Olympus Corp should be the easiest of takeover targets: a profitable business with its share price in tatters, its management in utter disgrace and its balance sheet in need of fresh capital. But not in Japan.
The long-term approach of major Japanese investors like banks and life insurers, combined with an aversion to foreign and hostile takeovers and uncertainty over lawsuits stemming from the $1.7 billion accounting scandal, will likely make any change of ownership at Olympus a gradual process.
The camera and endoscope maker is seeking a friendly capital tie-up with a rival electronics company such as Sony Corp or Fujifilm to bolster its finances after unpicking the 13-year accounting fraud to find its net assets had dwindled to just 45.9 billion yen.
Olympus is expected to stay listed for the time being and sources with the company's powerful main bankers, who are also shareholders, say they would be prepared to wait for the firm to recover on its own.
The tie-up proposal is meant to mollify more impatient foreign investors, say the bankers, who avoid commenting in public because of the sensitivity of the issue.
"This is a distinctively Japanese thing," said Alastair Macdonald, banking analyst at Macquarie Capital Securities in Tokyo. "For decades, Japanese banks have formed very long-term relationships with their corporate customers. I think by and large the mindset has been to stick with those customers through thick and thin."
That means inviting in an outside investor is not likely a bid by banks to lift the share price and head for the exit.
"The banks do have some equity exposure to Olympus, but it's not material relative to their own capital. They do have rather higher loan exposure, and rushing to dump their shareholdings would not be consistent with maintaining a long-term relationship with the company," Macdonald added.
The dearth of lending opportunities in Japan may also be a factor in their decision to sit tight, he said.
Japan's major banks are often key investors in domestic blue chips, calling the shots in the boardroom. They were seen as cold-shouldering British CEO-turned-whistleblower Michael Woodford's bid for reinstatement, which he abandoned earlier this month.
In another sign lenders are in the driving seat at Olympus, the company appointed an industrialist with connections to Sumitomo Mitsui Financial Group as the head of an outside panel to advise the firm on a management shake-up.
The panel's chief, Shiro Hiruta, was formerly head of chemicals company Asahi Kasei, which has close ties to SMFG.
"I have even heard that one of the banks wants to send over a representative to act as CFO to 'keep an eye on things,'" said one Western shareholder, who spoke on condition of anonymity. "That's definitely not a good outcome. That would be the bad old days," he added.
Jamie Allen, secretary general of the Hong Kong-based Asian Corporate Governance Association, agreed such a move would not be welcome.
"The danger is that other shareholders and stakeholders are being ignored," he said. "One of the things we're hearing from some of our members and investors is that the company is not being open to a dialogue with them."
A full buyout, though favored by some Western shareholders, is not an option now unless a suitor offers a substantial premium over the current weakened share price, banking sources say. And the complex web of lawsuits arising from the scandal would make a takeover risky at this point.
Not that there's any lack of interest in acquiring Olympus's medical business, which boasts a 70 percent share of the global market for flexible diagnostic endoscopes and is coveted as a rare gem of profitability in Japan's lackluster electronics sector.
"In the electronics industry, everyone and their cat wants to get into the healthcare business," said Keita Wakabayashi, an analyst at Mito Securities in Tokyo.
Olympus made a 28.4 billion yen operating profit on its medical business in the six months to September, a margin of 17.3 percent, while Sony suffered a 32.9 billion yen loss on its consumer products division in the same period.
"The attraction of M&A is that you can get over both R&D and regulatory hurdles quickly," said Kouichi Tamai, head of Fujifilm's medical systems unit, which last month announced it would pay $995 million for U.S.-based ultrasound equipment maker Sonosite
He plans more acquisitions but bemoans the shortage of appropriate targets.
Some electronics companies may also see synergies between Olympus's line-up and their own products, such as image sensor chips or flat panel displays.
For the likes of Sony and Panasonic Corp, which have been battered by competition from Asian rivals like Samsung Electronics in everything from televisions to smartphones and tablets, stable profits at Olympus are an attractive prospect.
Private equity fund TPG Capital is also willing to invest about $1 billion in a joint deal with a strategic investor, a source said last week.
But bankers and rivals in private equity cast doubt on the feasibility of such a deal. Foreign direct investment in Japan amounted to minus $1.4 billion in 2010, compared with $57 billion in Japanese direct investment abroad the same year.
Fund takeover bids have frequently been frowned on in the past and Japan's national interest might even be invoked in Olympus's case.
Stomach cancer is the most common form of cancer among Japanese men, meaning endoscopes are a vital piece of equipment for many clinics. And Tokyo Electric even uses the technology to peer into its crippled nuclear reactors at Fukushima.
Japanese law allows the government to halt an investment of 10 percent or more in a listed company, or 1 percent or more in an unlisted company, if foreign ownership is seen as affecting national security, a regulation some say might be applied to optical technology.
A minority stake in Olympus by a domestic strategic investor might not necessarily lead to a outright takeover, given the softly softly style customary in Japan.
"The Japanese take a much more cautious approach," said George Olcott, a banker-turned-academic who serves as an external director on the boards of two major Japanese companies.
"When approaching Olympus, people would approach it not just as an asset, but as an organic community which they would have to merge into their organizations and it has to be much more consensually driven. There are virtually no hostile takeovers in Japan," he added
Merged companies sometimes take decades to unify their businesses, alternating presidents from either unit during that time.