Beneath the veneer of CEO Sasa's recent interview with the press, the former medical equipment empire Olympus (OTCPK:OCPNY; OTC:OCPNF) is signaling to the world that, after years of scandal and poor management, it is a lost business with nowhere to go. Olympus is showing all the signs of a stagnant business: after an initial massive expansion leading to market saturation, the company is now looking to conquer smaller companies to preserve market share and lock out any potential competition.
Even disregarding the accounting scandal fallout in FY2012, the creditor-run company's cash flow has consistently decreased and is now in the red even as sales have continued to rise. Olympus' greatest operating cost 5 years on from the crisis is still litigation, and no amount of acquisitions can help the company regain its momentum or image. Rather than pursue M&A, Olympus should focus on downsizing and divesting away from its dying camera business or, in the least, regaining operational efficiency. But I digress...
Notwithstanding this massive decrease in cash from the recent U.S. Anti-Kickback settlement costs and ongoing litigation, Olympus is still much better-positioned to pursue M&A opportunities now than it was 5 years ago when the Woodford scandal began. Mainly due to its ability to return earnings to shareholders in spite of its failure to increase cash flows, creditors maintain a decent BBB+ on the company, meaning it could likely issue debt to finance any potential acquisitions. And the company is still sitting on a $1.55 billion cash pile that could be tapped to contribute to any future purchases.
The Japanese medical instruments sector is vibrant and there are many small companies ripe for the picking if Olympus so chooses to go such a route. We will explore potential M&A targets with criteria for identifying such companies as follows:
- Must be based/publicly-listed in Japan (easier synergy)
- Must have an enterprise value less than Olympus' current cash & cash equivalents (e.g. 100% cash consideration; non-dilutive)
- Must have 5-yr EPS growth above 60th percentile
|Market Cap ($ million)||5-yr EPS Growth Rate||Price/Sales TTM|
|Kawanishi Holdings Inc.||68.94||12.59%||0.07|
|Nippon Care Supply Co.||123.10||8.99%||0.95|
|Techno Medica Co.||123.87||13.67%||1.44|
|Nissui Pharmaceutical Co.||241.47||9.92%||2.13|
A&T Corp. is a manufacturer of products and technologies related to the clinical laboratory testing field, such as diagnostic reagents and analyzers. It already has a successful integrated business model "C-A-C-L" (Chemicals, Analyzers, Computers, Lab-Logistics) and sales/services network to distribute its products. Its laboratory automation system CLINILOG V4 has seen explosive growth with sales up about 38.9% since last year; overall, the company's clinical testing equipment sales have grown 9.9% year over year. The company has an enterprise value of $75.8 million with about $38.7 million in debt and $10.1 million in cash. While the company would have no apparent direct synergies with Olympus' imaging business, A&T is clearly a company worth looking at simply from its clear undervaluation in the public equity market.
Rion Co. is a manufacturer of products and technologies related to the acoustics and vibrations field, such as medical audiometers, hearing aids, and sound level analytic software. With consistently growing operating margins and a return on equity of nearly 10%, the company is another in a comfortable financial position and ownership would likely be hard pressed to allow a takeover without a substantial offering. The company has an enterprise value of $221.7 million with about $81.3 million in debt and $26.3 million in cash. Again, while there are no apparent synergies, Rion is another small company, like A&T, that is clearly well-positioned with highly capable staff in its subfield that would not only add value to Olympus' asset composition but also be EPS-accretive.
Techno Medica Co., like A&T, is a manufacturer of clinical laboratory solutions and products, such as automated storage systems and various analyzers. Its aggressive expansion into the blood collection test tube market has seen its income explode; simply from last year, the company marked an increase in free cash flow of $12 million. The company has an enterprise value of $101.8 million with about $31.5 million in debt and $53.6 million in cash. This should immediately raise a flag as to why the company is so cash-heavy, however, it appears that this may be simply because the company has experienced huge windfalls in income over the past few years and likely does not know what to do with it. The company also appears to be undergoing an executive management shift from father to son, which is a factor to be carefully considered.
Overall, as you can see, there are plenty of potential takeover candidates that Olympus could pursue to add value to its product line and diversify into other medical equipment subfields other than imaging. Now, of course, these are just the EPS-accretive, 100% cash consideration acquisition targets; if the company were to issue more debt or equity, it could finance a purchase of much larger scale. Additionally, it has to be considered that likely these smaller companies (typically family-owned) with such strong financials would command a high asking price likely higher than the enterprise value if they would even allow Olympus the ability to takeover in the first place. Even though I feel personally that it is not in Olympus' best interest to be worrying about M&A at the moment, there are certainly plenty of values to be had right now in the Japanese medical equipment sector.
(All financial figures converted at current USD/JPY exchange rate)
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