Company history

In April 1996 Horie Takafumi, still an undergraduate at the University of Tokyo, set up On the Edge in Minato-ku with ¥6m put up by the parent of a pupil at the cram school where he worked. The business was building and running corporate websites for other people — Fuji Photo Film, Bandai, an NTT subsidiary — and it is worth naming what that meant: the company had no product of its own, no paying members, and therefore no way of becoming known. Everything that followed was an attempt to fix that.

The move outside contract work began in 1999 with two ventures built alongside CyberAgent — a European ad-sales vehicle and an online community company, Hoops — covering the two fields every Japanese internet firm was then chasing. Neither was carried to maturity; Hoops was sold to Rakuten in 2001. What did work was the capital structure. A rights issue in August 1999 priced shares at ¥50,000; a month later, allotments to Hikari Tsushin and Goodwill Communications priced them at ¥3m — a sixtyfold revaluation in four weeks. After a twelve-for-one split, the company listed on the Tokyo Stock Exchange’s Mothers market in April 2000 at an offer price equivalent to ¥72m pre-split: 1,440 times the August valuation in eight months.

The underlying business was tiny — $2.3M (¥263m) of revenue in the seven-month period to September 1999 — yet the listing raised about $51M (¥6bn), arriving just before the dot-com collapse. That money did not go back into the web-building trade. Within six days of listing the company had formed an investment vehicle, Capitalista; within the month it had launched the Data Hotel data-centre business. The pattern of the next five years — raise on the market, spend on companies — was set at the listing itself. The listing was steered by CFO Miyauchi Ryoji, a tax accountant who had had On the Edge as a client.

From 2001 the acquisitions ran continuously and, crucially, were paid for in livedoor’s own shares rather than cash — Pineapple Server Service, At Server, Sputnik by share exchange; BitCat, ASCII EC’s operations, Prosygroup by purchase. Most were adjacent to the contracting trade: web production, server operation. Then in November 2002 came the acquisition that changed the company’s identity. It took over the entire business of a failing free-ISP operator called livedoor — and with it roughly 1.5 million subscribers and the best-known free-access brand in Japan. In April 2003 On the Edge renamed itself Edge Co.; in February 2004 Edge renamed itself livedoor. It had discarded its founding name twice in fifteen months to wear the name of a company it had bought.

The subscribers did not stay. Horie had assumed the acquisition could be turned around the way the others had — cut costs, change the revenue source — but the base kept shrinking. Ijichi Shin’ichi, the senior EVP running the portal, recalled realising by spring 2003 that users would simply drift to Yahoo!; Horie’s answer was that since Yahoo! itself had grown by copying and absorbing others’ services, copying was the shortest road. It did not hold: when Yahoo! launched a service its enormous base moved with it, and when livedoor launched the same service its own base did not grow.

So growth was manufactured in the share register instead. livedoor split its stock ten-for-one in August 2003, one hundred-for-one in February 2004, and ten-for-one again that August; shares outstanding went from 436,087 to 606.33 million in a single year. Horie’s stated logic was that more shareholders meant more users and more evangelists. The hundred-for-one split was approved in thirty minutes, over a mobile phone, after EVP Kumagai Fumito proposed it to beat a 21-for-one split announced by a rival. Fifteen consecutive limit-up days followed in January 2004, pushing market capitalisation past ¥800bn and past Rakuten. That paper then bought Value Click Japan and, for $59.2M (¥6bn), the brokerage that became livedoor Securities — and the April 2004 offering raised $330.1M (¥36bn), without which, Kumagai later said, the company could have gone under at any time.

In June 2004 livedoor offered to buy the ailing Osaka Kintetsu Buffaloes baseball club. The expansion slot went to Rakuten that November, but the bid made Horie a national figure — which was arguably the return on it. On 8 February 2005 livedoor bought 35% of Nippon Broadcasting, gatekeeper of the Fuji Television group, in a single morning of off-hours trading, becoming its largest shareholder. What made that possible was an ¥80bn convertible bond (MSCB) announced the same day and taken up by Lehman Brothers. The brokerage is said to have earned around ¥16bn on that one deal — and watching that margin from the other side of the table is what later drew livedoor into underwriting the same instruments itself.

Nippon Broadcasting counter-attacked with a warrant issue to Fuji Television; the Tokyo High Court blocked it in March 2005. Holding both a majority of the votes and the courts, livedoor nonetheless never exercised control. It settled: it sold the Nippon Broadcasting stake to Fuji Television for about ¥103bn, and Fuji Television took $399.5M (¥44bn) of new livedoor shares — ¥147bn in cash in total. An academic post-mortem in 週刊東洋経済 concluded that none of the three companies had increased its enterprise value.

The money exposed what livedoor actually was. Revenue for the year to September 2005 reached $712M (¥78bn) with 2,456 employees — but against ¥12.7bn of consolidated operating profit, the finance division alone earned ¥14.6bn, while the livedoor portal itself cleared only ¥0.3bn. The finance profit broke down as ¥4.0bn from selling a subsidiary’s shares, ¥3.5bn from underwriting MSCBs, ¥1.8bn from trading and ¥1.2bn from investment banking — every line dependent on the share prices of livedoor and the companies it had bought. On 16 January 2006 prosecutors and the securities watchdog raided the headquarters. The next day a broker cut margin collateral on livedoor-related stocks from 70–80% to zero; forced selling spread, and the Tokyo Stock Exchange halted trading in every listed stock at 2:40pm because order volume exceeded its capacity. Horie and Miyauchi were arrested on 23 January.

In March 2006 Uno Yasuhide, president of USEN, personally took Fuji Television’s 12.75% of livedoor off its hands for ¥9.5bn — a stake Fuji had paid ¥44bn for a year earlier. The securities filings record the transfer plainly: the same 133.74 million shares, a different name. Horie remained the largest shareholder at 17.24% even after his arrest. The Mothers listing was cancelled on 14 April 2006. The year to September 2006 booked ¥137.9bn of revenue against a net loss of ¥40.8bn, with headcount at its all-time peak of 3,539 — the company lost its listing and its management in the same year it was largest. In March 2007 Horie was sentenced to two years and six months without suspension; the court called the offence gravely damaging to the fairness of the securities market.

What followed was liquidation in slow motion. A 2007 reorganisation moved the media and network businesses into a new subsidiary named livedoor and renamed the parent livedoor Holdings, then LDH in 2008; a hundred-for-one reverse split cut the shareholder count from 130,000 to about 70,000. The accounting-software maker Yayoi, bought for roughly ¥23bn in 2004, was sold for $628.3M (¥74bn) in September 2007 — the one asset that fetched a real price, and it did so by being sold before the financial crisis rather than by being built up. By September 2008, ¥145.8bn — about 70% of consolidated assets — sat in cash against ¥5.6bn of debt. The money raised from the market had never become a business; it had simply stayed money.

The company could not close, either. As president Hiramatsu Kozo put it in 2007, with ¥75bn of cash and ¥65bn of damages claims outstanding, no one could say whether the ¥10bn difference was distributable — creditors rank ahead of shareholders, so nothing could be returned or wound up until the litigation settled. It settled with Fuji Media Holdings for ¥31bn in January 2009. In May 2010 the livedoor and Aisys subsidiaries were sold, and in the securities report for the year to March 2011 the revenue line reads simply “—”. The portal name went on under a new owner; the listed company that had bought it had no business left. And the figures at the heart of the criminal case — the FY2004 and FY2005 revenue and net profit — were never restated: the two amendment filings for that period corrected warrants, directors and the cash-flow statement, nothing more. The ¥5.3bn found to be fraudulent was only a fragment of the pattern, and on the reported numbers it still stands.