From Stardom to Scandal: The Rollercoaster Journey of Horiemon

The story of the Japanese Internet entrepreneur Takafumi Horie who was living on the edge and stepped over it

Introduction

This post is about a fast and furious university drop out who founded his first startup, aptly named “Livin’ on the edge” in 1996, while still studying at the prestigious University of Tokyo.

The tiny venture, located in a cramped office, debuted on the Japanese stock exchange in 2000. It soon transformed into the famous Japanese internet giant later known as Livedoor.

It is a tale of the conflict between two different cultures within Japan’s business community that escalated into an outright war.

On one side of the battlefield, a new cohort of Japanese businesspeople. Young Internet entrepreneurs, none of them above their 40’s, dressed in designer T- Shirts, Jeans and Sneakers, settling in a hip and chic quarter in Tokyo called Roppongi Hills. On the other side, Japan’s long-established, and elitist, business dynasty, wearing traditional costumes like neckties and suits, and none of them below their 60’s.

The story is set in a time when "Old Japan" was focused on hiding losses, while "New Japan" was busy fabricating gains.

Who was Takafumi Horie?

Horie was a self-proclaimed geek and computer whiz. He wrote a number of bestselling books provocatively titled: “Money is Everything: From Zero to 10 billion Yen My Way”.

Horie was not only blunt, but also ostentatiously flashy. He drove a silver Ferrari, bought racehorses, and enjoyed showing off with stunning models in public. On the pivot of his glory, he even announced the launch of a private space tourism venture.

Horie, and his disciples, shared two firm beliefs: The future of business was the Internet and greed is good.

Young Japan was captivated by Horie. In 2005 college graduates picked Horie as the “The CEO you want to become” in a survey. And his signature phrase, “sōteinai” (“within expectations”) when faced with adversity, was their chosen buzzword of the year.

Corporate Japan’s old guard observed the spectacle with great skepticism. They regarded manufacturing the only respectable industry. The internet was nothing more than a fad. More importantly, they favored understatement and scorned the rookie’s attitude, especially the Gordon Gekko inspired moneymaking and cash-grabbing ethos.

“Old Japan” struggled to ignore Horie. But his persistent digging on them (“All evil comes from aged business managers”), and his attempt to buy out an indebted professional baseball team, would eventually raise the ire of Japan’s business elite.

The young villain had thrown down the gauntlet at corporate Japan’s old guard. Young Japan was cheerleading while old Japan spitting nails. Especially, the contempt by the powerful Japanese media conglomerates, owners of Japan’s most prestigious baseball teams, would eventually haunt Horie.

The Rise of Livedoor

‘Livin' On the Edge’ started out in 1995 as a limited company (“Yugen Kaisha”), offering developing services for websites. In 1997 the company reorganized into a joint-stock company (“Kabushiki Kaisha”). In 2000 it debuted on Mothers, the Tokyo Stock Exchange market for start-ups.

In November 2002, ‘Livin' On the Edge’ acquired Livedoor, a defunct Internet service provider, and renamed itself accordingly in February 2004.

Livedoor, was a notorious stock splitter. It had performed a 3-for-1 stock split in May of 2001, a 10:1 split in June of 2003, and a 100:1 split in December of 2003. Another 100:1 split was scheduled for 2004.

Those stock splits are crucial in understanding Livedoor’s breathtaking ascent. Without doubt the Livedoor phenomenon would not have been possible without Japan’s “Big Bang” financial reforms of the late 1990’s.

Livedoor and Japan’s Big Bang Reforms

In the late 1990’s, former Prime Minister Koizumi initiated a reform program labeled “Financial Big Bang”, deregulating and liberalizing the Japanese financial markets plagued by the bubble era’s aftershocks.

Rendering M&A at Japan Inc. easier was one key issue of the reforms. They entailed changes to the tax rules and share swap arrangements, which enabled domestic companies to pay for acquisitions with shares rather than cash.

The reforms also allowed companies to split its stock. The goal was to make share purchases by the public easier and increase the liquidity of the overall stock market.

The intention by Japanese lawmakers might have been benign, but the implementations, especially of the stock split arrangement, were flawed.

The consequences of Livedoor’s 100:1 split in 2004 on its stock price serves as a good example. The price action that followed was nothing short of spectacular. For 15 days in a row the stock traded limit up. At the peak of the share price explosion, Livedoor’s market capitalization was almost ¥1 trillion ($9.3 billion). Not bad for a company with only 359 employees and ¥11 billion in sales.

Market pundits were observing the price explosion with disbelief and awe. Theoretically, stock splits are a zero-sum operation. According to textbook stock prices should adjust downward in relation to the “newly” issued shares.

Livedoor’s split taught them better. It turned out that delivery of “new” shares would be delayed for 50 days, creating a short- term supply and demand imbalance. Garnish those imbalances with a securities house shorting some 10,000 old shares just before the split, and an eager community of speculators sniffing an easy profit by mopping them up: Voilà, off you go!

The magic of this kind of financial engineering did not go unnoticed by Horie. He would turn Livedoor into a rollup extraordinaire.

By 2006 Livedoor had been splitting its stock 30,000-fold, while pasting together a conglomerate of 50 unrelated businesses as diverse as an accounting-software house, an online travel agency, a securities company, a mail-order retailer, a second-hand car firm, etc., creating a corporate Frankenstein.

Taking Control of Nippon Broadcasting System (NBS)

In 2005 Horie was instigating his biggest, and final, Coup d’état on Japan’s clubby business elite. He was taking a controlling stake in Nippon Broadcasting System (NBS).

Because of a complicated web of cross held shares, the hostile bid was regarded as one intended to gain control of Fuji Television, Japan's biggest commercial television station, and ultimately Fujisankei, Japan’s largest media conglomerate.

Horie fought the battle cunningly. Skirting trading rules, he bought shares in after-hours trading to circumvent disclosure rules about his exact controlling interest in the company.

The two-month battle was prominently covered in the Japanese Media. It was finally resolved in April 2005, through an “amicable” (greenmailing) settlement, in which Livedoor sold its block of shares back to NBS for a tidy profit.

Walking over the edge

The collapse of Livedoor had all the ingredients of a full-fledged scandal and drama. It was accompanied by a media blitz suitable for a celebrity murder trail ala O.J. Simpson.

Moody prosecutors parading in front of television cameras, frantic investors panic selling the Japanese stock market, betrayed investors, disillusioned believers in the cause, exultant enemies, and, on top of it all, the horror of a suicide. At the centerstage Horie- San, a risk-embracing entrepreneur in his 30’s who might also have been a crook.

The case broke on January 16, 2006, when Tokyo prosecutors raided several Livedoor locations, Horie's home and those of other Livedoor executives.

The raids spooked investors. Livedoor’s shares plunged the following day, taking with it the whole Japanese internet sector. On January 18, Hideaki Noguchi, an executive of H.S. Securities, a firm raided by prosecutors earlier in the week in connection with Livedoor, was found dead in an Okinawa hotel room in an apparent suicide.

This reinforced panic selling, not only in the stock of Livedoor, but the entire Japanese stock market. On January 19, the transaction volume on the TSE came dangerously close to a system failure and the TSE suspended trading in all stocks 20 minutes before scheduled closing. The multiday stock plunge garnered intense media coverage and was dubbed the “Livedoor shock”.

The exact charges laid in the Livedoor case remained kind of murky. From what had been leaked to the media by the Tokyo district prosecutor's office, the investigation centered around Livedoor Marketing, an advertising affiliate. Allegedly, Livedoor had deceived the public in October 2004 by announcing a buy- out of the publisher Money Life through a share swap. An entity it already controlled through a private-investment arm. In short it all was about good old market manipulation.

Final Remarks

Let us be clear here. Livedoor might have engaged in financial crookery like the prosecutors claimed. Still, the allegations were more than vague. And much of the rest not necessarily illegal in Japan during that time.

No accounting rules for Enron-style investment partnerships existed in Japan. Neither for share splits and the building up of stakes in acquisition targets during off-market trading.

In addition, spoon- feeding the press by prosecutors during investigations are common in Japan. The aim is to build a case in the public before charges are even filed. The media was willingly playing along the allegations, while the Japanese public was still wondering what the Livedoor scandal really was all about.

Many market pundits smelled something fishy given the timing of the action and the constant leaking of information to the press. They interpreted it as a political move by defenders of the status quo, the old guard, to punish Horie. Discrediting him, and the business practices he represented, which they considered distasteful and "un-Japanese."

In March 2007, Horie was found guilty of falsifying the company's accounts and misleading investors. He was sentenced to 2 years and 6 months imprisonment. He appealed the punishment, but the Supreme Court of Japan upheld the sentence. Lievedoor’s distressed assets were purchased by South Korea-based NHN Corp in 2010.

In the end, this little post on the rise and fall of Livedoor is the tale of an underdog’s struggle raising up against Japan’s geriatric business elite. A story about young Japan’s failed anti-establishment crusade that certainly resonated with the public.

Horie's polemic attitude ensured being at the heart of a struggle in the Japanese business community that is still relevant as of today. The fight between those favoring a market-oriented business model, and those who like to maintain the status-quo.

The former experienced a harsh backlash to their cause, because Horie-San was not only living on the edge, but apparently walked over it. The old guard struck back viciously and would be able to claim victory over the outcast.

But the jury is still out. Glossing over the benefits of "market fundamentalism" while emphasizing its risks suggests that the old system upholds higher ethical standards. Quite preposterous, given the numerous scandals Old Japan was engaged in during Japan’s “Lost Decades”.

Source:

The Livedoor Scandal: Tribe Versus Tribe (Time.com)

Livedoor executives admit to scandal that shook Japan (The Guardian)

http://www.japan-press.co.jp/2006/2465/livedoor%20scandal.html

From hero to zero (The Economist)

Melting down (The Economist)

Takafumi Horie: Bane of the old guard (The Japan Times)

Still livin' on the edge (The Economist)

The establishment strikes back? The life and times of Takafumie Horie by Lorraine Warren; Entrepreneurship and Innovation; Vol 8, No 4 2007, pp 261-270

'Livedoor shock' halts TSE (The Japan Times)

The Japan Stock Split Bubble and the Livedoor Shock Youki Kohsaka1 1 Center for Finance Research, Waseda University, Tokyo, Japan April 25, 2014