Japan's Olympus Corp <7733.T> risks collapsing under a massive accounting scandal, but the company's big and profitable medical business is likely to emerge from any wreckage unharmed.
That is the view of both Olympus's investors and customers as they watch, horrified at events unfolding at the once-proud company, which has admitted to hiding losses for decades and using dubious M&A payments to help cover them up.
Olympus, which began life as a microscope-maker, controls 70 percent of the global market for gastro-intestinal endoscopes, a staple of modern medicine used the world over to peer inside patients to help detect cancer and other illnesses.
That business, virtually the medical equivalent of a bank deemed too big to fail, is expected to be carried away by one of Olympus's rivals, or a private equity bid, if it becomes clear the company can no longer effectively run it.
There are many people who want to buy its business, said a fund manager at a firm whose clients have stakes in Olympus's collapsed stock.
No one loves the company, but everyone loves its business, he said, noting potential buyers would be in no hurry to move in, with police, regulators and company-appointed investigators still poring over Olympus's books and questioning its officials.
For prospective bidders, time is on their side. By waiting to see if the accounting scandal forces Olympus into a funding crisis, they might have the opportunity later to pick the assets up more cheaply, fund managers said.
Japanese rivals Fujifilm <4901.T> and Hoya <7741.T>, the second- and third-largest players in the endoscope business, are obvious bidders, though they would face competition hurdles.
Cash-rich camera and printer-maker Canon Inc <7751.T> has been keen on expanding its presence in healthcare, but has dismissed the prospect of buying Olympus. Analysts, though, expect it may want to cherry pick assets at a later stage.
Olympus spent half a century building up its endoscope business to the point where it makes about 70 billion yen ($900 million) in operating profit, with profit margins of 19 percent.
It far outweighs the 15 billion yen in losses from Olympus's older camera division and is so important for hospitals and medical specialists that some Olympus customers cannot imagine the company's owners or creditors would allow it to be harmed.
Bruce Elegant, president and CEO of Rush Oak Park Hospital in Oak Park, Illinois, said failure of the endoscope business would be very disruptive, given the dominance of Olympus products and the loyalty to the brand from medical specialists.
Getting a physician to agree to change a technology, whatever it is, is very difficult, Elegant said, unless there were technical problems with a product.
Few hospital customers were prepared to speak publicly about their concerns over the Olympus scandal, but one said he had sought reassurances from the firm that orders would be filled.
We are in the process of buying endoscopes too and Olympus is a top supplier, said a source with a Asian hospital chain.
HQ has assured all is well, he added.
Personally I agree that the good parts will be bought by someone else either as a company or all the staff. Of more concern is the innovation pipeline and the quality of the staff if the uncertainty is prolonged.
Along with the U.S. Federal Bureau of Investigation, police and regulators are investigating Olympus for possible fraud but the immediate focus for investors is on a potential delisting of the company, which would cut it off from equity capital markets.
The stock has already plunged 80 percent since the scandal broke last month and, with Olympus relatively highly geared and vulnerable to major asset writedowns, creditors are watching very closely. Japan's Rating and Investment Information has cut the firm's credit ratings by two notches to BBB+, near the bottom of investment grade, with a further downgrade possible.
The risk of insolvency is still deemed small, given the endoscope's business healthy cash flows and its entrenched market position, lawyers and investors say, but they stress it is very unclear how the situation could evolve.
With a third-party panel examining the acquisitions at the heart of the scandal and shareholder lawsuits on the horizon, lawyers say it is hard to foresee whether the company could end up filing for administration or bankruptcy.
No one doubts the investigation will have a big impact on Olympus's balance sheet, possibly asset writedowns of more than 70 billion yen, according to accounting experts.
Olympus is already highly leveraged compared with some rivals, with gearing of more than 70 percent as of June 30, compared with net cash positions for Canon and Nikon Corp <7731.T> as of September 30.
Olympus, which has been publicly traded since 1949, could be delisted as soon as January 15 if it fails to file its July-September earnings by Dec 14. Past financial skullduggery could in itself also trigger a delisting.
If it is shown that there was a deliberate and long-term falsification of accounts, it is possible it will be delisted like Seibu Railways, said Wataru Tanaka, a law professor at Tokyo University, referring to a 2004 case involving falsified financial documents.
Potential bidders will be patient, and wait for a clearer picture to emerge from the various investigations, while local laws may deter foreign players from stepping into the fray.
Japanese law allows the government to halt an investment of 10 percent or more in a listed company, or 1 percent or more in an unlisted company, if foreign ownership is seen as affecting national security, a regulation some say might be applied to optical technology.
For any suitors who do qualify, the parts will likely be more attractive than the whole.
If they take over the whole legal entity, they will be responsible for any liabilities that arise, said law professor Tanaka. There is a high probability of shareholder suits against the company, which raises the possibility of liabilities rising by tens of billions of yen, he added.
So, it would be more desirable to take over a particular unit, rather than the whole business, he said.
Olympus also has had a poison pill arrangement in place since 2006, which would make a hostile takeover bid difficult, at least while the company is listed, by allowing dilution of a hostile bidder's voting rights by up to 50 percent.
It's too complicated and nobody wants to put their hand in the fire, said a Hong-Kong-based banker who focused on the technology, media and telecoms sector.
M&A will happen but things have to settle down before that. No foreigner will step in and there has to be a local solution. When something like this has been happening for the last 10 years, then the rot is very entrenched.
(Additional reporting by Taiga Uranaka, Emi Emoto, Erol Emed and Hideyuki Sano in TOKYO, Deb Sherman in CHICAGO and Kevin Lim in SINGAPORE; Editing by Mark Bendeich)