Explained: Why The Troubled Japanese Conglomerate Toshiba Is Splitting Into 3 Separate Companies

Japanese industrial conglomerate Toshiba will divide itself into three separate companies focussing on infrastructure and energy, electronic devices, and semiconductor memory as early as 2023.

Toshiba, a formidable industrial giant with businesses ranging from power plants to transportation systems to elevators to air conditioners to hard-disk drives to semiconductors, has been in a state of turmoil since the better part of the last decade.

A big accounting fraud in 2015 followed by disastrous decision to invest in an American nuclear-energy company led to a series of radical restructuring moves including selling off even crown-jewel businesses. It was very close to a financial bankruptcy in 2017. The near -bankruptcy marked the beginning of several activist investors building stakes in the conglomerate.

In April this year, Toshiba received a preliminary buyout offer from CVC Capital Partners though the move did not materialise.

In June this year, an independent investigation found that Japanese government officials colluded with Toshiba executes in an attempt to prevent shareholders from exercising their voting rights during the 2020 annual general meeting.

The report concluded Toshiba, together with officials from the Ministry of Economy, Trade and Industry, (METI) colluded to prevent Effissimo Capital Management, which holds 9.9% of Toshiba shares, from exercising its shareholder proposal. Effissimo, a fund based of Singapore and managed by two long-time Japanese activist investors, has been a bugbear for the conglomerate.

The report cast serious aspersions on quality of corporate governance in Japanese companies and raised concerns on the role played by Japanese government to secure the interests of Japanese shareholders over foreign investors.

The investigation report led to the ouster of Osamu Nagayama, the chairman of the group, during the 2021 annual general meeting on June 25.

Activist hedge fund Elliott Management also build an significant stake in troubled Japanese industrial conglomerate. One of the world's most powerful activist investors, which oversees some $48 billion in assets, Elliot began investing in Toshiba since 2017 but by this year its holding rose close to 5%, making it a top 10 investor.

With activist-investors subjecting the group to scrutiny over governance and strategy, Toshiba faced growing calls for transparency and efficiency.

After reviewing various options including an outright sale to a private equity firm, Toshiba has circled in on splitting the conglomerate in to three divisions. It hopes that the trifurcation will give shareholders and investors better clarity on various businesses and individual businesses will unlock greater value for the investors.

In a briefing, the group CEO argued that purpose of the split is to "create a simpler organization" for each business area.

How the trifurcation will work?

Toshiba is expected to secure nod for the trifurcation proposal in the next shareholders meeting. Existing shareholders are expected to be allocated shares in the new separate entities.

The three new companies will be

1. Infrastructure Service Company consisting of Toshiba’s Energy Systems & Solutions, Infrastructure Systems & Solutions, Building Solutions, Digital Solutions and Battery businesses;

Under the proposed plan, the infrastructure cum energy and electronic device units will be spun off by the end of fiscal 2023 into separate public companies,

Three newly formed companies will be totally independent with no cross holding of shares.

One of the newly-carved companies will combine Toshiba's energy and infrastructure business. The conglomerates 's infrastructure business focusses on public transport systems, water supply and sewage systems, and elevators. The energy unit handles construction of thermal and nuclear power plants. The new energy and infrastructure company will also include advanced industrial technologies, such as the internet of things, factory automation, smart grids and quantum computing.

Another company will focus on electronic devices and semiconductor business. It will be responsible for the production of semiconductors and HDDs(hard disks). Toshiba produces semiconductors through its subsidiary Japan Semiconductor.

The third company which will retain Toshiba name is likely to be in charge of assets such as semiconductor memory making subsidiary Kioxia. The memory business, which was already spun off from the Toshiba conglomerate in June 2018 and later renamed to Kioxia in October 2019. Toshiba Tec, the office and retail machinery manufacturer, will also be part of this division. It will also manage revenues from the licensing of Toshiba brands.

Toshiba also said that it will take advantage of a new tax rules a few years ago by Japanese companies allowing companies to defer payments when spinning off business units.