Toshiba announced plans to split into three separate firms on Friday, in an attempt to please dissident shareholders demanding a drastic makeover following years of controversy.
Toshiba will split off essential companies — its energy and infrastructure divisions will be housed in one firm, while its device and storage operations will form the backbone of another — in a move similar to that of rival industrial behemoth General Electric.
The third will be in charge of Toshiba’s holdings in Kioxia, a flash memory semiconductor firm, as well as other assets.
According to individuals familiar with the situation, the proposal, which resulted from a five-month strategic review following a severely devastating corporate governance incident, is partially geared at enticing activist shareholders to quit.
The revision was announced after Japan’s markets had closed. On Friday, the company’s Frankfurt-listed shares plummeted 4% at the outset, indicating investor dissatisfaction with the strategy.
Some shareholders have called for Toshiba to be taken private, and a break-up would go against that. However, the strategic review committee noted that option had prompted internal concerns about its influence on business and employee retention.
It noted that private equity groups had expressed reservations about concluding a purchase owing to a potential contradiction with Japan’s national security statute and antitrust agency objections.
“We came to the decision that this strategic reorganization was the best solution after significant debate,” Chief Executive Satoshi Tsunakawa said at a press conference.
He noted that Toshiba would have selected the option to split regardless of the existence of activist shareholders, and that Japan’s strong trade ministry had not raised any concerns to the proposal. Toshiba intends to complete the revamp in two years.
The strategy, according to a portfolio manager at an activist fund that owns Toshiba stock, is disappointing and unlikely to be approved at the Japanese company’s next extraordinary general meeting (EGM) in March.
“Activists now have two options: sell and leave for two years, or acquire additional shares and fight this thing at the EGM. I’m going to think about what I should do “According to the portfolio manager, who did not want to be recognized,
Toshiba expects to return over JPY 100 billion (around Rs. 6,530 crore) to shareholders over the next two financial years as part of the reform.
It also stated that it planned to “monetize” its Kioxia shares and deliver the net revenues to stockholders as soon as possible. However, it did not specify if this indicated it was still interested in an IPO or was evaluating alternative possibilities.
Toshiba will keep its investment in Toshiba Tec Corp, a manufacturer of printing and retail information systems, as well as other businesses.
Some Toshiba investors are skeptical that a split would add value, according to shareholder sources speaking ahead of the plan’s formal announcement.
“If the valuation of a highly competitive firm is hampered by other businesses, it makes sense to separate,” said Fumio Matsumoto, chief strategist at Okasan Securities.
“However, if there isn’t such a business, the breakup just generates three mediocre midsize firms.”
Since an accounting scandal in 2015, the 146-year-old corporation has lurched from crisis to crisis. Two years later, it raised $5.4 billion (approximately Rs. 40,190 crore) from more than 30 outside investors, avoiding delisting but bringing in activist shareholders Elliott Management, Third Point, and Farallon.
Since then, tensions between Toshiba management and overseas shareholders have dominated headlines, with an explosive shareholder-commissioned investigation concluding in June that Toshiba colluded with Japan’s trade ministry to prevent investors from having a say at last year’s shareholders meeting.
Toshiba published a second investigation on Friday, finding that officials, including its previous CEO, had acted unethically but not unlawfully.
Toshiba was found to be unduly reliant on the trade ministry, with difficulties also stemming from its “overly cautious attitude toward foreign investment funds” and “lack of readiness to create a sound relationship with them,” according to the report.
Toshiba’s operational profit nearly quadrupled to JPY 30.4 billion in the second quarter, recovering from a fall caused by the COVID-19 epidemic (roughly Rs. 1,985 crore).