The phenomenal rise of Japan's most flamboyant entrepreneur could have been outdone only by his very public fall. The arrest of Takafumi Horie, the man behind Livedoor, an internet portal that grew from a $50,000-company in 1995 to a $7 bn-company in just over a decade, seems to have shaken the investors' faith in the economy's recovery. On January 17th, when Livedoor's office was raided in connection with criminal investigation, not only the stock prices of the company came crashing down, plummeting to one-third of its original value, the entire Japanese stock market tumbled. However, Japan's economic fundamentals were strong enough to restore back the investors' lost confidencethe two-day panic selling which led to a 6% fall in Nikkei 225 index was followed by a 2.3% increase the next day, indicating that Japan's comeback from its decade-long slump was real. For all the hype and hoopla created around Horie and his company, it is possible that the Livedoor incident may be brushed off from the minds of investors and young entrepreneurs as just another case of manipulation in a booming economy but it has certainly exposed the hollowness of corporate governance practices in Japan.
In Japan, the homeland for giants like Sony, Toshiba and Toyota manufacturing is still widely regarded as the most honorable industry. Organic growth is held in high esteem and some organizations, even to this day, scornfully reject the idea of mergers and acquisitions. But Horie seemed to be defying these conventions. Instead of growing his company slowly over several years, he discovered a short route to growth. He cobbled together an empire by acquiring no less than 50 small and financially weak firms, often using the Livedoor stock as currency. Along with the company, Horie's popularity also grew, enabling him to maintain the capital inflows from individual investors. The 33- year-old knew what investors liked to hear about his company and how to use the media attention to his advantage. His informal look, brash management style, lavish way of living and frequent appearance on national talk showsall helped him to ensure investors' interest in his stock.
Behind this ever-increasing popularity and rapid growth, Livedoor, it appears, managed to conceal some shocking facts. The company is said to have manipulated the markets in 2004. On October 24th, Livedoor Marketing, a subsidiary of Livedoor, announced that it was going to acquire a publishing company, MoneyLife Inc., which the parent company already controlled through an investment fund. After it made the announcement, Livedoor Marketing's share prices began to escalate, rising from ¥1790 to ¥2200 on November 8th, when it announced an astonishing 100-for-1 stock split. The prices then touched dizzying heights of ¥80,500 on December16th. After the new shares were distributed, the price of Livedoor marketing settled at ¥6000 levels, resulting in an increase of market capital by 300 times.
This phenomenon reflects two peculiarities of the Japanese markets. While the shares of a company may be fewer in number they would be higher in value and price. A share split will dramatically boost liquidity and tradability and result in a significantly higher value. Secondly, whenever a share split takes place in Japan, the new shares are not available for trading for several months. This temporary shortage automatically leads to increase in share prices as there is a mismatch between the supply and demand of that company's shares. And the prices would eventually cool down once the new shares are distributed.
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