When activist hedge fund Elliott Management Corp’s significant stake in Toshiba Corp. became public in 2021, the company was in the middle of a strategic review. Over 18 months later, the storied Japanese conglomerate’s earnings have turned to losses, private-equity firms are bidding for it at a discount and a top executive has resigned on expense-related misdeeds.
For all the hedge fund-talk of “underlying value” and the need for change, it’s hard to see what gains have been made so far.
This month, Toshiba posted dismal earnings: Operating income fell 87.5 percent for the quarter ended December, as every segment — from energy systems to printing and infrastructure — struggled. The situation is bad by almost any standard, but the company pointed to one-off factors for the drop. Those included product warranty issues, goodwill impairment charges and a “drastic change” in the hard-drive market.
Supply-chain problems including costs of raw materials and logistics hit hard, too, but much later than most other industrial companies had felt the brunt of the snarls. Toshiba cut its full-year profit forecast. To add to the ongoing turmoil, its chief operating officer resigned over inappropriate entertainment expense claims while he was manager at Toshiba Energy Systems in 2019. That doesn’t say much about its internal controls.
Meanwhile, after months of speculation, a consortium led by Japan Industrial Partners, or JIP, backed by over $9 billion in loans from major Japanese banks and investments from 20 companies, submitted an offer this month to buy out Toshiba — at a discount to its market value, no less. Shareholders were left disappointed. A leveraged buyout was considered one of the most viable options to resuscitate the electronics giant and had attracted foreign heavyweights like Bain Capital and CVC Capital Partners.
It’s unclear why management was effectively waiting around for deep-pocketed investors to show up with bids, while the performance of the business units tanked. Surely, the board had some insight into what was happening with the company’s operations? The earnings drop was far more than consensus estimates, too. Meanwhile, in June last year, analysts had already begun saying Toshiba’s segments had “weakened beyond repair.” Little was done to staunch the bleeding or heed the warning.
Executives have tried to brush off concerns around deteriorating performance. At the latest earnings briefing, Masayoshi Hirata, Toshiba’s chief financial officer, said the current results won’t steer the company away from its strategic plans, which are about future corporate value.
While activists and other foreign investors were quick to jump in to rescue the firm with a lucrative $5.4 billion bailout in 2017, they have done little to make surgical operational changes. Much of the rise in Toshiba’s market capitalization came from the optimism around the presence of foreign hedge funds and what they could potentially do, not so much on the creation of real value.
The thing is, Toshiba does have genuine businesses on offer. From energy systems including nuclear to power semiconductors, many of the industrial products are in high demand right now. If restructured and invested in, there are real returns to be had. Hedge funds and foreign investors have instead focused on so-called long-term value — for the better part of a decade. Taking seats on boards and working through strategic solutions on paper for an enormous company isn’t the same as running an industrial conglomerate. In theory, operational, sector-focused experts could have been brought in to dig deeper into performance and work out where to cut fat.
The only option now is the JIP bid. Shareholders didn’t love the discounted buyout offer — the stock price fell. However, it’s worth considering what the potential deal will mean for Toshiba. If it goes through, the company will once again be caught in a web of domestic firms like Chubu Electric Power Co. and Orix Corp. that operate across several sectors. That looks more like a mess of cross-shareholdings that has long plagued the country’s corporates. It’s hard to say who will bring the operational overhaul that is so desperately needed. Too many players may leave Toshiba exactly where it is now.
At one point, Toshiba had all the trappings of change: With Paul Singer’s Elliott on the board, it got brownie points for good governance, while lots of talk of corporate and shareholder value, spin-offs and restructuring made it sound progressive. The company looked as if it was going to make a comeback. It had been beset by a series of crises including accounting issues, a hairbreadth escape from bankruptcy and a report that exposed Toshiba’s efforts to block shareholders’ from exercising their rights.
In a letter to shareholders following the JIP bid, Akihiro Watanabe, chairperson of the board of directors, blamed the difficult macro environment for the troubles, saying “we feel strongly that there is an urgent need to transform” Toshiba. He added they needed to reach a final conclusion soon to start moving forward.
That may be too late.
Anjani Trivedi is a Bloomberg Opinion columnist. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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