In Clubby Japan, A Brash Raider Takes a Big Fall
Prosecutors Suspect Mr. Horie Of Livedoor Cooked Books;
30 Acquisitions in 5 Years
Flaunting His Ferrari on TV
By YUKA HAYASHI, ANDREW MORSE and SEBASTIAN MOFFETT
Staff Reporters of THE WALL STREET JOURNAL
February 3, 2006; Page A1
TOKYO -- Takafumi Horie's rapid rise to fame shocked Japan, where businesses historically have been built on careful development of products and factories. The 33-year-old entrepreneur assembled a company with a market value of $7 billion in just 10 years through more than 30 acquisitions, in businesses ranging from Internet advertising to online dating to used cars.
"My personal assets are now equivalent to the national budget of Mongolia," he bragged in a book called "Making Money for Beginners," published in March 2005.
[Takafumi Horie]
Mr. Horie's ambitions may have driven him too far. Prosecutors, according to their written allegations, suspect his company, Livedoor Co., carried out accounting tricks, such as inflating earnings to boost a subsidiary's share price -- the same kind of fraud that brought down WorldCom Inc. Since Jan. 23, Mr. Horie (pronounced "HO-ree-eh") has been held in a tiny cell in a Tokyo detention center.
Mr. Horie, who hasn't been charged, couldn't be reached for this article, and his lawyer, Yasuyuki Takai, wasn't available for comment. Before his arrest, Mr. Horie said on his blog that he was "not guilty of the things that I am suspected of."
Mr. Horie personifies a style of raw capitalism that is new in Japan. The spiky-haired entrepreneur became most famous for trying to buy up established companies that never dreamed they would become takeover targets -- including one of Japan's 12 professional baseball teams and the country's biggest publicly traded television station. While old-style Japanese capitalism focused on increasing corporate revenue, Mr. Horie kept his eye on increasing his company's market capitalization. His long-term ambition was for Livedoor to have the world's biggest market capitalization, he said in a book published the day before his company was raided on Jan. 16.
Many Japanese recognize that, to grow in the future, the country could benefit from an injection of this fast, rough way of doing business. During Japan's decade or so of economic slump in the 1990s and early 2000s, large, plodding corporations were criticized for ceding leadership of fields such as technology to more dynamic American, South Korean and Chinese rivals.
To improve the business environment, the government loosened employment regulations, cut down import restrictions and deregulated financial markets. During the past three years, an unprecedented wave of mergers and acquisitions has contributed to Japan's economic revival. Seeing Mr. Horie as a breath of fresh air, Prime Minister Junichiro Koizumi endorsed him as a parliamentary candidate in last September's general election, although he failed to win a seat.
[Split Personality]
Mr. Horie's aggressive M&A tactics struck fear into big companies. Many scrambled to adopt antitakeover measures such as poison pills. More widely, Mr. Horie's flashy lifestyle, featuring a fashion-model girlfriend and a Ferrari, was an affront to the country's traditional values of patience and modesty.
He has thus become the focus of national soul-searching over how Japan should evolve. This mirrors a similar debate in other developed economies over whether to throw out old, comfortable ways. France and Germany, for example, are loath to abandon heavy employment protection -- even though this makes it hard to create new jobs.
Little Sign of Backlash
In Japan, there is little indication of a possible backlash against deregulation, which continues to gain momentum under Prime Minister Koizumi. So far, most Japanese regard the Livedoor debacle as a freak occurrence rather than a sign of deeper rot. The immediate consequence is likely to be efforts to beef up Japan's corporate and stock-market regulators, so that they can more effectively police corporations and investors in the newly liberalized business environment.
"The people in the government...can see the need for reorganization," in order to revitalize Japan, says Marc Goldstein, Japan director for Institutional Shareholder Services Inc., a provider of proxy and corporate-governance services. "Livedoor's problems won't prevent these changes from happening."
Growing up in a small farming town in southern Japan, Mr. Horie itched to get out. In some of the two dozen books he has written, including a Japanese business bestseller called "Those Who Make Money Win," he has disparaged his father as an "ordinary salaried worker" and written that his family was "in the lower end of the middle class." At school, he aced his tests and scoffed at classmates who struggled, refusing to play with them.
"Since I was a child, I hated adjusting myself to other people," he wrote in one of his books. "I believe I was hated both by friends and teachers."
Mr. Horie gained a place at the University of Tokyo, Japan's most prestigious college. He soon got bored studying, took part-time jobs and discovered the Internet. In 1996, when he was 23, he borrowed about $50,000 from an acquaintance and set up a Web-site-design company, which he named after an Aerosmith song, "Livin' On The Edge." Mr. Horie eventually dropped out of school to focus on his business, later renamed Livedoor after one of the companies it acquired.
[Fallen Star]
At the time, Japan still was striving to recover from the bursting of the stock and real-estate bubble in the early 1990s. One solution, figured government leaders, would be for Japan to produce more entrepreneurs who might spark new growth. In 1996, Japan began a wave of financial and corporate liberalization to loosen its highly regulated business environment.
One goal was to make it easier for small businesses to raise money in the markets so they could grow quickly. In 1999, for instance, the commercial code was amended to allow stock swaps -- paying for an acquisition with a company's own shares, which can be easier than coming up with cash. In 2001, the government removed a rule that restricted stock splits to make it easier for individual investors to buy shares.
Ryoji Miyauchi, a quiet, intensely focused tax accountant who became Mr. Horie's chief financial officer in 1999, took full advantage of these changes to help boost the company's share price.
Stock splits proved one unlikely route. In theory, a 10-for-1 stock split -- in which a company issues 10 shares for each share held -- should lower the price of the stock to one-tenth its previous level. The company's market capitalization shouldn't change. But in Japan, the share price often rises after a split, because there is a temporary shortage of stock certificates while new shareholders are accounted for and certificates are printed. This process took about 50 days until recently. In the U.S., stock splits also often cause a company's share price to fluctuate, but the impact tends to be smaller because splits are more modest, such as 2-for-1 or 3-for-1, and the paperwork is quicker. Japanese investors aware of this anomaly often pile into a company's shares after a split is announced, keeping the shares rising further.
Mr. Horie's company conducted four stock splits from 2001 to 2004, including a 100-for-1 split in February 2004. The announcement of that split created such a market buzz that the company's shares more than quadrupled during the three weeks before it was executed. Overall, the frequent splits helped bolster the company's long-term share price and allowed it to make some of its acquisitions with inflated shares.
Mr. Horie appeared proud of taking advantage of such anomalies in the market. "There are a number of systematic defects in today's stock market," Mr. Horie said in one of his books. "Many of these defects are being brought to light because of our challenges."
Other companies copied the strategy. New Deal Inc., an online music distributor that branched out into art dealing and yoga classes, carried out a 1,000-for-1 split in February 2004. Concerned that stock splits were being used to artificially boost share prices, the Tokyo Stock Exchange last year effectively banned splits larger than 5-for-1.
Mr. Horie also found that aggressive self-promotion helped bolster the share price. While most Japanese executives don't like to draw attention to themselves, Mr. Horie showed off his Ferrari on television and sponsored a range of Horie-themed products from jeans to an energy drink. He kept a widely followed blog in which he wrote about his obsession with food -- ranging from cheap squid-leg sushi to fancy dinners loaded with truffles.
In 2004, Mr. Horie even tried to buy a weak, financially troubled baseball team. The bid failed, but for a while the Japanese media dubbed him "the savior of baseball."
In 2005, Livedoor borrowed $700 million from Lehman Brothers Holdings Inc. to make its boldest move yet.
To help Japanese companies unwind their cross-shareholdings, the Tokyo exchange in 1998 introduced a system called Tostnet, which operated outside normal trading hours and was designed for block trades. That normally meant two shareholders had negotiated a large trade in advance and wanted to process their deal outside the hurly-burly of the trading day.
Learning to Raid
Livedoor discovered that by carrying out a series of trades on Tostnet, it could buy up a large part of a company before that company's management or key shareholders knew. In other words, Tostnet could be used to carry out a corporate raid.
Before the start of trading on the Tokyo exchange last Feb. 8, Livedoor used Tostnet to find six big sellers of Nippon Broadcasting System Inc., a small AM radio broadcaster. Using the money borrowed from Lehman, Livedoor grabbed 29.6% of the company in the space of a few minutes. By late March, Livedoor had acquired more than half the radio broadcaster, accomplishing a rare Japanese hostile takeover.
The share purchase was a backdoor way for Livedoor to purchase part of Fuji Television, Japan's biggest publicly traded network. Nippon Broadcasting was one of the core companies in the Fuji Television group -- and held 22.5% of Fuji, making it the network's biggest shareholder. Livedoor also bought a number of shares in Fuji, though didn't manage to take it over.
Though the takeover stayed within the law, it broke the conventions of Japanese corporate etiquette and shocked the old corporate establishment. Scores of Japanese companies began adopting poison-pill plans -- arrangements to discourage hostile takeovers by making them prohibitively expensive. Japanese legislators, worried that the door was opening to hostile takeovers by foreign companies, postponed a planned rule change that would have allowed overseas companies to pay for acquisitions with their own shares.
No one knows what prompted prosecutors to begin investigating the company. On Jan. 16, Tokyo prosecutors entered Livedoor's offices in one of central Tokyo's most fashionable districts. A week later, Messrs. Horie and Miyauchi and two other executives were arrested. They are accused of conspiring to use improper accounting and false information to accommodate an acquisition and inflate the share price of a group company. Mr. Horie's lawyer didn't make himself available for comment. Livedoor wouldn't identify Mr. Miyauchi's lawyer.
The drama also turned into a black eye for regulators and the Tokyo exchange. The stock splits pioneered by Livedoor, plus an increase in online-trading services offered by Livedoor and others, had led to such a boom in individual investing that these traders accounted for more than half of overall volume on Japan's top three stock exchanges last year. As these investors strived to sell Livedoor and other Internet stocks, the volume of sell orders threatened to crash the Tokyo exchange's computer system, forcing it to shut down 20 minutes early on Jan. 18, two days after the raid.
Critics also say financial authorities let the Livedoor saga go too far. Japan's securities watchdog, the Securities and Exchange Surveillance Commission, has just 307 staff members, compared with 3,865 at the U.S. Securities and Exchange Commission. The arrest of Livedoor executives prompted calls to add staff and otherwise strengthen the capability of Japan's financial regulators to cope with the wide range of deals now allowed in Japan.
Livedoor's market capitalization, which stood at $7.1 billion just a month ago, has fallen to $762 million, and the president of the Tokyo exchange has said the exchange may delist Livedoor's shares. The company's shares now trade below its book value, meaning it is valued at more if it is broken up than kept together, making it a potential takeover target. Mr. Horie has resigned as chief executive and new management is trying to resuscitate the company.
While in jail, Mr. Horie is served simple meals of rice and fish. According to a person familiar with the situation, he has told his lawyers to ask someone to drive his Ferrari to keep the battery from dying. |
