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Last updated: January 23, 2006 9:56 pm

Shocking fall for the man who thought big

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Takafumi Horie likes to talk about the fast pace of business in the brave new world of the internet.

But even by his own standards, the rise and fall of Livedoor, the vast internet empire he cobbled together through a string of acquisitions over a decade, will seem to Mr Horie to have been shockingly fast.

The arrest on Monday of Mr Horie and three other group executives, on suspicions of accounting fraud and market manipulation, comes as Livedoor appeared to be going from strength to strength, and Mr Horie’s popularity was at a peak.

The company, which the young Mr Horie started 10 years ago when he was just a 23-year-old college drop-out, had its fingers in a fast-expanding stable of businesses from online matchmaking to consumer finance and media services.

In just a decade, the self-confident Mr Horie, who talked of building a company with the world’s largest market capitalisation, had listed Livedoor, raised its market capitalisation to more than Y700bn ($6.1bn) and become a role model for young Japanese.

Even after his arrest, Mr Horie has many staunch supporters who have been encouraged by his example which suggested that it was possible to both rebel against the status quo and succeed financially.

“He represents our generation. [His arrest] is a real shame,” said one young man in Osaka who was interviewed on TV.

If the allegations that Mr Horie instructed Livedoor executives to engage in accounting fraud and market manipulation turn out to be true, the rag to riches story that gave hope to many a struggling entrepreneur will turn out to have been a myth.

The latest development has also raised questions about the future of Livedoor, which until recently appeared to be set for further growth.

With four of its top executives under arrest and a rapidly dwindling market value, Livedoor is set to come under pressure from several quarters.

Fuji TV, which spent Y44bn to take a 12.5 per cent stake in Livedoor and become its second largest shareholder, after the latter threatened a hostile takeover bid, could sue the company for breach of trust.

Many of its business partners have already indicated they are re-considering their relationship with the group.

If Livedoor’s suppliers and other business partners demand cash upfront, they could potentially force a cash squeeze.

Although it is unlikely that Livedoor will face imminent bankruptcy, it could become the target of a take-over and break-up, says Masatoshi Kikuchi, strategist at Merrill Lynch in Tokyo.

Livedoor could also find itself ejected from its prestigious offices in Roppongi Hills, landlords say.

Although Japanese law makes it tough to evict tenants, landlords can bring pressure on tenants perceived to bring reputational risk.

The spotlight is also set to fall on auditors, who signed off Livedoor’s accounts.

Last September certified public accountants at ChuoAoyama PriceWaterhouseCoopers were arrested on suspicion of conniving with company executives to cook the books of Kanebo.

The tendency to link Livedoor’s business practices with all start-ups, particularly those in the internet sector, have raised concerns that the Livedoor scandal will taint new businesses and discourage entrepreneurialism in Japan.

The past week’s events have already intensified criticism of the business practices Livedoor used, including legitimate tactics, such as the use of M&A to support growth.

Says Ikuo Kimura, president of Invoice, a payment services company listed on the Tokyo Stock Exchange: “Many companies are involved in violations of the securities and exchange law so to say that venture companies do not pay sufficient attention to the rules is misleading.”

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