Livedoor - Why Do They Have Money?

[GuyJean]

I keep seeing that Livedoor brillo-head on TV every 30 seconds.. I have nothing against him; he's apparently built up a reputable company.. But how do they make money? Isn't their service free? And do you know anyone using Livedoor now? I used to, but now all my Japanese friends are Sonet heads.. Or other 'big' ISPs..

What services do they offer that made them so amazingly powerful.. Or, is he just on TV a lot? Another 'powerful' Japanese company with no money?

GJ

[gomichild]

I was asking GG the same thing just the other day...GG what was your answer?

(Must have been drunk...again)

[Socratesabroad]

I keep seeing that Livedoor brillo-head on TV every 30 seconds.. I have nothing against him]

One angle is the Japanese Linux market, which they virtually rule after acquiring TurboLinux (a Japan-centric distro I use) while also distributing Lindows exclusively in Japan:
http://www.linuxbusinessweek.com/story/44581_p.htm

LD also has a sizable stake in Nippon Broadcasting System, which they just increased:
http://www.iht.com/articles/2005/02/08/bloomberg/sxnippon.html

LD additionally put out Livedoor-Skype software to provide free Internet telephone services only through Livedoor's portal:
http://www.skype.com/company/news/2004/livedoorlaunch.html

And they've got baseball franchise aspirations (given the lack of a team in Tohoku, this represents a major untapped market, uh, I mean fan base)
http://202.221.217.59/print/news/nn09-2004/nn20040917a1.htm

FWIW, the free Internet service that Horie bought out was just a way of getting an established consumer base on the cheap:

Your company first came to prominence in the foreign market when you bought out livedoor, the free ISP service, from NewBridge Capital in 2002. Why did you buy a business that couldn't create revenue?

On the Internet, brand recognition means everything, and frankly, the name we had before, "Edge," was weak. Japanese people couldn't spell it, and for foreign investors the name is so common that it didn't stand out.

But what about the livedoor business model?

It was a dying company, so we didn't pay any particular premium for the business. However, given that our direction was to create a massive content portal, the over 700,000 subscribers to the service were definitely an attraction.

[snip]

You sell Microsoft software online?

Yes, the site is called ASCII-store, and perhaps surprisingly is the biggest online seller of Microsoft titles -- sometimes even rivaling Microsoft's own online store for volume of sales.
http://www.japaninc.net/article.php?articleID=1357

[GuyJean]

Information, information, information..

Cool, thanks!

Sounds like he's going for it.. Refreshing, considering this is Japan.. Bet the dinosaurs don't like him..

GJ

[Captain Japan]

Information, information, information..

Cool, thanks!

Sounds like he's going for it.. Refreshing, considering this is Japan.. Bet the dinosaurs don't like him..

GJ

That's a very good assessment. I have it on pretty good authority that one of the major reasons he lost out to Rakuten (for the Sendai club) was that his attitude and casual way of dressing went against the ways of the current owners. That deal about porn content on his site was really just an excuse.

[GomiGirl]

I predict a very loud thump when LD hits the ground - which it will.

I DO NOT like their business practices of buying up lots of small companies with lots of shady back door stock option deals. It is all vapour and hype at the moment. Unless they can produce something of substance, it will be a very ugly fall-out with lots of good people losing alot of money.

You can bet one of those people will not be the brillo-head.

[gomichild]

Possibly that is what confused me about your answer. Buying up smaller companies hmmm must scrutinize Socrates answer in more detail...

[Big Booger]

My father in law has invested heavily in livedoor. I hope they don't hit too hard too soon.

[GuyJean]

I DO NOT like their business practices of buying up lots of small companies with lots of shady back door stock option deals. It is all vapour and hype at the moment. Unless they can produce something of substance, it will be a very ugly fall-out with lots of good people losing alot of money.

How did they get the money to buy these small companies? It doesn't seem like the Japanese Linux market, free Internet telephone software, and a stake in Nippon Broadcasting would be lucrative enough to attract the attention he has. Last time I checked, Nippon was tanking from it's probable already inflated market price.. Did it turn around after LD increased it's share?

It just doesn't seem like he has anything solid to show; everything's on paper. Is there an LD building?

I respect him for rippling the wa-ters but wonder where he goes from here. I thought it was total bullshit that Rakuten first stole his baseball team idea, then went after the same fucking stadium! And got the deal!. Typical Japan.. (Not sure on the details though)..

He seems to be very indepentent, which I like.. I remember the dinos picking that Cyber Agent guy as the 'next Nihonjin revolutionary'.. Do they still exist?

GJ

[cstaylor]

He seems to be very indepentent, which I like.. I remember the dinos picking that Cyber Agent guy as the 'next Nihonjin revolutionary'.. Do they still exist?

IIRC, the LiveDoor guy got started by marrying rich and bilking his father-in-law for wads of cash to get the company started... and then when it went big, he ditched her.

[gomichild]

Livedoor has a gorgeous office - saw it on telly....

[GomiGirl]

Marrying rich and getting the father-in-law to bank-roll his company. Now that is a terrible thing to do!!!

It sounds grubby when you put it like that, but as we all know it is not always the case.

[cstaylor]

Marrying rich and getting the father-in-law to bank-roll his company. Now that is a terrible thing to do!!!

It sounds grubby when you put it like that, but as we all know it is not always the case.

Not that I would know anything about that.

The grubby part is ditching the wife after he made it big. That's fucked up.

[GomiGirl]

The grubby part is ditching the wife after he made it big. That's fucked up.

Totally agree with you on that one.

I was just having a good natured dig at you my friend. I owe you an email. I have been away but now am back.

[American Oyaji]

BTW, what is IIRC?

[cliffy]

If I Recall Correctly, It is a shitload shorter as IIRC!

[American Oyaji]

thanks cliffy

[cstaylor]

I owe you an email. I have been away but now am back.

You should come and visit the office and see some of our new toys. We've got some really cool stuff coming out for that new spa I was telling you about.

[Mulboyne]

Livedoor is the investment bank community's latest best friend. That's how they get their money. For the Nippon Broadcasting stake, they sold 80 billion yen in convertible bonds to Lehman Brothers. For 18 months now, Livedoor have been willing to look at any media content business you care to show them.
Initially, Livedoor bought businesses in the e-business space such as an e-broking business from Nikko but they turned their attention to media/content businesses - with the obvious high profile target being a baseball franchise.
Livedoor's move co-incided with a growing sense that Japan's media assets may be undervalued so banks have been relatively happy to supply funding. The truth is that since the days of Drexel Burnham and the junk bond market ("Barbarians at the Gate"), investment banks globally are usually very willing to supply funding to anyone who shakes up the status quo.
In the US, this now ranges from buy-out groups like KKR to companies like WorldCom. In the UK, banks funded Philip Green in his takeover of UK retailers. In Japan, there are fewer risk-takers to back outside the private equity groups like Ripplewood but there is a lot of money that wants to "do something" so Horie just came along at the right time.
At the moment, Horie's empire is asset-rich but cashflow poor. That is OK for now but he'll need revenue growth to service his debt. Or else he'll need to sell the assets he buys for more than he paid. That's exactly how Rupert Murdoch built his business.
However, as Amazon discovered, a convertible bond is great cheap finance when your stock price is rising because you pay it off in shares. If your stock price falls, however, you'll need hard cash so that's what investors will be keeping an eye on.

[GomiGirl]

Mulboyne's post is much more erudite than my own..

But I still predict a very loud thud when the crash happens. The staff are not happy with all the vapour and hype from management and investors are wanting some substance.

I rarely go out on a limb but in this case I will.

[gkanai]

Livedoor is the investment bank community's latest best friend. That's how they get their money. For the Nippon Broadcasting stake, they sold 80 billion yen in convertible bonds to Lehman Brothers. For 18 months now, Livedoor have been willing to look at any media content business you care to show them.
Initially, Livedoor bought businesses in the e-business space such as an e-broking business from Nikko but they turned their attention to media/content businesses - with the obvious high profile target being a baseball franchise.
Livedoor's move co-incided with a growing sense that Japan's media assets may be undervalued so banks have been relatively happy to supply funding. The truth is that since the days of Drexel Burnham and the junk bond market ("Barbarians at the Gate"), investment banks globally are usually very willing to supply funding to anyone who shakes up the status quo.
In the US, this now ranges from buy-out groups like KKR to companies like WorldCom. In the UK, banks funded Philip Green in his takeover of UK retailers. In Japan, there are fewer risk-takers to back outside the private equity groups like Ripplewood but there is a lot of money that wants to "do something" so Horie just came along at the right time.
At the moment, Horie's empire is asset-rich but cashflow poor. That is OK for now but he'll need revenue growth to service his debt. Or else he'll need to sell the assets he buys for more than he paid. That's exactly how Rupert Murdoch built his business.
However, as Amazon discovered, a convertible bond is great cheap finance when your stock price is rising because you pay it off in shares. If your stock price falls, however, you'll need hard cash so that's what investors will be keeping an eye on.

This is an awesome post and a perfect example of why I love FG. Mulboyne- thank you!

[GuyJean]

For 18 months now, Livedoor have been willing to look at any media content business you care to show them..

Hhhhhmmmm. Hi Mr. Horie-sama-sensei.. Please have a look at TokyoDV's 'Penis Shrine'.. As Pongi-sama says, "Have a fun with us!".

GJ

[Mulboyne]

[Mulboyne]

Kyodo via JapanToday: Lehman Brothers sells part of borrowed Livedoor shares
TOKYO — Lehman Brothers has sold 8.9 million shares out of 46.7 million Livedoor Co shares it borrowed from Livedoor President Takafumi Horie, according to a report submitted Thursday by the U.S. brokerage house to the Finance Ministry. Lehman Brothers borrowed the 46.7 million shares from Horie on Feb 10, which account for 7.26% of Livedoor's total outstanding shares, and sold 8.9 million, or 1.38% of the overall shares, on the same day, the report said.

Worth remembering that Livedoor sold 80 billion yen in "Death Spiral" convertibles to Lehman to fund the purchase of Nippon Broadcasting shares. If you look at this definition of the CB, you can see why Lehman is selling shares

Death Spiral: A type of loan investors lend to a company in exchange for convertible debt, which, like a convertible bond, typically has provisions that allow the investors to convert the bonds into stock at below-market prices. This can lead to the original shareholders losing control of the company.
This type of loan is undertaken by companies that desperately need cash. It is called a death spiral because companies' stocks often plunge drastically after they take on these types of loans. Investors can short the company's stock and try to drive its price down. The falling price results in more shares for the investor who chooses to convert. The short position can be closed out with the shares received from the conversion.

[GuyJean]

Thanks for the update.. It seems to be a web of 'drama'.. That's why Horie's always on the news..

But excuse my financial ignorance; LD 'sold' shares to Lehman to get cash for Nippon? Or Lehman 'borrowed' shares, then sold them?

Does this Lehman move shake the LD foundation? Signifying there are cracks? A loss of confidence?

GJ

[Captain Japan]

Here's a pretty good story that talks about an analyst who predicted Amazon's reliance on convertible bonds eventually killing it.
Is Amazon's biggest critic crying wolf?
CNET

Lehman Brothers bond analyst Ravi Suria, one of Amazon.com's biggest critics, issued his third and potentially most scathing research report this week, leaving Wall Street to debate whether the e-tailer will face a lethal credit squeeze or prove Suria to be the analyst who cried wolf.

The debate over Suria's report underscores a rift between two sides of Wall Street--the bond analysts who pick over balance sheets and assess credit risk and the equity analysts who look at company fundamentals. Amazon executives maintain Suria was just looking for some attention. Suria said he would let his report do the talking and declined to speak on the record.

That state of affairs left the analyst community to pick through Suria's report point by point to figure out if there is a chance Amazon could get squeezed by suppliers as its working capital disappears.

The crux of Suria's argument revolves around Amazon's working capital, defined as a company's current assets minus its liabilities. Suria argues working capital is the main measuring stick vendors use to determine whether or not to extend credit to retailers....the rest...

[Captain Japan]

[quote="Mulboyne"]Kyodo via JapanToday: Lehman Brothers sells part of borrowed Livedoor shares
TOKYO &#8212]

What's the difference between this and selling the stock short?

[Mulboyne]

Lehman want to sell LD shares short to increase the value of the convertibles they own. They have borrowed the shares from Horie which might seem odd but, since they would end up borrowing them anyway, he may as well lend them and take the fee himself.
It is fairly standard practice after the issue of a death spiral, depending on how the stock conversion price is set. It doesn't mean Lehman is running away from LD, it just means they are exacting a very full price from Horie for backing him.

[Mulboyne]

What's the difference between this and selling the stock short?

No difference. This is selling short.
They can either buy back or, more likely, exercise the conversion option in the death spiral. Then they would end holding cheap LD shares which they could deliver and cover their short position.

[GuyJean]

Thanks guys! I can feel my brain expanding.. It hurts..

GJ