The Lessons of Livedoor

It seems there's only one month left for investors to trade shares of Livedoor on the Tokyo Stock Exchange. With criminal charges being filed against current and former executives of the company on Monday, the exchange has moved to have the shares delisted, though they can still be traded privately.

The biggest losers in this situation are the shareholders. In this case, that includes individuals and the Fuji Television Network, which purchased 12.5% of the company in an agreement last year. At the time, I believed that Livedoor's move to purchase a large stake in Nippon Broadcasting, and in turn a stake in Fuji TV, was quite savvy -- even when the result was Livedoor selling its stake to Fuji TV in exchange for a collaboration agreement.

Fuji TV has stated that it will attempt to reclaim its losses via the legal system if necessary. I'm left pondering a larger question, though: Was Fuji TV's due diligence that poor, or was the fraud at Livedoor that well-orchestrated? Given that a Livedoor subsidiary announced in October 2004 that it was acquiring a company it already owned, I suspect that nobody was paying very close attention to this company.

For U.S. investors, Livedoor is literally half a world away, and it has financials that few in the U.S. would ever have bothered to track down. Still, the numerous lessons to be learned from this company are relevant to U.S. investors.

The simplest lesson: Don't be drawn in by high-flying growth companies, assuming that if you don't buy today, you'll miss the boat. Investors in CMGI (Nasdaq: CMGI  ) and JDS Uniphase (Nasdaq: JDSU  ) learned that valuable lesson five years ago, but it often seems to be forgotten too quickly. Whether it's a well-known company with strong leadership like Procter & Gamble (NYSE: PG  ) or a smaller, less-well-known firm like Motley FoolHidden Gems selection CNS (Nasdaq: CNXS  ) , there's no substitute for taking your time and performing some due diligence -- maybe even a little valuation analysis, too.

There are other, more subtle lessons as well. If a company's CEO is focused more on drawing attention to himself than he is towards managing the business, beware. If a company is repeatedly splitting its stock over a short time period, beware. If it's making acquisition after acquisiton, beware. None of these three things alone makes a company a bad investment (with the possible exception of excessive stock splits). But they all make a company more difficult to value, and they can make its financials very difficult to interpret in the short term.

As investors with thousands of companies to choose from, it's often easier and safer to stick to firms with straightforward management. It'll save you a lot of headaches -- and it might just save you a few bucks as well.

For other Foolish lessons on bad accounting:

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NathanParmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.


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