On November 12, Japanese industrial conglomerate, Toshiba Corp (6502.T), outlined plans to break up into three independent companies by spinning off two core businesses – its energy and infrastructure business as well as its device and storage business.
Toshiba will continue to own its 40.6% stake in memory chipmaker Kioxia as well as other assets, after spinning off the two companies.
Sources with knowledge of the matter have said that the plan – borne of a 5-month strategic review undertaken after a highly damaging corporate governance scandal – is partly aimed at encouraging activist shareholders to exit.
Its strategic review committee said that calls by some shareholders for scandal-ridden Toshiba to be taken private had raised concerns internally about its impact on business and the retention of staff. But, a break-up would run counter to that option.
“Due to possible conflict with Japan’s national security law and potential opposition from anti-trust regulators, private equity firms had also conveyed concerns about completing a deal”
Regardless of the massive presence of activist shareholders and the fact that Japan’s powerful trade ministry had not voiced any objections whatsoever to this plan, Toshiba decided to take the option to split, as explained by Chief Executive Satoshi Tsunakawa. The company said in a statement:
“The decision allows each business to significantly increase its focus and facilitate more agile decision-making and leaner cost structures.”
Just days after General Electric Co (GE.N) unveiled plans to split three ways – also marking the end of another pioneering conglomerate with more than 100 years of history, Toshiba made the announcement.
RETURNS FOR SHAREHOLDERS
By the second half of the 2023 financial year, Toshiba hopes to complete the reorganization and said that it aimed to return around 100 billion yen ($875 million) to shareholders over the next two financial years.
As soon as practicable, it intended to “monetize” its shares in Kioxia, returning the net proceeds in full to shareholders. However, it did not elaborate on whether that meant it was still keen on an IPO or would be considering other options.
Toshiba will continue to hold other assets which include its stake in Toshiba Tec Corp (6588.T), a maker of printing and retail information systems.
Ahead of a formal announcement of the plan, shareholder sources said that some Toshiba investors are not convinced that a break-up would create value. Fumio Matsumoto, chief strategist at Okasan Securities, said:
“It makes sense to split if the valuation of a highly competitive business is hindered by other businesses. But if there isn’t such a business, the break-up just creates three lackluster midsize companies.”
Since an accounting scandal in 2015, the once-storied 146-year old conglomerate has lurched from crisis to crisis. The 5.4 billion cash injection it secured from 30-plus overseas investors two years later helped it avoid a delisting but brought in activist shareholders including Elliott Management, Third Point, and Farallon.
Since then, the tension between Toshiba management and overseas shareholders has dominated headlines and in June, it was concluded that Toshiba colluded with Japan’s trade ministry to block investors from gaining influence at last year’s shareholder’s meeting from an explosive shareholder-commissioned investigation.
Toshiba released a separately commissioned report that found executives including its former CEO had behaved unethically but not illegally earlier on Friday.
It concluded that Toshiba was overly dependent on the trade ministry, adding that problems were also caused by its “excessive cautiousness towards foreign investment funds” and “its lack of willingness to develop a sound relationship with them.”
Since November 8, when it first agreed that it might be considering a split, shares of Toshiba are down 1.3%. Its Frankfurt-listed shares fell 4% at the open on Friday and are down 5.8% since November 8.
Toshiba reported second-quarter operating profit roughly doubled to 30.4 billion yen, recovering from a slump due to the COVID-19 pandemic.
($1 = 114.0400 yen)