Toshiba on Friday outlined plans to split into three companies in an effort to appease active shareholders, calling for a radical overhaul of the Japanese conglomerate after years of scandals.
A rare move in a country dominated by the conglomerate, Toshiba’s breakup comes in the same week that US industrial powerhouse General Electric called time on its sprawling empire and Johnson & Johnson announced it was also splitting up.
Founded in 1875, Toshiba plans to keep its energy and infrastructure divisions in one company, while its hard disk drive and power semiconductor businesses will be the backbone of the other. One-third will manage Toshiba’s stake in flash-memory chip company Kioxia Holdings and other assets.
Sources with knowledge of the matter said the plan stems from a five-month strategic review following the highly damaging corporate governance scandal, partly designed to encourage active shareholders to sell their stake. has gone.
A breakup, however, countered calls by active investors to take Toshiba private and some major shareholders said the plan could struggle to get through an extraordinary general meeting scheduled for March.
The overhaul was announced after markets closed in Japan, but the company’s Frankfurt-listed shares fell 4% at open Friday, highlighting investor dismay. Later the shares corrected slightly with very low volumes.
Toshiba’s Strategic Review Committee said the idea of going private had raised concerns internally about the impact on its businesses and employee retention, while the private equity firms’ proposals were not compelling relative to market expectations.
The company said private equity firms had also expressed concerns about completing a deal because of potential conflicts with Japan’s national security law and potential opposition from antitrust regulators.
“After much discussion, we came to the conclusion that this strategic restructuring was the best option,” Chief Executive Satoshi Tsunakawa said at a news conference.
crisis for crisis
He said Toshiba, which expects to complete the overhaul in two years, would have opted to split regardless of the presence of active shareholders and that Japan’s powerful trade ministry had not objected to the plan.
A major Toshiba shareholder said other investors may still consider nominating a new board of directors to proceed with an auction process.
“The option to take Toshiba private could create more value in a shorter period of time than the break-up,” the shareholder said.
A portfolio manager at an activist fund with Toshiba shares said the plan was disappointing and the company was unlikely to vote at the extraordinary general meeting until March.
“The workers now have two options: you can sell and walk away and come back in two years’ time or you can buy more shares and fight for it at the EGM. I am going to go and think about what to do,” said the manager, who declined to be identified.
The 146-year-old group has gone from crisis to crisis since an accounting scandal in 2015.
Two years later, it secured a $5.4 billion cash injection from more than 30 foreign investors, helping it avoid delisting, but bringing in active shareholders including Elliott Management, Third Point and Farallon.
Tensions between management and foreign shareholders have been in the headlines since then. In June, an explosive shareholder-commission investigation concluded that Toshiba colluded with Japan’s trade ministry to prevent investors from gaining influence at last year’s shareholders meeting.
‘extreme caution’
Earlier on Friday, Toshiba released a separately commissioned report that found that officials, including its former chief executive, had committed unethical, but not illegal, behavior.
It added that Toshiba was highly dependent on the trade ministry and that the problem was also due to its “excessive caution” towards foreign funds and a reluctance to develop a strong relationship with them.
Under the overhaul, Toshiba aims to return 100 billion yen ($875 million) to shareholders over the next two fiscal years.
It also said it intends to “monetize” its Kioxia shares and return full net income to shareholders as soon as possible, a change from the previous plan to return only most of the proceeds.
Other assets that will remain with Toshiba include its stake in Toshiba Tech Corp (6588.t), which makes printing and retail information systems.
Toshiba plans to complete the overhaul by March 2024.
A trade ministry official said the government would be interested in how the breakup affects Toshiba’s national security-related businesses, including radar systems.
Toshiba also reported on Friday that its second-quarter operating profit nearly doubled to 30.4 billion yen ($267 million) as the recession began. coronavirus Global pandemic.
“If valuations of a highly competitive business are hindered by other businesses, a divestiture makes sense,” said Fumio Matsumoto, chief strategist at Okasan Securities.
“But if there is no such business, the breakup just creates three weak mid-sized companies.”
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