As Hiroshi Mikitani pushes ahead with his dream to rule the world’s most dominant Internet service giant, his company Rakuten, Inc. said on Wednesday that it bought the Spanish video on demand business Wuaki.tv for an undisclosed amount. This latest effort adds to the uncertainty that’s apparent in the Japanese firm’s financial statements.
CEO Mikitani, a clean cut 47-year-old Harvard graduate with a jutting chin, founded an online shopping mall in Japan in 1997 and called it Rakuten – the Japanese word for “optimistic.” He soon went on his own spree starting in 2000, investing in numerous companies on an ongoing basis and even founding a sports business. His acquisitions have ranged from the low-interest consumer loan company Aozora Card in August 2004 to the Canadian e-book business Kobo, Inc. in Nov. 2011. The recent Wuaki.tv acquisition marks Rakuten’s fourth European one in just two years.
Mikitani now sits atop a sprawling empire, wanting more. This March Forbes glorified Mikitani as Japan’s third richest billionaire, but only the world’s 161st. Mikitani is determined to globalize Rakuten, and has even held morning meetings in English with employees who look at him confusedly, according to a transcript of his February 2011 interview with CNN. Rakuten also put signs in its cafeteria saying “Friday, let’s speak English as much as possible.” Mikitani pointed out in the interview that in the internet business, you don’t have much time. “There are so many strong players — global players, local players. And we need to compete against them,” he said.
Rakuten said it made 379.9 billion yen in revenue during the year ended 2011 — with 7,615 employees to pull it off. Menlo Park, Calif.-based Internet service giant Google, Inc., in contrast, earned the equivalent of 3.01 trillion yen in 2011 with 32,467 employees.
While Mikitani urges his team to take on a new international identity so he can face off against Google’s founders Larry Page and Sergey Brin, his financial statements have grown hard to interpret in some ways. For example, Rakuten estimated in the year ended December 2011 that its acquisitions were worth 115.06 billion yen more than their book value and its intangible assets such as brands another 58.2 billion yen. This guesswork contributed to around 9% of the company’s total assets at the time. Five years ago Rakuten’s goodwill and intangibles had together amounted to only 83.09 billion yen, or 6% of assets.
Due to this red flag as well as others, Rakuten’s financial statements reflect an AGR score of 2, indicating higher accounting and governance risk than 98% of comparable companies. Of course everyone has to estimate earnings numbers and Mikitani isn’t necessarily doing anything wrong; as it happens, Rakuten also has a C rating on its environmental, social and governance behavior. But the low AGR shows that Mikitani is presenting his company’s finances to his investors in the best possible light rather than the most conservative one.
To be sure, Mikitani’s optimism seems to have paid off so far. His company’s shares traded at 762 euro apiece in Frankfurt on Tuesday, up from around 249 euro five years ago and outperforming the Nasdaq by a long shot.
Gutsy bets come with the risk of a tumble. In January 2010 Rakuten said it established a joint venture with the Chinese language Internet search provider Baidu to launch an online shopping mall in the country called “Lekutian.” Then competition intensified in Chinese e-commerce and Lekutian didn’t perform in line with expectations. Rakuten said this April that it planned to close the e-commerce service, adding that doing so would have a “negligible” impact on the company’s overall financial performance because the level of cumulative investment was less than originally planned.
Rakuten also warned investors that Internet services businesses are characterized by “high uncertainty.” Google’s envied fortune does indeed have an edge.
Sector: Cyclical Consumer Goods / Services
Industry: Retail – Department Stores
Market Cap: JPY 1,112,666.4mm (Large Cap)
ESG Rating: C
AGR: Very Aggressive