50 thousand, not even half of GN's circulation.

Fast forward 2011 - business took an about turn. Quite a few happenings in KT have changed the game overnight. New rules were set in. Numbers started changing in favor of KT. GN subscription figures were stagnant or lost significantly against the overall circulation growth of KT.  Khaleej Times once again rose to fame, this time, for achieving the highest increase in subscribers for the year.

What went in favor for KT? How GN lost its subscribers to the marketing efforts of KT? Let’s get into the gut of the story. Ever since KT began loosing its market share, there were concerted efforts from the management to revisit its strategic plans. Government of Dubai through its investment arm, a holding company, acquired the majority of the shares of the newspaper. The management got revamped and editors were changed. Mr.Rahul Sharma of Hindustan Times fame was given the charge of chief editor. The company also appointed Mr.Didier Brun, the then VP of International Herald Tribune, as CEO. The marketing department was brains stormed and urged to devise a new strategy to grab the readership.

 Media analysts and marketers state many reasons for this turnaround but I personally feel the below FIVE STRATEGIES adopted by KT has killed the competition at point blank.

 

STRATEGY 1

FOCUS ON READERSHIP THAN PER DAY CIRCULATION

News paper companies globally give prominence to per day circulation numbers than the total readership. The water tight business model followed by these companies in relation to their revenue earning capability always insists to abide by this principle. Traditionally, news papers earn 60% - 70% of their revenue from advertising and the rest 30% - 40% from daily sales and annual subscriptions. Advertisers used to focus on per day circulation, but this tread had witnessed a dramatic change. Marketers in various industries started asking for split up details of the newspaper reach in different segments. Mass marketing is passé. Targeted distribution is the new mantra. Anymore it’s not the total circulation number which matter most, but the actual reachable figures. It’s the readership figures now marketers weigh before they advertise their products or insist media guys to do so as part of their media plan. KT got it right, and they kept this as one of their prime strategy to get the mind share of the prospects. The underlying principle is - Circulation numbers automatically increases when readership improves. KT firmly believed on this and it paid off. 

GN always focused on circulation numbers rather than readership and they still wonder what is so important in readership figures if the per day circulation don’t match up and collections don’t click. Only after they started losing subscribers, it seems vital  for them to look up in the readership area and I presume they are serious. They better.....

 

STRATEGY 2

COMMODITIZE THE PRODUCT

This is unheard of in the newspaper industry despite it has some of the features of a mass product. In fact, newspapers cannot be classified as one such. But this has become a ‘food for thought’ line for those inside the KT, especially the marketing bench. This thought process has made the marketing to believe that a product can only be successful if it is made available at all major centers. Soon the product found its place in all educational institutions, gas stations, malls, libraries, ministries and all places where public show up. There were distribution ties up with various agencies, supermarkets, book shops corporate and institutional centers. The idea worked well and the visibility soared to new heights. People started noticing this new trend and in fact bought many copies from these centers to get the real feel of the news, supposedly, to know the another version of the story. Once again the readership increased significantly and the circulation numbers followed. 

On the other hand, GN were known for monetizing every opportunity and the revenue per copy was the most important thing for the company. To see the product from the above angle was something they could not digest.

  

STRATEGY 3

NEW DESIGN – SLIM AND TALL VERSION

It was a jaw drop moment for the readers to see a slim and tall version of the newspaper on their door steps and news stands. KT has become the first newspaper to adopt this new standard in size ( 6 column) & design keeping in mind of the 'ease of reading' and 'handling side' of the news paper. It has followed the foot steps of some of the international newspapers here. The new version showed increased acceptance from the public and readers alike. There is no mystery that the numbers started showed up in the board- Circulation almost doubled.

GN still believe in 8 column newspaper and the marketing sees no threat and still publish the old version but with some design change. What they don’t realize is that the new gen readers prefer concise and capsule news in a newspaper which is manageable and easy to handle while reading on the go or stationary.

STRATEGY 4

STRATEGIC TIE UP WITH IHT (International Herald Tribune)

IHT, The international version of New York Times is a global print winner in the race for space. The strategic tie up of KT with the IHT has increased the acceptance level of the newspaper in the minds of readers. A global touch is always welcomed. People started perceiving that the content is customized to world standards along with the local news.

 GN don’t believe in any strategic tie ups, but interested only in distribution tie ups for some reputed magazines and EXPAT specific language news papers like Malayala Manorama in UAE.

STRATEGY 5

COMPLETE REACH OUT - UNBELIEVABLE PROMOTION OFFERS

KT has come up with some unbelievable subscription offers last year. Pay AED 400 and get AED 250 voucher of DG Sharaf, AED 100 coupon for Baskin Robins and AED 100 coupon which can be redeemed at Yellow Hat showrooms in UAE. You pay 400 Dhs for subscription and get back 500 dhs in return... Wow... In short, this translates in accounting language to free bonus earning - Free newspaper subscription for one year and a bonus of AED 100 !!!

 

The grapevine is that KT now commands a widespread circulation in the market and the revenues have shot up to a meteoric level. No of advertisers have increased dramatically. Ad revenues showed multifold increase from all quarters. International brands like McDonalds entered into long term contracts with KT to publish their advertisements. A new ad item like full cover page (before the actual front page of the newspaper) has become an all time success ad item. Marketing has reaped the benefits. New strategy paid off. GN may be still wondering where their clients have gone hiding.

Let the guessing game continue……

Antony Konnoth, Dubai.