The three leading contenders for a capital and business tie-up with Olympus Corp. are Fujifilm Holdings, Sony, and medical equipment provider Terumo.

Fujifilm has presented a plan to Olympus containing specific details of a proposed tie-up. Shigehiro Nakajima, Fujifilm's representative director, told a news conference at the end of January, "We would be seeking personnel exchanges along with the capital investment."

The main prize it seeks is a piece of Olympus' endoscope business, which accounts for 70% of the endoscopes sold worldwide. Fujifilm is the next largest manufacturer, with a 15% global share that focuses on the nasal endoscope, a slimmer type of endoscope which is inserted through the nose. Olympus' oral endoscopes would be highly complementary to Fujifilm's current catalog. The investment would also have a synergetic effect on its other businesses in medical IT systems and diagnostic imaging equipment.

The medical equipment manufacturer Terumo is a major Olympus stockholder with a 2.1% equity investment. The two already have a collaborative business relationship, engaging in joint research in artificial bone material and the field of regenerative medicine. "The benefits of a tie-up are significant for both companies in sharing know-how on medical equipment," says Terumo executive officer Shouji Hatano. The firm obviously aims to bolster existing ties by increasing its equity participation in Olympus.

Sony, too, has presented a proposal to Olympus that includes a capital and business tie-up, aiming for at most a 20 to 30% share. The company has had little notable success in the medical field since its products were scattered in different divisions. But it moved to rectify this in January 2011, launching a new division focusing on medical equipment. Although Sony's slide continues, symbolized by the river of red ink in its flat panel TV business, it is betting its future on electronics in professional applications such as healthcare rather than consumer products. The synergy between the endoscope business and its own imaging sensor technology could be highly effective within this strategy.

Saved by a whisker, Olympus is now free to choose a partner

Let's look at Olympus. After correcting its fraudulent accounts, the company's valuation declined significantly, and as of September 30, 2011 its equity ratio was down to a mere 4.5%. Olympus is said to be aiming to procure over 100 billion yen in funds through a capital tie-up to cover at least the amount lost in the adjustment.

Olympus considers a new infusion of capital as critical to its survival, considering the looming shareholder damage suits for losses suffered in the share price plunge. These impending suits are likely to result in further damage to corporate equity.

Before a capital infusion can be arranged, however, new management must be appointed quickly to ensure steady corporate leadership. President Shuichi Takayama has asserted, "A new board of directors will be elected at an emergency general meeting [scheduled for April 20] and will take over decision-making for the firm."

Takayama expects candidates for the new board to be determined "no later than mid-March," after which partnership negotiations can get going at full speed. After finally being allowed to retain its listing on the Tokyo Stock Exchange, Olympus is suddenly in a position to choose whom it partners with.

A potential obstacle is shareholder opposition to raising capital through a business partnership, as it will invite the dilution of shareholder value. Olympus must show its shareholders how it will make this loss a temporary setback on the way to further boosting corporate value.

Some overseas investors remain fundamentally opposed to this strategy. "Any decisions on capital raising must be made by the new board. Even if the new board finds it necessary to increase capital, what they should do first is offer a rights issue to the existing shareholders. If Olympus seeks a capital alliance now, it would benefit only the creditors and the company that gets the strategic partnership, and would dilute the value for existing shareholders," argues Josh Shores, a principal at Southeastern Asset Management Inc., an American investment fund and major shareholder that holds over 5% of Olympus stock.

If Olympus insists on raising capital without persuading such shareholders that this will be an effectual strategy for growth, the firm will be subject to even tougher scrutiny from them. The deadline for shareholders to submit proposals for the emergency general meeting is in late February. Depending on the actions of foreign investors, the general meeting could yet experience some unfamiliar turbulence.

(Masaki Kodani, Chikako Ishiguro, Nikkei Business)