When shit hits the proverbial fan of a corporate leader (or inexperienced trader) in the west, they might, in the panic of the moment, be more inclined to respond by "throwing good money after bad" in a desperate Hail-Mary attempt to miraculuously snatch victory from the seemingly inevitable jaws of defeat. Some Reg-D "Death Spiral" deals undoubtedly fall into this category as does Nick Leeson and other trading losses martingaled directly to prison. In Japan, the S.O.P. seems to be concoct some other half-baked quarter-truth or non-truth (i.e. outright fabrication) in a desperate attempt to avoid the dreaded shame, embarrassment (even the unlikely jail!) and subsequent ritual skewering that inevitably follows being caught in whatever indecently illegal act one was undertaking or had undertaken.
I am intrigued by the Olympus Corporation's and former President and Chairman Tsuyoshi Kikukawa's behaviour. I am not in the least surprised. Nor am I shocked (for I am not though I soon will be) long. Not because I shouldn't be but because one could almost predict it. Not of course specifically Olympus's corporate trousers being precisely caught around their ankles, but rather the general class of corporate response to a potentially shame-inducing crisis, that at some point would reveal the series of decisions that lead to the point of being in so deep, one has no choice but to continue the charade (or at least one FEELS there is no choice).
I have been reminded by different folk on various occasions of the old adage: "never lie to your doctor, your lawyer, or your accountant". I cannot help but wonder whether this holds true for The Olympus Corporations Japanese managers and directors in regards to their new Chief Executive, Mr Woodford. I wonder whether they would even consider NOT disclosing the full truth a blood-relative of a lie. One would guess however that his response, might be different to those with soiled hands, or those fearing the resulting stigmata of FD, with its sordid details.
The facts as revealed by Mr Kikuwa and the Olympus Corporation just do not make logical sense. There is a story here, not yet disclosed. I think it is related to the legacy Zaitech losses. Rather than come clean and have to bow very low in admitting one-and-a-half decades of more or less continuous deceitful accounting to hide and cover them up, they tried an alternative exit. Perhaps they thought that exit could be written down more easily without embarrassing questions to the WA of Olympus. Perhaps they thought Plan B was that if brought to the spotlight, a person rather than the organization might fall on his sword claiming "good intentions" but "bad investment". Uncompliant auditors however, who might force greater disclosure and footnoting placing a new (foreign) CEO in a potentially compromising position, was probably not under the meat of their distribution of probable outcomes (howver much it should have been).
The next few weeks will be fascinating. For what its worth, I like Olympus. For what its worth, I like buying into fundamentally-sound enterprises, with good assets, brands, and/or technological leaders in their fields, that have large one-time writedowns (however mischievously generated). Hanover Compressor (HC), OMG, El Paso (EP), Yakult (2267) are such examples, to name a few. It is something I can, at the very least, understand, without having to judge or condone it, however morbidly fascinated I might be in the personal details enroute to the perditious act(s). I reckon Olympus will fit this pattern, though cannot wait for the truth to come out.
Tuesday, October 18, 2011
Throwing Good Money [or Honor] After Bad
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I think we're getting towards sensible, if not exactly cheap, valuations on Olympus. 4x book and 20-ish PE for a low teens ROE was always a stretch in this environment, even for Japan. The downgrades are yet to come, though, and quite what happens now to the black hole that is the camera business is anyone's guess.
The potential zaitech angle is fascinating.
What I do not understand about all this is that, having something pretty embarrassing to hide, why did Japanese managers invite a Brit, however briefly, to be their President? It's not as if he is fluent in the time-honoured Japanese art of averting his eyes gracefully from big problems. Why did't they install a Japanese non-entity who will do their bidding? And most Japanese companies have a pretty deep pool of non-entities. Mind boggles.
What I don't understand about all this is, having something deeply embarrassing or even incriminating to hide, why did Kikukawa et al invite a Brit, however briefly, to be their President? Did they believe that he was in the same boat? Did they assume that he would look the other way as all well-mannered Japanese managers do? It doesn't take a genius to realize that anyone not encumbered by co-guilt of previous misconduct would raise hell. And it would have been so easy to install a Japanese non-entity who would do Kikukawa's bidding. I am sure that Cassandra-san knows that most Japanese companies have impressively deep pool of non-entities. Mind boggles.
Cassandra: you called it!
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