Japan’s crisis-plagued Toshiba delists and enters era of private ownership

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After almost a century and a half in business and 74 years as a public company, Toshiba was delisted on Wednesday by the Tokyo Stock Exchange — a warning to global investors, said one of its outgoing board members, of “what does and does not work in Japan”.

Toshiba’s departure from public markets is the result of the country’s biggest-ever leveraged buyout: a ¥2tn ($14bn) deal led by private equity group Japan Industrial Partners.

That deal followed eight years of turmoil that included an accounting fraud scandal, a financial crisis, an asset fire sale and a bitter war between management and activist shareholders. 

Over those years, Toshiba exhibited governance shortcomings and an institutional reluctance to act in the interests of shareholders, according to fund managers who held its stock during the period, former board members who are still restricted from speaking publicly and bankers and lawyers who advised the company through its many trials.

“I felt that, in the end, a lot of Toshiba’s governance issues were just not fixable,” said one outgoing board member, adding that the Japanese industrial giant’s exit into private hands was probably the only context in which it could be forced to restructure, sell-off non-core assets and become a more efficient user of its capital.

“Toshiba is like a state-owned enterprise, it has never had a shareholder-focused mindset,” said the person of the conglomerate that makes everything from batteries and chips to nuclear and defence equipment.

Toshiba declined to comment. The company said in a statement on Tuesday that it was taking “a major step towards a new future with a new shareholder” and would “strive to further enhance its corporate value and contribute to society”.

Its protracted ordeal, said a private equity executive connected with Toshiba, should be “required reading” for any investor looking at the Japanese market in the belief that billions of dollars worth of trapped value can easily be unlocked.

“Financial institutions like private equity and hedge funds see Japan as a great opportunity, and no doubt that will continue. But Toshiba is a case study of how far management and shareholder expectations can differ,” said one former board member. “A lot of time was spent convincing Toshiba management that shareholders were partners, not the opposition.”

But others, including Nabeel Bhanji, the senior portfolio manager at the activist fund Elliott who was appointed to the Toshiba board as an independent director in 2022, said he hoped that the Toshiba saga would “prove to be a case study of a renewal of a Japanese icon”. 

Board members departing the company this week questioned whether the many red flags raised by Toshiba’s eight-year ordeal would now be heeded. In its final year as a public company, Toshiba was overseen by a board that included women, non-Japanese and activist shareholders. By contract, all six of the new directors nominated by JIP are Japanese males, and only chief executive Taro Shimada will retain his job.

Another former board member predicted that, without the glare of scrutiny associated with being a public company, Toshiba would ultimately be split into several companies — a plan that was proposed by advisers in 2021 but rejected by shareholders in an atmosphere of intense mistrust. 

Its sale instead to private equity was the culmination of a process that began in 2017 when, as a means of averting bankruptcy, the company was convinced by Goldman Sachs to issue $6bn worth of new shares. 

These were mostly bought by hedge funds, which meant that after years of dealing with largely docile domestic institutions, Toshiba was confronted by a shareholder register suddenly populated with aggressive foreign funds pushing the conglomerate to unlock value trapped in non-core businesses. 

“The problem you had was that Toshiba had built into its DNA the idea that it just would always seek to expand, so its management saw the company as a growth story. The new shareholders, however, saw it as a value play, and that was a long source of mistrust and conflict,” said one adviser to the company. 

Four outgoing board members said that while the situation between shareholders and management did reach a stage in 2021 where it was becoming difficult to find any way forward, the impasse was resolved once representatives of activists Elliott and Farallon had joined the board.

“I hope that what has happened with Toshiba heralds an era where shareholder value is more highly prized and where independent directors on other boards start exercising their power more rigorously than they have in the past,” said one former board member.