Toshiba agrees to cease-fire with investors but the battle is far from over

For four years, Toshiba has been at war with its investors in a bitter conflict that has broken long-standing Japanese corporate conventions.

But now, after a series of conflicts and a disastrous defeat for the company in shareholder votes, Toshiba is ready to make history again – with a ceasefire.

In a decision that investors believe could break an impasse that has threatened to cripple one of Japan’s largest industrial conglomerates for years, Toshiba agreed last week appoint two independent board members from activist shareholders Elliott Management and Farallon Capital.

The move has cleared the way for the 146-year-old industrial conglomerate to conduct Japan’s biggest-ever private sale: a potential management acquisition in excess of $20 billion that has attracted valuations. tenders from at least eight of the world’s largest private equity firms and will likely involve domestic investors, a state-backed fund and corporate buyers.

The appointments are also the first time that a large, prominent, technology-sensitive, government-friendly Japanese company like Toshiba has invited active shareholders to its board.

On Thursday, Toshiba will have the opportunity to present its long-term vision to the group at a strategy meeting that could convince potential acquirers to raise their bids.

Raymond Zage, chairman of Toshiba’s nomination committee, said the appointment will help strengthen Toshiba’s engagement with shareholders, improve governance and ensure transparency in its strategic review process. me.

“I think this will end the war,” said one of the company’s large, long-term holders. “Since 2018, the relationship between Toshiba and investors is based on deep mutual distrust. For the first time in four years, I am confident that the board will actually make decisions that benefit shareholders. ”

Trust between management and shareholders

Another major shareholder said the biggest source of conflict is “information asymmetry”. This person added, the company has repeatedly failed to be transparent in its transactions with investors and even with board members.

“The presence of representatives Elliot and Farallon makes a mark of quality on whatever the board has to say, especially when it is actually proposing a particular bid. These are funds that have the resources to do the analysis,” the person said.

A person close to Toshiba said one factor behind the information asymmetry was language differences and denied that the company had deliberately withheld information.

The company’s shareholder investment comes as a surprise, but people close to the board say it was inevitable after a battle engulfed the corporation after it neared financial collapse and forced delisting.

Toshiba’s bank advisers swaddled the idea of ​​a substantial cash outflow from a single sovereign wealthy investor, but the company ultimately opted for an alternative offered by Goldman Sachs that made more sense. : issued $5.4 billion in new equity to be sold to some of the world’s most active hedge funds and activists.

The Stock Price (¥) line chart shows Toshiba's performance over the past four years

Toshiba has been battling with its new shareholders ever since.

Investors including Effissimo Capital Management, the Singapore-based activist fund, won a series of critical votes against management and forced the removal of key executives.

Shareholders have also posed a series of challenges to Toshiba’s strategy, such as voting against a plan to split the company into three. They also beat management this year as Toshiba backtracked with plans to split itself into two.

The pivotal moment leading up to the appointment of directors Farallon and Elliott, who are close to Toshiba, came in a second clash when proxy advisory services ISS and Glass Lewis recommended shareholders to vote against plan again.

“That was absolutely stunning for the board. They never saw it coming, and it changed everything – all their calculations,” said a person close to the company. “I think that was the moment when the management realized they couldn’t keep fighting their shareholders forever, and when they started looking for names they could put on the board. among investors.”

Toshiba may have reached a truce with investors but the board has now been tasked with finding a consortium that will offer an attractive enough price to provide an exit for activist shareholders.

Japanese government officials also said the proposals would require a robust and credible plan to rebuild the company and take care of business divisions sensitive to national security, including including chips, defense, nuclear plants, and quantum computing.

But the years-long turmoil has angered many. “Our job is to support the competitiveness of Japanese businesses, and if there are companies that fail because of poor management, it is not our job to support them. If anything, a healthy economic environment will require them to be allowed to fail,” a government official said.

Buyers circle but the process is far from over

Several private equity firms and other players participated in the first round of bidding, which ended on Monday. They include Bain Capital, KKR, CVC, MBK Partners and Baring Private Equity Asia, according to people with knowledge of the discussions.

Japan Investment Corporation, a government-backed $30 billion fund, and electronics maker Nidec have also express interest.

Investors are strongly divided on the value of the company. With its shares closing at 5.85,816 ($45.31) on Wednesday, some say bids will be at ¥6,200-6,500 while others say they could go all the way up to ¥6,200-6,500. ¥ 6,800- ¥ 7,200.

But Macquarie analyst Damian Thong noted that even shares of rival Hitachi are trading lower after a decade of corporate governance reforms. “It’s hard for them to get out with good margins if they pay too much because I’m not sure there’s a good IPO market for Toshiba-type corporations,” he said.

One auctioneer said the private deal could take years to complete as bidders negotiate to form a coalition that could be accepted by Japanese regulators.

Even if privatization is complete, that will only put Toshiba at the starting line of any rebuild.

“This is not the end of the story for Toshiba,” said Chieko Matsuda, a corporate governance expert at Tokyo Metropolitan University. “Even if the company finds a financial solution by going private, what is currently missing is the solution for the future of the business.”

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