TOKYO – Toshiba Corp announced plans to split into three companies on Friday (November 12th) to appease activist shareholders who are calling for a radical overhaul of the Japanese conglomerate after years of scandals.
A rare step in a country dominated by conglomerates. The split from Toshiba comes in the same week that US industrial company General Electric summed up its sprawling empire and Johnson & Johnson also announced the split.
Toshiba was founded in 1875 and plans to house its energy and infrastructure departments in one company while its hard drive and power semiconductor businesses will form the backbone of another.
A third will manage Toshiba’s stake in the flash memory chip company Kioxia Holdings and other assets.
The plan is based on a five-month strategic review conducted after a hugely damaging corporate governance scandal and is in part intended to encourage activist shareholders to sell their shares, well-informed sources said.
A split, however, goes against calls by activist investors to take Toshiba private, and some major shareholders said the plan may struggle to survive an extraordinary general meeting due by March.
The overhaul was announced after the markets in Japan closed, but the company’s Frankfurt-listed shares fell four percent when it opened on Friday, highlighting investor disappointment. Shares later rebounded slightly to a very small extent.
Toshiba’s strategic audit committee said the idea of privatization had raised concerns internally about its impact on the company and employee retention, while offers from private equity firms were not compelling compared to market expectations.
Private equity firms have also expressed concerns about closing a transaction because of potential conflicts with Japan’s national security laws and potential opposition from antitrust authorities, the company said.
“After much discussion, we have come to the conclusion that this strategic reorganization is the best option,” said CEO Satoshi Tsunakawa at a press conference.
Crisis to crisis
He said Toshiba, which hopes to complete the revision in two years, has opted for the split regardless of the presence of active shareholders and that Japan’s powerful Commerce Department has raised no objections to the plan.
A major Toshiba shareholder said other investors might still consider appointing a new CEO to help enforce an auction process.
“The option to make Toshiba private can create more value in less time than the split,” said the shareholder.
A portfolio manager of an activist fund with Toshiba shares said the plan is disappointing and is unlikely to be passed at the extraordinary general meeting the company plans to hold by March.
“The activists now have two options: they can sell and go away and come back in two years, or they can buy more shares and fight this thing at the general meeting. I’ll go and figure out what to do,” said the manager who refused to be identified.
The Toshiba Corp. logo can be seen on June 10, 2021 at the company’s location in Kawasaki, Japan. PHOTO: Reuters File
The 146-year-old conglomerate has been stumbling from crisis to crisis since a balance sheet scandal in 2015.
“Two years later, the company secured a $ 5.4 billion ($ 7.3 billion) injection of cash from more than 30 overseas investors who helped avoid delisting but were activist shareholders like Elliott Management, Third Point and Farallon brought in.
The tensions between management and foreign shareholders have dominated the headlines ever since.
In June, a high-profile shareholder-commissioned investigation concluded that Toshiba had consulted with Japan’s Ministry of Commerce to prevent investors from lobbing at last year’s shareholders’ meeting.
“Excessive Caution”
On the previous Friday, Toshiba released a separately commissioned report that found that executives, including the former CEO, had behaved unethically but not illegally.
Toshiba is overly dependent on the Commerce Department and problems have also been caused by its “excessive caution” towards foreign funds and unwillingness to develop a solid relationship with them.
As part of the revision, Toshiba plans to return 100 billion yen (1.19 billion SGD) to shareholders over the next two fiscal years.
It also said that it intends to “monetize” its Kioxia shares and return the net proceeds in full to shareholders as soon as possible, a change from a previous plan to return only a majority of the proceeds.
Other assets Toshiba continues to hold include its stake in Toshiba Tec Corp, which manufactures printing and retail information systems.
Toshiba plans to complete the overhaul by March 2024.
A Commerce Department official said the government is interested in how the liquidation will affect Toshiba’s national security-related businesses, which include radar systems.
Toshiba also reported Friday that its operating profit roughly doubled to 30.4 billion yen in the second quarter after recovering from a slump triggered by the coronavirus pandemic.
“A split makes sense when other companies are hindering the valuation of a highly competitive company,” said Fumio Matsumoto, chief strategist at Okasan Securities.
“But if there is no such deal, the split will only create three lackluster medium-sized companies.”
