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Toshiba's headquarters in Tokyo. (Photo by Tomoki Mera)

Toshiba Memory sale treads a precarious path

Antitrust screening, legal risk, crowded management among pitfalls

| Japan

TOKYO -- After many twists, turns, and delays, Toshiba was finally able to put together a deal to sell its flash memory unit -- but the drawn-out saga isn't over, with a number of hurdles still standing in the way.

Competition questions

For one, it remains unclear how antitrust authorities will respond to the deal.

Toshiba, still reeling from massive losses on U.S. nuclear operations, seeks to complete the sale before the fiscal year ends next March to bring its net worth back into positive territory and avoid stock delisting. But given that antitrust screening often takes half a year or more in China, for example, time is running short.

The involvement of SK Hynix in the buying consortium, a Japanese-American-South Korean team led by U.S. private equity firm Bain Capital, could bring extra scrutiny. The South Korean chipmaker and Toshiba Memory control a sizable chunk of the global flash memory market between them, at 10% and roughly 16% respectively.

The company has sought to head off any potential regulatory snags with assurances that it has no interest in getting involved in Toshiba Memory's management. "I think of it as an investment rather than an acquisition," Chey Tae-won, chairman of SK Hynix and parent SK Holdings, told reporters Thursday.

The deal gives the chipmaker no voting rights initially and bars it from holding more than 15% of voting rights for 10 years.

"But even if SK Hynix has no voting rights [to begin with], the question of whether it can have a say on important matters because of the financing will be scrutinized by Chinese authorities," argued Japanese attorney Toshiaki Tada. With China working to nurture its own chip industry, Beijing may not be inclined to be lenient.

Legal risks

The biggest potential headache for Toshiba is the possibility that a legal row with chipmaking partner Western Digital could bring the sale to a halt.

Western Digital and Toshiba share ownership of production equipment at chip fabrication facilities in the Japanese city of Yokkaichi, as well as rights to their output, via joint ventures. Toshiba Memory operates those facilities.

The American hard-drive maker asserts any transfer of Toshiba's interest in these joint ventures without its consent violates the agreement governing them. This argument would effectively give it veto rights in the Toshiba Memory sale. Toshiba argues that Western Digital's rights are limited to the joint ventures themselves.

Western Digital filed a request for arbitration with the International Chamber of Commerce's International Court of Arbitration in May in an effort to block the sale. The company said this week that it plans to seek "interim injunctive relief" once a tribunal is set up, likely in October.

A temporary injunction could be granted as early as year-end. If so, Toshiba would be unable to sell its memory operations until arbitrators reach a final decision, which could take a year or more.

In the Sept. 20 statement announcing its intent to sell the memory unit to the Bain-led consortium, Toshiba said the agreement assumes that the sale will be completed even if an injunction blocks it from transferring its interests in the joint ventures. But the announcement of the actual deal Thursday used more cautious language. It stipulated that this is the case "unless the transfer of [Toshiba Memory's] stock itself is blocked," making clear the risk that the arbitration could cause the sale to fall through.

Too many cooks

The third concern relates to the complex management structure created by the deal.

Toshiba and glass maker Hoya will hold a majority of voting rights in Toshiba Memory, keeping the unit under Japanese control. While the state-backed Development Bank of Japan and the public-private investment fund Innovation Network Corp. of Japan have expressed interest in investing, they will do so only after the dispute with Western Digital is resolved.

In the meantime, Toshiba plans to give the duo a say in how Toshiba Memory should be operated by allowing them to decide how the conglomerate will exercise a portion of its own voting rights. This provision may be intended to ensure that they stay on board, since it would offer the DBJ and INCJ a degree of oversight, giving them a chance to block decisions that could be detrimental to their future interests. But this sort of arrangement, rarely seen in Japan, is meeting with some skepticism.

Questions also hang over the involvement of the four U.S. technology enterprises in the consortium, including Apple. Though these companies are to receive preferred shares with no voting rights, they could still have some degree of influence in management.

In a field like chipmaking where speedy decision-making is vital to stay competitive, having so many different interests involved could bog Toshiba Memory down.


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