Buyout offer on Toshiba

By Ichiro Suzuki

On April 7, British private equity fund CVC has made a $20 billion buyout offer to Toshiba Corp, Japan’s troubled electronics conglomerate. 

Once a heavyweight that drove Japan’s post-war industrial expansion and more recently was a powerhouse in semiconductor manufacturing, Toshiba suffered a serious blow with an ill-fated $5.4 billion purchase in 2006 of Westinghouse Electric Company that was strongly positioned in nuclear power generation. Back then Toshiba management saw their future in nuclear in a post-fossil fuel, zero carbon emission world. That logic appears to have made sense at that time. On March 11, 2011, however, a mega earthquake hit Japan’s northeastern region, blowing up a nuclear power plant in Fukushima. That catastrophe has drastically changed the fortune of Toshiba and the nuclear power generation industry. Despite its relative cleanliness, nuclear has immediately lost an appeal in the industry, in Japan or elsewhere. In a severely challenging business environment, Toshiba’s management began to hide the truth about the state of its businesses. Then in 2015, the Japanese SEC brought to light that Toshiba had been making fraudulent financial reporting by overstating the value of businesses whose earnings potential had suffered considerable declines.

Since then, Toshiba management came under intense pressure from foreign shareholders who did not nod simply to everything they say. Toshiba shares lost 85% of its value from 2007 levels when the acquisition of Westinghouse appeared to have made sense. Rights of shareholders have been rarely tested in Japan though they are spelled out clearly in a law. In order to stay independent as a going concern amid severe downturn of its core businesses, the semiconductor division, Toshiba’s crown jewel, had to be divested after a lengthy, messy process. 

The struggle of Toshiba since 2015 has been uniquely Japanese. It is worth asking why a company that fell so hard with a tarnished reputation had to be saved as a stand-alone entity. Why could it not have been broken into parts and be sold? For whom did Toshiba have to be saved? Many jobs were gone already and shareholders have suffered acute losses. Lost jobs won’t come back and shareholders would be better off shifting their money to elsewhere. This struggle was perhaps about saving the face of stakeholders, management and employees, to be specific.  Founded in 1875 Toshiba has a longer history than General Electric that was created by Thomas Edison in 1878. A long history itself sometimes means so much to a few Japanese who cherish tradition. Japan’s business world has no shortage of companies with a very long history but it is not entirely something to brag about. It is a proof of reluctance to restructure businesses that are no longer able to compete in a changing world. Stakeholders may prefer to let an uncompetitive company keep going simply to save face for themselves. 

In 2017, two years after the revelation of fraudulent accounting practices, Toshiba faced a risk of delisting from the stock exchange. The Tokyo Stock Exchange does not allow a company with back-to-back years of negative shareholders’ equity. Pushed to the corner, Toshiba raised equity in desperation, by selling new shares to new investors in onerous terms, many of whom were foreign activist funds. These kind of investors have been considered as a nemesis by Corporate Japan that prefers shareholders who keep their mouths shut. Facing a choice between delisting and vocal shareholders, Toshiba chose the latter. It was a Faustian choice. The deal saved the listed company status at the cost of something they can’t stand with.

Having survived as a listed company, Toshiba was still suffered a demotion by the Tokyo Stock Exchange to its second section. Down there, shares are bought and sold as freely as they are in the first section though only the first section companies go into major indices. In spite of little inconvenience being in the second division, Toshiba of course took the demotion as a real shame and a loss of face. After several years of great efforts to regain public trust through improved corporate governance and restored profits, Toshiba was allowed back into the first section in early 2021. Regaining public trust through better corporate governance is a good thing in itself. Face-saving as a motivation may not be so bad. 

Toshiba’s struggle to stay in business in whatever form is totally different from restructuring at GE that also fell hard in the last several years. GE’s fall was essentially attributed to its oversized financial arm that suffered a precipitous decline. Manufacturing businesses has had less to do with GE’s fall overall. It is so much to do with GE Capital that was brought down by tightened regulations after the 2007-09 global financial crisis. Thomas Edison’s company is shedding its financial arm and refocusing itself on manufacturing. It is a very clear-cut strategic shift. While GE might never be as profitable as it once was without GE Capital, it still has a solid foundation in manufacturing. In contrast, Toshiba has lost its focus. The company has divested not only  its best division to retire debt and stay in business but also sold other core businesses such as nuclear power generation and medical equipment divisions to be a B-to-B focused company, and the 2019 operating results showed a runaround. Ten out of twelve board of directors at Toshiba are non-executive outsiders, with four of them foreign nationals. This is quite radical for a Japanese company. While the board structure certainly pleases the authority, it still remains to be seen if Toshiba can be relevant in B-to-B.

To CVC, Toshiba responded that it takes a look at the buyout offer. The offer might appeal to Toshiba since being a private company eliminates the trouble of dealing with a variety of vocal shareholders and hence makes it easier to restructure the company. However, the offer is going to take away from Toshiba the status of a public company, for which management made great efforts. How come did they have to fight for it so desperately if they could abandon it so casually? CVC aims to restructure Toshiba and have it re-listed in the market, if everything goes according to plans. If not, Toshiba could be broken down, and sold in a piece by piece. This is not something Corporate Japan is used to, let alone the Japanese public. Nonetheless, the market is forcing one of the most traditional companies in the country a hard choice.

Here comes another twist in CVC’s buyout offer. Toshiba CEO Nobuaki Kurumadani has stepped down a week after the offer was made. He came from CVC only twelve months ago, as the first outsider to assume the top position in over half a century. He was the architect of Toshiba’s turn-around plan preceding his official arrival at the company. While he had no knowledge of CVC’s latest move on Toshiba, the rest of the management team grew increasingly suspicious of CVC’s move. Mr. Kurumadani is replaced by current chairman of the board Satoshi Tsunakawa, who was CEO for almost four years through last April. The top position is returned to the hands of a man who rose through the ranks after joining the company straight out of college. While there is continuity at least, it remains to be seen how a typical company man navigates a troubled company through a variety of challenges that face Toshiba. 

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.