OCPNF.PK - Olympus Corp

[bluedevil]

I'm surprised there hasn't been more chatter about Olympus.  The stock is down 50% based on a corporate-management scandal.  While some ugly stuff seems to have gone on, there is no doubt that Olympus's endoscope business is a jewel -- fast growing, safe, high-margin, and dominant (75% of the market).  None of the allegations speak to that business's ability to generate cash flow.  This strikes me as a salad oil type scandal -- ugly allegations that reduce the price of a wonderful business, but that do not impact its long-term economics.  I initiated a position this morning.  Thoughts?

[bluedevil]

Here is an article in the WSJ about the underlying value of Olympus's endoscope business.  According to the article, Olympus's endoscope business is worth about $11 billion to a competitor like J&J.  (With the recent plunge in price, Olympus's current market capitalization is about $4 billion.)

 

http://online.wsj.com/article/SB10001424052970204777904576652832520551192.html

[AZ_Value]

This looks interesting and definitely fits the profile of a salad oil opportunity.

At current market cap it seems to be selling at just 3-4 times net profits generated by their endoscope business alone.

Definitely has a salad oil smell to it.

[AZ_Value]

Crap... looks like it has jumped 20% on the Tokyo exchange.

[eclecticvalue]

Be patient it can fall back soon, but thank you pointing this investment idea out. It will be added on my watch list.

[AZ_Value]

On my watch list too.

Thanks for pointing it out Bluedevil

 

[Guest misterstockwell]

Note the $5.8 billion in debt

[Guest misterstockwell]

Also, more possible wrongdoing

 

http://www.reuters.com/article/2011/10/27/us-olympus-yokoo-idUSTRE79Q22P20111027

[AZ_Value]

Yeah... This whole thing is really messy! It does look like that chairman ruled like a king and fired the CEO for doing his job (i.e. worrying about the operational decisions made like paying hundreds of millions to some consultant). Really nasty stuff. Makes you wonder what else was going on that we don't know.

 

But I think that's why bluedevil referred to it as a salad oil opportunity. AMEX also messed up big time when that happened and someone could have asked where was the oversight then. I can't remember exact numbers but didn't that episode end up costing them like a full year of earnings? That wasn't pretty either.

 

And the idea here is to wonder if what is going on affects the underlying business especially the endoscope franchise. I mean, if it's generating $940M in profits alone and the whole company was valued at $4B a person has got to take a look I think. Especially if it goes much lower which will significantly increase your MOS.

 

 

[AZ_Value]

Yeah the debt is high... I agree with you

But it's not why the market cap has been cut in 1/2 is it? I've been reading about this and I haven't seen anyone mention the debt as a reason for the drop.

The debt seemed manageable last week before all this stuff started happening.

Which is why I said that as long as one is confident about the underlying business not being too damaged by these headlines one ought to take a look.

Especially if it keeps dropping.

[AZ_Value]

Some light starting to be shed on this mess...

 

http://www.bloomberg.com/news/2011-11-07/olympus-used-gyrus-fees-to-hide-losses.html

 

What a clusterf@&k...

 

So in short they made dumb investments into several investment funds that lost them about $700M and after hiding the losses for a while they decide that the best way to go about it is to funnel another $700M using phony advisory fees back into those funds to cancel out the losses. So the shareholders lose out twice if they can't get that money back now... Brilliant!

[keerthiprasad]

Some light starting to be shed on this mess...

 

http://www.bloomberg.com/news/2011-11-07/olympus-used-gyrus-fees-to-hide-losses.html

 

What a clusterf@&k...

 

So in short they made dumb investments into several investment funds that lost them about $700M and after hiding the losses for a while they decide that the best way to go about it is to funnel another $700M using phony advisory fees back into those funds to cancel out the losses. So the shareholders lose out twice if they can't get that money back now... Brilliant!

 

This is so incredibly bizarre lol.  I can't believe how stupid people can behave sometimes.  This one is going to get extremely cheap and they need to suck it up and bring Woodward back in.  That is the only way they will regain any credibility.  He's probably the only person who knows how to run the company that shouldn't be fired too.

[AZ_Value]

Some light starting to be shed on this mess...

 

http://www.bloomberg.com/news/2011-11-07/olympus-used-gyrus-fees-to-hide-losses.html

 

What a clusterf@&k...

 

So in short they made dumb investments into several investment funds that lost them about $700M and after hiding the losses for a while they decide that the best way to go about it is to funnel another $700M using phony advisory fees back into those funds to cancel out the losses. So the shareholders lose out twice if they can't get that money back now... Brilliant!

 

This is so incredibly bizarre lol.  I can't believe how stupid people can behave sometimes.  This one is going to get extremely cheap and they need to suck it up and bring Woodward back in.  That is the only way they will regain any credibility.  He's probably the only person who knows how to run the company that shouldn't be fired too.

 

I agree. Bringing Woodward back would go a long way in bringing some credibility back.

I also agree that it is going to get much cheaper than this - down 30% today.

I haven't bought any shares and now I am worried that talk of the TSE delisting the stock might be on the table now:

 

http://blogs.wsj.com/japanrealtime/2011/11/08/olympus-what-next/

 

If the delisting is no longer an issue and it continues to drop significantly I will definitely try my luck and buy some. It looks to be valued at $2.5B now and the medical imaging division alone generates almost $1B in net profits every year. If I was a big guy like JNJ I would be looking to acquire the whole thing, those side issues about  cover-ups of investment losses that happened in the 1990's don't mean anything to JNJ.

Also Mason Hawkins owns 5% of the company and he's already asked for the entire board to be replaced immediately.

[PlanMaestro]

This is so incredibly bizarre lol.  I can't believe how stupid people can behave sometimes.  This one is going to get extremely cheap and they need to suck it up and bring Woodward back in.  That is the only way they will regain any credibility.  He's probably the only person who knows how to run the company that shouldn't be fired too.

 

The ADR closed at $9, 2.4B market cap ... 70% down in a month. Oil Salad scandal anyone? The problem is how to believe the rest of the balance sheet

[eclecticvalue]

I found out they have two symbols OCPNF.pk and OCPNY.pk    I am trying to figure out which one to invest in and difference, since they both equal 1 ordinary share. Any thoughts?

[PlanMaestro]

Southestern does not seem to catch a break, they are involved in this one too:

 

http://www.reuters.com/article/2011/11/08/us-olympus-southeastern-idUSTRE7A72DI20111108

 

Southeastern Asset Management, which holds about five percent of the company, called for the immediate resignation of Tsuyoshi Kikukawa and Hisashi Mori as directors, Hideo Yamada as corporate auditor and Akihiro Nambu as general manager of the media and investor relations department.

 

[mloub]

There is no doubt the company looks interesting at first blush, but I think it would be difficult to justify an investment here. The financial misstatement was huge, and worse yet it seemed to happen with the tacit approval of the Board. Knowing that, as Plan said, how could you trust anything about this company's financial reports?

 

The best case scenario is the company remains cheap even after a thorough clean out of the current board has happened and a new Board and management have re-stated all of the previous financial statements. But I'd pass for now.

 

M.

 

[AZ_Value]

This is so incredibly bizarre lol.  I can't believe how stupid people can behave sometimes.  This one is going to get extremely cheap and they need to suck it up and bring Woodward back in.  That is the only way they will regain any credibility.  He's probably the only person who knows how to run the company that shouldn't be fired too.

 

The ADR closed at $9, 2.4B market cap ... 70% down in a month. Oil Salad scandal anyone? The problem is how to believe the rest of the balance sheet

 

I really do think this looks like a salad oil situation.

While following this situation, I've been wondering for a few days now, what could make it not be a salad oil play.

 

So today I decided to track down the best information I could find that would describe the thesis the Longleaf guys had in buying 5% of the company reason being that I consider them to be smart (smarter than me) and I would look to see if the current scandal about those bad investments is damaging in any way their thesis and try to make my best judgement, kind of like WEB, after AMEX was cut in 1/2, going around asking retailers if AMEX credit cards and traveler's checks were suddenly no good because some crook had screwed them with a salad oil scheme.

 

Here's one of the best excerpt I read today from one of the Longleaf's Q&A sessions

 

Another recent success for Longleaf is Olympus. A lot of people paid attention to the camera business and didn’t quite get the message on the medical imaging business—but Longleaf did. Would you like to take this opportunity to brag?

 

JB That’s a good segue into another piece of our philosophy—we talk about owning businesses at a significant discount to what we think they’re intrinsically worth, [in the range of] fifty or sixty cents on the dollar. We also want our appraisals to grow, so that we’re being paid as we wait for the price to meet the value. For Olympus, our [appraised] value when we first initiated the position, I guess three and a half years ago, was well below where it’s trading right now. The value is up 70% over the last three and a half years. We closed the initial gap between price and value and we’ve now eclipsed it, and it is really all due to the medical business.

 

If you look at the history of analyst coverage, the people who were covering that company [on Wall Street] were camera analysts. But in our appraisal, that was only about 10% of the value. [The camera business] made a huge difference on the year-to-year earnings per share changes. But if you just looked at it from a private owner standpoint, and you looked at what the medical business was, which is primarily endoscope business—they have a 70% market share in endoscope technology used for procedures such as colonoscopies. Demographically, people are getting older, they’re getting more colonoscopies, and there’s a backlog of doctors learning how to use endoscopes. Then if you look at it from a price perspective, as Frank was saying before, you just look at our appraisal and compare that to comparable business transactions for much inferior businesses in the medical field. [The price of Olympus is] still well below where that stock would probably trade if someone were to buy the medical business.

 

 

[mloub]

I suppose the difference between the salad oil scandal and Olympus is that in the Salad oil scandal some crook ripped off American Express. In the case of Olympus it was the Board and the Management that turned out to be the crooks. The Olympus scopes may well be the best in the world, and it may be a great business, but it is impossible to value that business  now that the financial statements have been so badly compromised.

 

I would not look at the Longleaf investment as a successful one. While they focused on how strong the scope business was, they missed the fraud, and lost oodles of cash. It just reinforces Buffett's point that you have to have a trustworthy and capable management to safe guard your investment. We don't have that at Olympus, though this scandal may be a catalyst that installs a better Board and Management group. If that happens, Olympus would be worth a closer look.

 

If on the other hand Olympus takes a half-hearted approach to their problems and pretends that the fraud was only perpetrated by 3 executives, while maintaining that no one else on the board knew what was happening (which is their current position), then things may get much worse before they get better.

 

M.

[AZ_Value]

There is no doubt the company looks interesting at first blush, but I think it would be difficult to justify an investment here. The financial misstatement was huge, and worse yet it seemed to happen with the tacit approval of the Board. Knowing that, as Plan said, how could you trust anything about this company's financial reports?

 

Yeah all this is what I've been worrying about. How many other cockroaches are we gonna see now that someone just switched the light on.

No doubt that all the board members, especially the chairman, were all in and I'd like to see some people go to jail.

 

But they're not faking their dominance in the medical imaging, some publications have them enjoying up to 80% market share. And they're not faking how profitable it is, it is pretty much subsidizing their other less profitable businesses.

 

The best case scenario is the company remains cheap even after a thorough clean out of the current board has happened and a new Board and management have re-stated all of the previous financial statements. But I'd pass for now.

 

This is what I'm hoping for. For it to remain cheap while some clarity is given on how bad the situation is; but at first blush like you say, $700M that they wasted in the 1990s and have been covering up for years doesn't destroy the whole company, I think they pay something like $100M in dividends, they could have just been ethical about it back then and taken the losses instead of this whole mess and the company would have been fine long-term. Actually those idiots had to be running a good business to be able to lose $700M and then still funnel out another $700M to try and cover that up without killing the company.

 

But still I'm kind of holding back because I'm not sure how many cockroaches could be uncovered that could kill me as it is hard to trust anything they've reported in the past years.

A few things would make me take the gamble: A continued drop ($2.4B is already pretty cheap I think but cut that in 1/2 and I'll take the gamble) or some more clarity with decisive actions like swallowing their pride and bringing back the CEO who blew the whistle as well as a brand new BOD.

I really hope it stays cheap or gets cheaper while all this unfolds.

[AZ_Value]

I suppose the difference between the salad oil scandal and Olympus is that in the Salad oil scandal some crook ripped off American Express. In the case of Olympus it was the Board and the Management that turned out to be the crooks. The Olympus scopes may well be the best in the world, and it may be a great business, but it is impossible to value that business  now that the financial statements have been so badly compromised.

 

I would not look at the Longleaf investment as a successful one. While they focused on how strong the scope business was, they missed the fraud, and lost oodles of cash. It just reinforces Buffett's point that you have to have a trustworthy and capable management to safe guard your investment. We don't have that at Olympus, though this scandal may be a catalyst that installs a better Board and Management group. If that happens, Olympus would be worth a closer look.

 

If on the other hand Olympus takes a half-hearted approach to their problems and pretends that the fraud was only perpetrated by 3 executives, while maintaining that no one else on the board knew what was happening (which is their current position), then things may get much worse before they get better.

 

M.

 

I'm pretty much in agreement with you.

[Gopinath]

It is less than 2 billion now! Looks like a worth gamble :-)

[fenris]

http://online.wsj.com/article/SB10001424052970204554204577026843171730900.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Has anybody looked into the delisting issue?

[cayale]

Not a pretty balance sheet, but the business does not look all bad.

[tradevestor]

Anyone know what happens in the case of delisting, IF it happens ?  The stock won't trade in public markets, but that won't mean the equity will be worth zero, will it ?  Also,  I assume they could get relisted in an year or two, if they could meet the listing requirements.  Is that true ?