• Bloomberg


Olympus Corp.’s 2009 sale of a profitable diagnostics unit it spent four decades building up for what appeared to be a bargain price is beginning to make sense as the company admits covering up decades of losses.

A day after announcing the purchase, Beckman Coulter Inc. Chief Executive Officer Scott Garrett told analysts the Olympus division’s “long and enviable track record of above-market growth” would give an immediate boost to earnings. The deal won an upgrade for Beckman from Barclays Capital. Olympus’ then-president, Tsuyoshi Kikukawa, said the camera maker couldn’t compete in the sector, even as he bought face cream, plastic cookware and recycling firms.

“If we hadn’t wasted all our money on silly things,” diagnostics “would have been a really good business to invest in,” said ousted Olympus CEO Michael C. Woodford, who publicly questioned Kikukawa’s acquisitions after he was fired on Oct. 14. “We had to strengthen our balance sheet and didn’t have the money to invest.”

Olympus shares have lost more than half their value since the company admitted on Nov. 8 using the purchase of Gyrus Group and three other companies to cover up losses on investments dating back decades. The Tokyo Stock Exchange said 92-year-old Olympus may be delisted as it faces regulatory and criminal probes at home and in the U.S.

Kikukawa stepped down Oct. 26, and newly installed President Shuichi Takayama last week blamed him and two senior aides for the coverup.

Before Woodford’s dismissal, Olympus won plaudits from analysts, including Goldman Sachs Group Inc.’s Toshiya Hari and Kenya Moriuchi, for in April making the Briton its first foreign head. Woodford had promised to focus on the more profitable medical business, cut costs and bring discipline to mergers and acquisitions, they wrote in an Oct. 12 report.

Olympus, which branched out from cameras to become the world’s biggest maker of endoscopes, sold its blood-testing and chemical-analysis unit for ¥77.5 billion to Beckman in August 2009.

In a conference call with analysts after announcing the deal in February, Garrett said the division’s expected revenue for the year would be about $500 million. Olympus paid 4.8 times sales in its $2.1 billion takeover of U.K.-listed medical-equipment maker Gyrus in February 2008.

The Olympus unit had operating margins “in the range of 10 percent” in the five years before the sale, even as investments in new technology raised costs, he said.

Beckman got a warning from the Food and Drug Administration in June last year for marketing a heart test without proper clearance. Garrett left three months later, after earnings fell short of analysts’ estimates.

Last Feb. 7, Danaher Corp. bought Beckman for $6.8 billion. The deal valued Beckman’s equity and net debt at 8.6 times earnings before interest, taxes, depreciation and amortization, the cheapest deal of more than $1 billion on record for a medical-instruments maker, data compiled by Bloomberg show. Olympus paid 27 times earnings before interest, taxes, depreciation and amortization (EBITDA) for Gyrus.

Tokyo-based Olympus admitted last month it paid $687 million in fees to advisers on Gyrus. Most of that went to a Cayman Islands fund that no longer exists, according to filings from the offshore center’s registry.

The fees may have never reached the advisers and instead been used to cancel out nonperforming securities Olympus was keeping off its books, according to a report in the Shukan Asahi magazine. Olympus said last week an independent committee it appointed to look into its acquisitions is still examining the method used to hide the losses.

“You can’t just throw $700 million down a pipe without anyone else being involved,” said Ben Collett, head of Japan equities at Louis Capital Markets HK Ltd. “There’s a combination of events that need to involve other parties.”

The camera maker’s revelations recall the practice of concealing impaired investments known as “tobashi” that became widespread in the late 1980s and led to the failure of Yamaichi Securities Co., said Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto.

Between 2006 and 2008, Olympus paid ¥73.4 billion to increase stakes in News Chef Inc., which makes plastic containers for microwave ovens, Humalabo, a face-cream maker, and recycling company Altis Co., according to a letter Woodford sent to Kikukawa.

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