Toshiba’s best invention is one of the main reasons it broke – Quartz

Faced with demands from activist shareholders, Toshiba announced last week that it was splitting into three companies, one for infrastructure, one for electronics and one to house the 40% it still owns in its old memory chip unit.

A report from its strategic review committee, set up by the Japanese conglomerate in June, reviewed options, including privatization before presenting the proposed split as a vision for Toshiba that “looks beyond the limits. past Japanese business practices ”and embraces Japan’s efforts to revitalize its economy.

Toshiba, with roots dating back to the late 1800s, has been plagued by governance scandals for nearly a decade and, in recent years, has become the focus of activist shareholding companies such as the Singapore-based hedge fund Effissimo Management and the American Elliott. Management. This year, shareholders forced the ouster of its chairman following an independent investigation that found the company had sought help from the Japanese government to counter the influence of activist shareholders, while in April, its chief executive resigned after controversy over a takeover offer made to Toshiba.

The plan aims to complete decommissioning by the second half of 2023 and has yet to be approved by investors.

It is possible that over time the breakdown will lead to the parts being more valuable than the whole. That’s the hope for other industrial-age conglomerates taking this route, including General Electric, which last week announced it was splitting into three companies focused on energy, health and aviation. Ulrike Schaede, who studies Japanese conglomerates at the University of California at San Diego, and is the author of a book on how Japanese companies are reinventing themselves, notes that while this initiative is being encouraged by activist investors, Toshiba is not the only Japanese company to rethink a structure that reflects the industrial age.

“There is renewed energy and enthusiasm in Japan for what you might call ‘deconglomerization’ – that is, becoming nimble and agile,” Schaede said. “For some companies that includes pivoting their core competencies to next-gen technologies… in some ways, it’s right in the middle of that trend. “

The fate of Toshiba’s former “crown jewel”

Of the two new businesses to be created, one would house electronics, while the infrastructure and energy unit would house some of the most struggling parts of the business.

“In the meantime, the existing Toshiba entity would effectively become a stand-alone entity that commits to selling Kioxia’s large stake and returning all net proceeds to shareholders as soon as possible,” the report said.

So much to solve long-standing management problems at Toshiba, the split also appears to be aimed at making it easier for shareholders to monetize the stake in Kioxia, its remaining share of its old memory company. Toshiba almost inadvertently invented flash memory in the 1980s – an engineer’s side project – and today it has become the backbone of many consumer electronics devices. But Toshiba lost control of the memory division after a bad bet on nuclear power.

In 2006, he paid $ 5.4 billion to buy US nuclear technology maker Westinghouse in anticipation of a boom in the industry. Then came the earthquake and tsunami in Japan in 2011, which led to a dangerous collapse of the country’s Fukushima reactor and unrest in the area. Westinghouse then filed for bankruptcy and Toshiba was forced to sell its precious memory unit to a consortium led by investment group Bain Capital to cover its losses and avoid write-off. Toshiba Memory was renamed Kioxia a year after the sale.

“This is the tragedy of the Toshiba affair: they invented flash memory,” Schaede said. “And the missteps, if we’re polite, the mistakes in nuclear power and some other businesses, mismanagement and scandals have forced them to sell this crown jewel … in a way, when it does. was out, we do not know what remains of it. And now if we want to divide the rest, then it comes down to what we do about Toshiba’s stake in Kioxia and the activist shareholders have seen it.

Kioxia was heading for an IPO in 2020, but it was postponed over fears its valuation was clouded by US-China tensions that saw semiconductor sales to Huawei face US restrictions, while talks for a possible merger with Western Digital were also at a standstill.

The committee “particularly considered that isolating the participation of Kioxia, arguably the largest valuation variable according to comments from private equity funds, in an autonomous entity guaranteed transparency because it is monetized and prevents its value from being lost. arbitrated by a potential buyer for all of Toshiba, ”he said on Friday.

The slow and steady “deconglomerization” of Hitachi

According to Schaede, a more successful example of deconglomerization in Japan is Hitachi, founded in 1910.

For about a decade, the conglomerate sold parts of itself that didn’t fit with its future vision for the business, including Hitachi Metals, its rare earth magnet unit, and Hitachi Chemicals, which makes the necessary materials. to semiconductors and batteries, in a “very well organized, very deliberate and methodical way,” Schaede said. This has enabled it to make acquisitions like its recent purchase from US software developer GlobalLogic.

“It’s going to become kind of a great deal on how to take a huge conglomerate and prepare it for a digital transformation,” she said. “Hitachi no longer sees itself as a manufacturer of infrastructure input materials but rather as a major player in the organization of the smart city system. “

As far as Toshiba is concerned, however, while a breakup offers a chance for a fresh start, its long-standing issues mean, “we shouldn’t expect that to make a great company,” Schaede said. “This may be the end of one of the strongest brands in the world.”