Morgan, Goldman rake in Livedoor billions

Bloomberg

Livedoor Co., the Internet service provider whose founder, Takafumi Horie, faces prison for inflating profits, is providing a payday for Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG.

As the largest shareholder of unprofitable LDH Corp., the holding company that controls Livedoor, Morgan Stanley will receive ¥15.3 billion in dividends this year, according to LDH financial statements released Nov. 17 and June 29. Goldman Sachs is getting ¥8.4 billion and Deutsche Bank ¥6.9 billion.

Morgan Stanley invested in Livedoor after the company was delisted in April 2006 after prosecutors charged Horie with fraud. The bet is paying off as LDH announced ¥85 billion in dividends this year, equivalent to 86 percent of Livedoor’s market value when it stopped trading. Horie, who remains the second-biggest shareholder, won’t get a payout.

“It’s good to fish in troubled waters,” Horie, 37, said in an interview Monday in Tokyo at an event to promote his new book, “The Theory of Hope.”

“The overseas firms had the courage to jump in and take risks,” he said. “The return makes sense.”

LDH’s cash pile shrank by more than half in the 12 months through June.

“We decided to unwind cash reserves to pay dividends to investors,” said Kiyotaka Mura, LDH investor-relations manager. “We have caused inconvenience to the investors, as they can’t trade the shares.”

Horie has appealed the 30-month prison sentence he received in 2007 for securities fraud to the Supreme Court.

His rise and fall captured the public’s attention as the University of Tokyo dropout rode the surging share price of Livedoor to become tremendously wealthy, bid for control of the nation’s biggest private broadcaster, ran for a seat in the Diet and then was convicted for faking profits.

The entrepreneur, who quit school in 1997 to set up what would become Livedoor, thumbed his nose at Japan’s gray-suited business world by spiking his hair and appearing on the April 2005 cover of the Japan version of GQ magazine wearing a checkered suit and pink tie.

Less than a year later, Horie became a poster boy for corporate wrongdoing. Livedoor’s shares plummeted 80 percent in seven days in January 2006, following news that prosecutors had raided its offices. The company sued Horie in August 2008.

As other investors bailed out, Morgan Stanley and Goldman Sachs stepped in.

Hybrid Capital Second, an investment unit of Morgan Stanley, bought 1.34 million shares in LDH from Usen Corp. Chief Executive Officer Yasuhide Uno in 2007, according to a statement by Usen at the time. The price wasn’t disclosed. Uno bought the stake from Fuji Television Network Inc. in 2006 for ¥9.5 billion.

“It’s a principal investment using Morgan Stanley’s capital,” Natsuo Nishio, a Tokyo-based spokesman for Morgan Stanley, said when the purchase of Uno’s stake was announced in August 2007. “Looking at Livedoor’s assets, we judged we can get sufficient returns.”

Nishio declined comment. Hybrid Capital President Takumi Ooga and Usen’s Uno didn’t return calls. Hiroko Matsumoto, a Tokyo-based spokeswoman for Goldman Sachs, also declined comment, as did Deutsche Bank’s Aston Bridgman.

LDH changed its name from Livedoor Holding Co. in August 2008. Morgan Stanley owned 1.9 million LDH shares, or an 18 percent stake, as of March 31. The firm received a ¥12.3 billion dividend in June and will get a ¥3 billion special payout by Wednesday, according to LDH statements.

Goldman Sachs appeared on LDH’s list of major shareholders for the first time in 2006 and was the fourth-largest investor as of March 31. Deutsche Bank was No. 7, according to LDH statements. It wasn’t clear if Goldman Sachs and Deutsche Bank owned the LDH shares or held them on behalf of clients.

“Overseas companies and funds have been targeting Japanese companies that have plenty of cash but have some corporate governance issues,” said Takao Saga, a Waseda University professor who is also a director at Japan Securities Research Institute. “Japanese banks won’t do it because of the reputation risk.”

Nippon Life Insurance Co., banks and more than 1,800 individual investors have filed lawsuits against LDH seeking compensation for losses stemming from Horie’s securities law violations.

LDH posted a loss of ¥57.6 billion for the fiscal year that ended March 31 as it paid settlements and set aside money to cover lawsuits. The company had ¥68.1 billion in cash on June 30, 57 percent less than a year earlier. This month’s special dividend, which will be paid to all shareholders except Horie, will reduce LDH’s cash pile by ¥17 billion, Mura said.

Sales at LDH’s Internet and portal businesses rose 19 percent to ¥2.5 billion in the quarter that ended June 30 from a year earlier.