Olympus in tie-up talks with tech groups

Olympus, the scandal-hit Japanese optical equipment maker, is in the late stages of negotiating a strategic alliance with a larger technology group and could announce a tie-up as early as Friday, when management unveils its latest plan to revive the company.

Panasonic and Sony are among the rival groups seeking to buy a stake, according to industry insiders and Japanese media reports. Both compete with Olympus in digital cameras and are seeking to expand their medical technology businesses – the main area of strength for Olympus which controls about 70 per cent of the global market for surgical endoscopes.

This week Kyodo News reported that Panasonic had all but clinched a deal to invest Y30bn-50bn ($377m-$629m), giving it a stake of between 8 and 12 per cent, though talks with other groups were said to be continuing as of Thursday. Fumio Ohtsubo, Panasonic’s president, has told Reuters there was no investment plan in place.

Olympus’s balance sheet has deteriorated since it was caught in a more than Y100bn accounting fraud last year and executives have been looking for ways to raise capital since at least December. In the wake of the scandal, the company was forced to write down the value of assets and take a Y49bn net loss for the fiscal year that ended in March.

Olympus was already one of Japan’s most heavily indebted manufacturing groups thanks to a string of loan-financed acquisitions – some of which turned out to have been used in the fraud, as cover to settle losses on investments dating back more than a decade.

As of March, Olympus’s net debt was nearly six times its equity and its equity ratio – net assets as a proportion of total liabilities plus net assets – was a wafer-thin 4.5 per cent, less than half the level of a year earlier. Cash flow remains healthy enough to keep it out of danger, analysts say – sales have held up despite the scandal – but it has little cushion against downturns or other unforeseen shocks.

Panasonic, Sony and other suitors – Fujifilm has acknowledged having made a bid – may be seeking access to Olympus’s endoscope technology as well as its established sales network among hospitals and national health services, analysts say. In February, Sony appointed Hiroshi Yoshioka, an experienced senior executive from its consumer electronics division, to run its small medical devices business – a move seen as confirming its intention to expand.

In depth

Olympus accounting scandal

Concerns over deal-making at the Japanese camera maker have been aired by the group’s former chief executive, Michael Woodford

The appeal of the medical niche is clear: at a time when Japanese companies are being squeezed out of many consumer electronics segments by cheaper Asian competitors, Olympus’s endoscope business is generating profit margins of 20 per cent. Panasonic and Sony, which are stuck in price-war battlegrounds such as LCD televisions, lost Y772bn and Y457bn respectively last year.

Still, some have questioned what a minority stake of 10 per cent would actually buy. Eiichi Katayama, an analyst at Bank of America Merrill Lynch, says an investment of that size would amount to a “mere cross-shareholding” of the passive sort common among Japanese companies. Given that Panasonic and Sony are deep in the red, spending money to prop up Olympus could draw criticism, he adds. The companies are both in the middle of management transitions – Panasonic gets a new chief executive in July and Sony installed a new chief in April – making the timing especially awkward.

For Olympus, the move to issue new shares is already controversial, at least among its foreign investors. When the company originally floated the plan in December, many saw it as a tactic to dilute their stakes and strengthen management control. At the time, several funds were agitating for the return of Michael Woodford, the former Olympus president who revealed the accounting scandal.

Mr Woodford was sacked in October, and has since won an estimated £10m settlement over his dismissal. Olympus has revamped its board – and three former executives have been arrested – but its new president is a company veteran, not the outsider some investors were hoping for.

The company’s revival plan is also expected to include the elimination of perhaps 2,500 jobs, or 7 per cent of its workforce, as it seeks to cut costs in its unprofitable digital camera business.

Olympus suspended earnings guidance after the scandal but Japan’s Nikkei business daily reported this week that it would forecast net profit for this year of between Y5bn and Y10bn, below the Y25bn average view of analysts surveyed by Bloomberg.