Morgan Stanley Gets $173 Million Payday From Livedoor

Dec. 15 (Bloomberg) -- Livedoor Co., the Japanese Internet service provider whose founder Takafumi Horie faces prison for inflating profits, is providing a payday for Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG.

As the largest shareholder of unprofitable LDH Corp., the holding company that controls Livedoor, Morgan Stanley will receive 15.3 billion yen ($173 million) of dividends this year, according to LDH financial statements released Nov. 17 and June 29. Goldman Sachs is getting 8.4 billion yen and Deutsche Bank is receiving 6.9 billion yen.

Morgan Stanley invested in Livedoor after the company was delisted in April 2006 as prosecutors charged Horie with fraud. The bet is paying off as LDH announced 85 billion yen of dividends this year -- equivalent to 86 percent of Livedoor’s market value when it stopped trading. Horie, who remains the second-biggest shareholder, won’t get a payout.

“It’s good to fish in troubled waters,” Horie, 37, said in an interview yesterday in Tokyo at an event to promote his new book, “The Theory of Hope.” “The overseas firms had the courage to jump in and take risks. The return makes sense.”

LDH’s cash pile shrank by more than half in the 12 months through June.

“We decided to unwind cash reserves to pay dividends to investors,” Kiyotaka Mura, LDH’s investor-relations manager, said in an interview. “We have caused inconvenience to the investors as they can’t trade the shares.”

Rise and Fall

Horie has appealed the 30-month prison sentence he received in 2007 for securities fraud to the Supreme Court. His rise and fall captured the public’s attention as the Tokyo University dropout rode the surging share price of Livedoor to become a billionaire, bid for control of the nation’s biggest broadcaster, ran for public office and then was convicted for faking profits.

The entrepreneur, who quit school in 1997 to set up what would become Livedoor, thumbed his nose at Japan’s gray-suited business world by spiking his hair and appearing on the April 2005 cover of the Japan version of ‘GQ’ magazine wearing a checkered suit and pink tie.

Less than a year later, Horie became a poster boy for corporate wrongdoing. Livedoor’s shares plummeted 80 percent in seven days in January 2006, following news that prosecutors had raided its offices. The company sued Horie in August 2008.

As other investors bailed out, Morgan Stanley and Goldman Sachs stepped in.

‘Sufficient Returns’

Hybrid Capital Second, an investment unit of New York-based Morgan Stanley, bought 1.34 million shares in LDH from Usen Corp. Chief Executive Officer Yasuhide Uno in 2007, according to a Usen statement at the time. The price wasn’t disclosed. Uno bought the stake from Fuji Television Network Inc. in 2006 for 9.5 billion yen.

“It’s a principal investment using Morgan Stanley’s capital,” Natsuo Nishio, a Tokyo-based spokesman at Morgan Stanley, said when the purchase of Uno’s stake was announced in August 2007. “Looking at Livedoor’s assets, we judged we can get sufficient returns.”

Nishio declined to comment for this story. Hybrid Capital President Takumi Ooga and Usen’s Uno didn’t return calls. Hiroko Matsumoto, a Tokyo-based spokeswoman for Goldman Sachs, declined to comment, as did Deutsche Bank’s Aston Bridgman.

LDH changed its name from Livedoor Holding Co. in August 2008. Morgan Stanley owned 1.9 million LDH shares, or an 18 percent stake, as of March 31. The firm received a 12.3 billion yen dividend in June and will get a 3 billion yen special payout by Dec. 16, according to LDH statements.

Japanese Targets

Goldman Sachs appeared on LDH’s list of major shareholders for the first time in 2006 and was the fourth-largest investor as of March 31. Deutsche Bank was No. 7, according to LDH statements. It wasn’t clear whether Goldman Sachs and Deutsche Bank owned the LDH shares or held them on behalf of clients.

“Overseas companies and funds have been targeting Japanese companies that have plenty of cash but have some corporate governance issues,” said Takao Saga, a University of Waseda professor who’s also a director at the Japan Securities Research Institute. “Japanese banks won’t do it because of the reputational risk.”

Nippon Life Insurance Co., banks and more than 1,800 individual investors have filed lawsuits against LDH seeking compensation for losses stemming from Horie’s securities law violations.

Horie’s Regret

LDH posted a loss of 57.6 billion yen for the fiscal year ended March 31 as it paid settlements and set aside money to cover lawsuits. The company had 68.1 billion yen of cash on June 30, 57 percent less than a year earlier. This month’s special dividend, which will be paid to all shareholders except Horie, will reduce LDH’s cash pile by 17 billion yen, according to Mura.

Sales at LDH’s Internet and portal businesses rose 19 percent to 2.5 billion yen in the quarter ended June 30 from a year earlier. Livedoor sold its unit Cecile Co., a Japanese mail-order catalog sales company, for 4.4 billion yen in July.

“We will expand our blog and advertisement business as we are kind of the market leader,” LDH’s Mura said. “M&A is another possible strategy,” he said, without providing specifics.

Horie, wearing a green T-shirt emblazoned with an image of Australian rock band AC/DC, blue jeans and white sneakers at yesterday’s event in Tokyo, expressed regret -- at not being able buy Livedoor shares after they crashed in January 2006.

He was arrested on Jan. 23 that year and was in custody until two weeks after Livedoor had been delisted.

“I wish I could have bought Livedoor shares,” Horie said. “I don’t understand why the stock price fell so much. Livedoor had plenty of assets and cash.”