Olympus bows to investor pressure, launches M&A review

TOKYO Fri Oct 21, 2011 5:42pm BST

Olympus's logo is seen through its waterproof housing at an electronics shop in Tokyo October 20, 2011. REUTERS/Kim Kyung-Hoon

Olympus's logo is seen through its waterproof housing at an electronics shop in Tokyo October 20, 2011.

Credit: Reuters/Kim Kyung-Hoon

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TOKYO (Reuters) - Japan's Olympus Corp said on Friday it would set up an independent panel to examine its past M&A deals after shareholders demanded an explanation for massive fees paid to advisers in a 2008 acquisition.

The announcement came a week after the maker of endoscopes and cameras fired its British CEO, citing management incompetence, only to see him turn whistleblower.

Olympus shares have lost half their value since the October 14 sacking of Michael Woodford, who had been appointed to the job only two weeks earlier.

Woodford, who is now in Britain, has sent dossiers to British fraud investigators about the Japanese firm's $687 million (434 million pound) payments to two advisory firms over its $2.2 billion acquisition of British medical equipment maker Gyrus.

Olympus has confirmed the payments, but has not given details on why the huge fee was required. Criticism from investors has mounted, with even normally pliant Japanese stakeholders such as Nippon Life Insurance Co, Olympus' biggest shareholder, calling for prompt action.

"We are preparing to set up a third-party panel, including lawyers and accountants, to look into past acquisitions by the company," Olympus said in a short statement, adding that shareholders had been asking for information.

Woodford has also written to Japan's Securities and Exchange Surveillance Commission (SESC) asking it to look into the matter.

Japanese Financial Services Minister Shozaburo Jimi said the financial watchdog would do its duty but declined to comment on individual cases.

"It looks like a step in the right direction," said Kiyoshi Noda, chief fund manager at MU Investments Co, referring to the independent panel.

"Investors want full disclosure of what has really happened because statements from the ex-CEO and the board differ. So if independent investigators take a close look at past deals and compile a report on that, that should be helpful," Noda said.

At the heart of the controversy is the advisory fee paid to two companies, New York-based AXES America LLC and Axam Investments in the Cayman Islands. The amount is equal to a third of the acquisition price, compared with an industry standard of 1 percent to 2 percent of a deal's value.

A large portion of the fee was paid in preferred shares, which ballooned in value, ultimately raising fees from an originally agreed $100 million, according to a PricewaterhouseCoopers report commissioned by Woodford.

Financial adviser AXES had demanded payment in preferred shares in part to delay tax payments on the fees, Olympus President Hisashi Mori was quoted as saying in an email exchange, forwarded to Reuters by Woodford.

A former Wall Street banker of Japanese descent has emerged as a key figure in both of the recipient advisers, according to documents provided by the firm's ex-CEO.

The veteran banker, Hajime 'Jim' Sagawa, owned AXES, which was hired by the endoscope-maker five years ago to provide what turned out to be expensive advice, the documents show.

"Sagawa represented AXES in relation to the Gyrus transaction who we understand has resided in the United States from 1980 to the present, including a period stationed in New York for Nomura Securities," the PWC report said.

It said Sagawa, who also worked for Drexel Burnham and PaineWebber before setting up AXES, was AXES president and "held himself out" to be a director of affiliated firm AXAM which ultimately received the bulk of the fee.

Reuters went to Sagawa's Florida home on Thursday, but the ex-banker was not in. Instead, his wife Ellen said he was travelling and that he had done nothing wrong.

"My husband was on Wall Street for many years and was well-respected," she said, after answering the door of their waterside two-story home in Boca Raton, north of Miami.

"My husband is clean as a whistle, I assure you," she said when asked about Sagawa's connection with the scandal.

Mori told analysts in a teleconference call on Monday that Olympus had close dealings with AXAM, described in Gyrus's financial statements as the portfolio manager for AXES, but that he had no contact with AXAM recently.

The PWC report said AXAM had been struck off the Cayman Islands registry in the last year. Mori told investors he was not aware of this fact.

Woodford, dismissed just two weeks after taking over as CEO and six months after becoming president, took his case to British fraud investigators since most of the Gyrus deal was paid for through an Olympus subsidiary in the UK.

Woodford said he was fired because he requested an explanation of the payment and demanded Chairman Hisashi Kikukawa and Mori resign when he didn't receive a satisfactory answer. Woodford had worked at Olympus for 30 years.

(Additional reporting by Reiji Murai and Antoni Slodkowski; Editing by Abi Sekimitsu and Chris Gallagher)

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