Toshiba's CEO is stepping down, leaping before being pushed, amid concern over his role in a US$20 billion offer for the Japanese conglomerate from CVC Capital Partners, his former employer. The stage is now set for competing bids. Any deal for Toshiba is likely to be Japan's largest-ever leveraged buyout.
Toshiba (TOSBF) shares got another boost on Wednesday, closing up 5.8% in Tokyo trade. They have risen 29.9% this month as it became clear the company, wracked by an inflated-profits scandal and massive losses at its U.S. nuclear-plant business, is in play.
Rival private-equity investors Brookfield Asset Management (BAM) and KKR (KKR) are both thought to be preparing bids that would outdo the CVC offer. U.S. hedge fund Farallon Capital Management, the company's third-largest shareholder, on Monday issued a statement urging the company to consider offers from other suitors in a "proactive market check."
Toshiba's outgoing CEO, former Sumitomo Mitsui banker Nobuaki Kurumatani, steps down immediately. He joined the Japanese conglomerate in 2018 from Luxembourg-based CVC, and headed CVC's Japan office for just under a year before taking the reins at Toshiba.
There are conflicting currents washing over Toshiba, with talk of a "civil war" among the board. Kurumatani had narrowly squeaked through at last year's annual general meeting, reelected with only 57% of the vote. There was due to be discussion at a board meeting today about forcing him to quit. He has now been pushed out by insiders, the company closing ranks against unprecedented pressure from activist investors.
The company has named veteran insider Satoshi Tsunakawa to succeed as president and CEO. Tsunakawa joined Toshiba in 1979, and served as president and COO from 2018 to 2020. That's a safe pair of hands for existing management if there ever was one.
Toshiba managers had reportedly lobbied the Japanese government against the CVC bid. But it would at least have kept the existing management structure in place, something that can't be guaranteed with bids from other private-equity investors. Any offer will require government clearance, since Toshiba builds nuclear reactors, makes parts for Japanese defense-force submarines, and is helping clean up the Fukushima Daiichi nuclear power plant that melted down and exploded in 2011.
The venerable conglomerate, founded in 1875 to make telegraph equipment and switching systems, has been under heavy pressure to reform. Activist shareholders, as I explained in mid-March, won a landmark shareholder vote, the first time at a major Japanese company that a shareholder-proposed initiative has been approved.
CVC's bid was thought to offer a 30% premium over the closing price before the talks became public knowledge. That would mark its shares up from ¥3,830 to around ¥5,000, with Toshiba stock closing at ¥4,860 on Wednesday. There's further room to rise if the Brookfield and KKR bids come in higher.
The shareholder vote mandates that Toshiba conduct an independent investigation into its last annual general meeting. The activists say shareholders were put under undue pressure, including from government officials, to vote according to management's preferences on the selection of board members.
The endowment fund of Harvard University says it was told by a Japanese government adviser that it could be subject to a regulatory probe if it didn't follow management's recommendations at the AGM last July. The Harvard endowment abstained from voting as a result. It later learnt there was no basis for any kind of government probe, according to Reuters.
All this - backroom pricing on deals, an unwritten rule that shareholders don't rock the boat, the idea that "what management says, goes" - drives to the core of what critics say is wrong with "Japan Inc." Japan's large companies were so successful in dragging Japan from post-war destruction and turning it into a world leader in electronics, pharmaceuticals, automobiles and more that they, in days gone by, went unchallenged about how they were run. A new group of activists, many of them Japanese, want that to change.
The friendly ties between CVC and Toshiba could have alleviated the pressure from Farallon and its largest shareholder, Singapore-based Effissimo Capital. Effissimo was founded in 2006 by the Japanese value investors Yoichiro Imai, Takashi Kousaka and Hisaaki Sato, former traders for Japan's most famous activist investor, Yoshiaki Murakami. Effissimo had nominated Imai and two other candidates to the Toshiba board in the annual general meeting vote that is now under scrutiny.
I wrote last Friday about how Western venture capitalists are finally making headway in Japan. Besides the Toshiba deal, Hitachi (HTHIF) is negotiating exclusively with Bain Capital to buy its separately-listed Hitachi Metals (HMTLY) subsidiary. Hitachi is undergoing an extensive restructuring aimed at streamlining a structure that has already seen it absorb Hitachi High-Tech and sell off Hitachi Capital and Hitachi Chemicals, all subsidiaries that were listed independently on the Tokyo Stock Exchange.
Some 7% of companies listed on the TSE are subsidiaries of other listed companies. That's far higher than the 0.5% rate on U.S. markets. As part of the third arrow of "structural reform" in Abenomics, Japanese companies are being encouraged to improve corporate governance and transparency, which would involve untangling a knot of cross-holdings with customers, lenders and partners. Owning mutual stakes is a past practice that bound companies together but also made them far less likely to exert any pressure on the other party.
Toshiba came close to being delisted in August 2017, and was demoted to the Second Section of the Tokyo exchange, after its accountants refused to sign off on its books. In 2015, it admitted to a US$1.2 billion cover-up in which it had overstated profits for seven years.
Adding to Toshiba's woes, it took a US$6.2 billion hit to earnings in 2017 after shocking losses at its Westinghouse operation in the United States that builds nuclear power plants. That saw it miss deadlines to file earnings. It has had frequent opportunity to put those woes behind it - and to date has dropped that ball, rather than running with it.