In the face of demands from activist shareholders, Toshiba last week announced it would split into three companies, one for infrastructure, one for electronics, and one to house the 40% share it still owns in its former memory chip unit.
A report from its Strategic Review Committee, set up by the Japanese conglomerate in June, reviewed options that including taking it private before presenting the break-up proposal as a vision for Toshiba that “looks beyond the confines of past Japanese business practices” and embraces Japan’s efforts to revitalize its economy.
Toshiba, whose roots go back to the late 1800s, has been plagued by governance scandals for the better part of a decade and in recent years has become a focus of activist shareholding firms such as Singapore-based hedge fund Effissimo Management and US-based Elliott Management. This year shareholders forced the ouster of its chairman in the wake of an independent probe that found the company had asked for help from Japan’s government to counter the influence of activist shareholders, while in April its chief executive quit after a controversy over a buyout bid made to Toshiba.
The plan aims aims to complete the break up by the second half of 2023, and still needs to be approved by investors.
It’s possible that over time, the break-up will lead to the parts being more valuable than the whole. That’s the hope for other industrial-era conglomerates taking this route, most notably General Electric, which announced last week it would break up into three businesses focused on power, healthcare, and aviation. Ulrike Schaede, who researches Japanese conglomerates at the University of California, San Diego, and is the author of a book on how Japanese businesses are reinventing themselves, notes that while this move is pushed by activist investors, Toshiba’s not the only Japanese firm rethinking a structure that reflects the industrial era.
“There is a renewed energy and enthusiasm in Japan toward what you could call ‘deconglomerization’—getting nimble and agile,” said Schaede. “For some companies that includes pivoting their core competence into next-generation technologies…in some ways this is smack right in the middle of that trend.”
Of the two new companies to be created, one would house electronic devices, while the infrastructure and energy unit will house some of the more troubled parts of the company.
“Meanwhile, the existing Toshiba entity would effectively become a standalone entity that is committed to selling the significant Kioxia stake and returning the entire net proceeds to shareholders as soon as practicable,” said the report.
As much as addressing longstanding management issues at Toshiba, the break-up also appears to be aimed at allowing shareholders to more easily monetize the Kioxia stake, its remaining share of its former memory company. Toshiba almost inadvertently invented flash memory in the 1980s—the side project of an engineer—and it became the backbone of many mass market electronics devices today. But Toshiba lost control of the memory division after a bad bet on nuclear energy.
In 2006, it paid $5.4 billion to buy US nuclear technology manufacturer Westinghouse in expectation of a coming boom in the sector. Then came the 2011 Japan earthquake and tsunami, which led to a dangerous meltdown at the country’s Fukushima reactor and malaise in the sector. Westinghouse later filed for bankruptcy, and Toshiba was forced to sell its valuable memory unit to a consortium led by equity group Bain Capital to cover its losses and avoid delisting. Toshiba Memory rebranded as Kioxia a year after the sale.
“This is the tragedy of the Toshiba case—they invented flash memory,” said Schaede. “And the missteps, if we are polite, the mistakes in nuclear power and some other businesses and the mismanagement and the scandals forced them to sell off this crown jewel…in a way, when that was out it’s not clear what’s left there. And so now if we want to break up the rest, then it becomes about what do we do about Toshiba’s stake in Kioxia and the activist shareholders saw that.”
Kioxia was headed for an IPO in 2020 but it was postponed due to concerns its valuation could be clouded by US-China tensions that saw semiconductor sales to Huawei face US restrictions, while talks for a possible merger with Western Digital also stalled.
The committee “particularly felt that isolating the Kioxia stake, arguably the biggest valuation variable according to private equity funds’ feedback, in a standalone entity ensured transparency as it is monetized and avoids its value being arbitraged by a prospective buyer for the whole of Toshiba,” it said Friday.
According to Schaede, a more successful example of deconglomerization in Japan is Hitachi, founded in 1910.
For about a decade the conglomerate has been selling off parts of itself that don’t fit with its future vision of the company, including Hitachi Metals, its rare earths magnets unit, and Hitachi Chemicals, which manufactures materials necessary for the semiconductor and batteries, in a “very well organized, very deliberate and methodical” way, said Schaede. That’s freed it up to make acquisitions like its recent purchase of US software developer GlobalLogic.
“It stands to become sort of a great case for how to take a huge conglomerate and prepare it for a digital transformation, ” she said. “Hitachi is no longer seeing itself as a manufacturer of infrastructure input materials but rather as a main player in the system organization of smart cities.”
When it comes to Toshiba, though, while a break-up offers a chance for a fresh start, its longstanding problems mean, “we should not expect that makes for a great company,” said Schaede. “It may be the end of one of the strongest brands in the world.”