Is Credibility-Challenged Toshiba Japan's Worst-Run Company?

 | Apr 04, 2017 | 9:30 AM EDT
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Could things get worse for Toshiba (TOSYY) ? It's tempting to say no, with the company's shares already shedding more than one-quarter of their value this year. It faces Japan's biggest-ever industrial loss. And it appears unable to make sense of its own finances, which it previously lied about for years.

But just when you think Toshiba has reached its nadir, it finds a way to sink another level lower.

A Toshiba that is searching for spare change in its pockets was due to meet with its lenders on Tuesday, Reuters reported exclusively. It's asking that it be able to use shares in its lucrative chip business and other subsidiaries as collateral. That would help stave off the banks calling in their loans.

Its shares got hammered for a second day on Tuesday as a result, falling 9.4% in Tokyo trade. After another 5.5% drop on Monday, they're now down 27% for the year. Tuesday's performance made Toshiba by far the worst constituent in the benchmark Nikkei 225 index, which itself was down 1% for the day to a 10-week low.

Toshiba confirmed the meeting with its banks but declined to disclose any details. It suggested a similar arrangement last month. But this latest move, which also would include shares in units such as Toshiba Tec (TSHTY) , smacks of desperation.

Toshiba is trying to sell the chip business to offset $6.3 billion in losses due to cost overruns at two nuclear power plants that Westinghouse Electric was building. Westinghouse Electric, which Toshiba bought in 2006, filed for Chapter 11 bankruptcy on March 29. As a result, Toshiba anticipates a companywide loss of ¥1 trillion ($9 billion) for the fiscal year that just ended on March 31.

The banking operations of Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group (MFG)  both had asked Westinghouse to file for Chapter 11, the Nikkei reported late last month, so that the fiscal radiation from the nuclear losses could be contained.

Small creditors oppose the idea of Toshiba using shares as collateral because they're worried big banks will get the bulk of the valuable shares in the money-spinning chip unit. And Toshiba's minority shareholders are furious.

Toshiba has a "chronic culture of lying," one shareholder told management last Thursday, when 1,300 of his kin assembled to grill the executives. "We can't possibly trust such a company. Shame on you."

Stockholders don't believe the losses have come to a close with the bankruptcy filing, and they have excellent reason to doubt the 141-year-old company. In a separate case, Toshiba still faces multimillion-dollar lawsuits from lenders and shareholders after it confessed in 2015 that it had been inflating its profits since as far back as 2008. 

For instance, Mitsubishi UFJ Financial Group (MTU) , another of its major lenders, reportedly is preparing to sue the company to claim back ¥1 billion ($9.1 million) on behalf of its pension-fund customers. It's highly unusual for banks, historically so chummy with their clients, to square up against them in public.

Toshiba's finances remain in terrible shape, even if it has stopped just making them up. Indeed, things are so bad that the company itself appears not to be able to make any sense of them. It's likely to miss a third deadline for reporting its latest quarterly results, Reuters reported on Friday, causing Monday's stock plunge. Figures for the October-through-December quarter are due April 11.

Its auditor, PricewaterhouseCoopers Aarata (surely terrified of messing up the Toshiba envelope), has some unanswered questions about the company's performance for the year through March 2016. That barrier could force it to request an embarrassing third postponement or face being delisted from the Tokyo Stock Exchange. Due to disagreements with its auditors, Toshiba first delayed the quarterly results announcement in February, then again in March.

Toshiba also apparently is struggling to identify the preferred bidder for its semiconductor unit. It received 10 bids in the first round of bidding, which ended last week, that went as high as ¥2 trillion ($18 billion). After originally wanting to get the sale sorted in May, Toshiba now may not be able to announce the result by the time of its annual shareholder meeting in late June.

Toshiba's troubles highlight many of the fundamental flaws built into how "Japan Inc." operates, as I explained at the end of January.

Big business in the Land of the Rising Sun all too often operates without the interests of shareholders in mind, particularly minority ones, as a system of cross-holdings with entities such as its banks encourages a certain ennui. That's part of the reason not too much has changed economically since the end of the 1980s' bull run.

As the extraordinary meeting last week showed, minority shareholders are now voicing their fury. Whether they will be disappointed yet again by a Toshiba that is already on its knees remains to be seen.

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