At a lunch meeting in July 2011 to go over his concerns about massive, unexplained fees linked to Olympus’ acquisition of Gyrus in 2008, Michael Woodford, the new President and CEO, got the first sign his job was in danger. Chairman Tsuyoshi Kikukawa and Group President Hisashi Mori were served an elegant assortment of sushi; Woodford got a tuna sandwich.
In October, Woodford was fired before he could press his inquiry any further. Since then, Olympus has been forced to take a $1.3 billion loss and see its credit rating fall two notches to BBB+. Kikukawa and Mori have lost their jobs and been arrested.
The tuna sandwich was Woodford’s own early warning, but how could an outside analyst have seen Olympus’ problems developing? We’ve blogged about the early warning signs of companies in distress before: Early Warning Signs at Borders Part 1 and Part 2. We think Olympus is a good example of our sixth sign, problems with management.
Olympus is a classic example of a recurring problem with management at troubled companies: desperate strategies. From 2008 on, as smart phones with built-in cameras grew in popularity, the company’s sales of digital cameras suffered and profits collapsed. And digital cameras were vitally important to Olympus, accounting for as much as 26% of sales but only 8% of operating profits in 2008.
What was management’s response? Unable to counter the threat from telephone cameras, Olympus made a string of senseless acquisitions, including companies in pet care, medical-waste disposal, microwave cookware, and mail order cosmetics. When it made an acquisition in a core business, Gyrus in medical equipment, it overpaid. Then Olympus sold its profitable diagnostics unit at a bargain price.
This kind of flailing acquisition and divestiture activity is a symptom of management and a board that are unable to cope with reality. Instead of taking a methodical approach to analyzing and solving the company’s problems, they panicked. The danger signs should have been clear to any analyst concerned about risk well before Michael Woodward’s dismissal set off alarms.
For more about Michael Woodford and Olympus, read The Story Behind the Olympus Scandal by Karl Taro Greenfield in Bloomberg Businessweek, February 20, 2012. For more on management’s role in troubled companies, read How the Mighty Fall by Jim Collins.