What’s in a name?
The Livedoor brand may be tainted by scandal, but that’s not stopping big investors from taking out their calculators and weighing the risks and returns of buying one of its group companies.
Many foreign and domestic investment fund managers are hunting for bargains less than a week after Livedoor founder Takafumi Horie and three other executives were arrested on suspicion of violating the Securities and Exchange Law.
The Livedoor group had 44 subsidiaries at the end of last year. Six are listed, including mail-order retail firm Cecile Co. and computer operating system developer Turbolinux, Inc.
“In this case, the sum of the parts is greater than the whole,” said a director at a U.S. company involved in corporate turnarounds, noting that the parent firm is unlikely to have meddled in the day-to-day management of its subsidiaries. “Once you take some of the companies out from under the Livedoor umbrella, their value may well rise.”
One example is Yayoi Co., the top accounting software maker in Japan, he said, noting that the firm’s inherent value was high before it was purchased by Livedoor in December 2004, and is unlikely to have fallen since.
For investors looking for a potential bargain, the main risk, however, is a lack of transparency.
Investigators have alleged the parent firm fudged its earnings reports, which in turn has cast doubt on the credibility of Livedoor’s former auditor, Koyo Audit Co., and its scrutiny of Livedoor group firms.
If the allegations prove true, potential investors have to assess whether and to what degree each firm is entangled with loss-making group companies.
That risk is enough to turn off some big players, like Yoshitaka Kitao, CEO of asset management and investment group SBI Holdings, Inc. Kitao turned up his nose at the Livedoor group.
“I see few attractive buys, after a quick look,” he told reporters Thursday. “Livedoor (firms) may have given false earnings reports, and we can’t trust the auditors. That means we can’t do due diligence, which is the be-all-and-end-all of acquisitions.
“Why would we buy a company whose present value falls overnight from 800 billion yen to 120 billion yen?” he asked.
Others question whether Livedoor group components have sufficient cash flow. Livedoor’s bankers are now combing their records to make sure they won’t be caught by surprise should a group company go under.
“We may have to cut funding to a Livedoor subsidiary if it’s a case where our loan was based on our trust in Livedoor,” one creditor said.
Livedoor itself may be delisted from the Tokyo Stock Exchange if its new management cannot show that its accounting holds up under scrutiny, although Livedoor’s new president, Kozo Hiramatsu, has denied the firm is in any immediate danger of failing.
Despite the risks, the search is on for good buys, and the parent firm is also a potential target, even though it bears the tarnished Livedoor name.
Advertisers are fleeing the company’s Web portal, and used car dealer Livedoor Auto may strike “Livedoor” from its name and reconsider its capital ties with the group.
Nevertheless, Fuji Television Network Inc., Livedoor’s second-largest shareholder, with a 12.75 percent stake, has said it may step in to help the parent company.
Fuji TV Chairman Hisashi Hieda said Thursday an internal team tasked with devising ways to raise the broadcaster’s corporate value is now assessing the value of Livedoor’s assets with an eye to a possible takeover.
Fuji TV purchased the Livedoor shares last May for 44 billion yen at 329 yen each. Selling that stake now, with Livedoor Co. stocks closing at 139 yen Friday, would translate to a loss of more than 25 billion yen, leaving Fuji TV management open to shareholder lawsuits.
It makes sense for Fuji TV to consider rescuing Livedoor Co. and waiting for its stock to rise before selling its stake, a Fuji TV spokesman said.
According to a December earnings report currently under scrutiny by investigators, Livedoor held 92.8 billion yen in liquid assets, including 45.6 billion yen in cash. It also held over 50 billion yen in stocks, including those of its group firms. If these figures are correct, acquiring a majority stake in Livedoor could give an immediate payback, if its stock price falls further.
But buying such a stake may be difficult, with 54 percent of Livedoor stock held by noninstitutional investors inSeptember. Private equity fund managers said they never saw much sense in investing in Livedoor itself.
“The value of Livedoor lies in the subsidiaries that can churn out real value,” said a manager at a Japanese private equity fund. “It’s not in Livedoor (itself).”
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