Can Toshiba end management turmoil with 3-way split plan?

Toshiba Corp. has announced a plan to split into three companies that will focus on each of its core businesses. It says the spin-off plan is aimed at facilitating agile investment in the growth areas of its businesses.

Toshiba has seen its president and then its chairman of the board of directors resign due to conflicts with shareholders or for other reasons. To put an end to the management turmoil, Toshiba should set out a path for post-reorganization growth as soon as possible.

According to the plan, Toshiba will separate its infrastructure services unit, which mainly handles renewable energy and elevator businesses, and the devices unit, which is responsible for products such as hard disk drives and electronic components, into independent companies. Toshiba said these two companies will aim to go public by the end of fiscal 2023.

The remaining businesses will be encompassed by a company that will primarily manage shares in major semiconductor maker Kioxia Holdings Corp., formerly Toshiba Memory Corp., in which Toshiba has about a 40% stake.

It is unusual for a large Japanese company to split up completely. The spin-offs still need approval at an extraordinary general shareholders meeting, but if this restructuring leads to Toshiba’s growth, it is likely to serve as a useful reference for other major companies.

Toshiba and other electronics manufacturing giants once contributed to Japan’s economic growth as iconic conglomerates that cross many different industries.

A conglomerate has the advantage of maintaining stable management through the power of the entire group even if some of its businesses deteriorate. The larger the company, the easier it once was to attract talented people.

At the same time, a conglomerate tends to keep its low-profit businesses amid a prolonged economic slump. It has been pointed out that this tendency is one of the factors hindering the growth of Japanese industries as a whole.

Stock markets do not take into account the value of holding a wide range of businesses, apparently causing “conglomerate discounts” in which the value of the whole company is smaller than the sum of its combined business value. This phenomenon is believed to be behind Toshiba’s planned spin-offs.

However, corporate value is not enhanced simply by spinning off businesses. Toshiba must provide its shareholders and employees with convincing explanations of how it will improve these companies’ competitiveness after the spin-offs.

In 2017, Toshiba incurred huge losses in its U.S. nuclear power business, falling into excessive debt. The company increased its capital to cover the losses. At that time, many Toshiba shares were acquired by activist shareholders, who called for management reform.

Even if the spin-off plan is approved, dialogue will inevitably remain a challenge as shares in the envisaged three companies will be allocated to these shareholders.

Toshiba holds important economic security technologies in fields such as nuclear power, defense and quantum cryptography. The government needs to be cautious to prevent Toshiba from being forced to sell off businesses in pieces under pressure from its shareholders.

— The original Japanese article appeared in The Yomiuri Shimbun on Nov. 14, 2021.