Stephen Givens is a corporate lawyer based in Tokyo.
In the end, Toshiba CEO Nobuaki Kurumatani's bid to escape the encircling nets by taking the company private, in order to scuttle a looming investigation and avoid uncertain reelection at the coming annual general meeting, failed.
The telling detail is that the immediate trigger for Kurumatani's resignation was not pressure from shareholders, but from within. A majority of Toshiba's senior executives rendered a verdict of no confidence. They were understandably upset that Kurumatani, an outsider inserted as CEO only two years ago, would surrender their company to a mercenary foreign private equity company to save his own skin.
The appointment of Kurumatani's successor, Satoshi Tsunakawa, former CEO with 42 years of continuous service in the Toshiba ranks, returns authority -- at least temporarily -- to a salaried insider who lived the company's glory days in his early career and has presided over its decline during the last decade.
Toshiba has been on life support since 2017 when, on the verge of insolvency, it sought a $5.4 billion equity injection from a syndicate of investment funds. Since then, the existential question hanging over Toshiba and its constituents has been: Do we pull the plug and harvest the viable organs, or make heroic investments of capital to revive the patient?
Farallon Capital, one of Toshiba's largest fund shareholders remaining from the 2017 equity injection, made its position clear earlier this year, when it called an extraordinary shareholders meeting to raise alarm at an announcement by Toshiba management that it would spend 1.3 trillion yen ($1.2 billion) in excess cash flow on investments, including large-scale M&A, that had not previously been part of the business plan.
Financially motivated shareholders like Farallon expect proceeds from the pending sale of its remaining 40% interest in semiconductor manufacturer Kioxia to be returned to shareholders, not reinvested in M&A and a cluster of new infrastructure services to return Toshiba to its glory days.
Toshiba's financially motivated shareholders are also presumably happy to see private equity players like KKR and Brookfield join the fray started by CVC Capital's informal 5,000 yen per share bid, so long as the bidding war results in a buyout price that meets or exceeds their sum of the parts valuations, likely to be well in excess of CVC's initial lowball bid.
Tsunakawa and his fellow career executives, on the other hand, cannot be thrilled at the prospect of working under the yoke of a foreign private equity company, whoever it is or how high the buyout price. A private equity owner will maximize return by cutting cost and head count and selling off Toshiba's component parts, starting with Kioxia, to the highest bidders.
The prestige and autonomy that come with status as a First Section Tokyo Exchange listed company, No. 32 in the Fortune Global 500 as recently as 1996, will be gone forever. Toshiba ranked No. 402 in 2020.
Now that the bidding war has started, Tsunakawa has no choice but to go through the motions of "carefully reviewing" the bids as they come in. Given Toshiba's shareholder and board composition, as well as changing norms of corporate governance over the past decade, Tsunakawa is in no position -- as he would have been during the glory days -- to tell unwelcome bidders to go to hell.
The reality is that Toshiba is now the target of competing hostile -- that is, unwelcome by management -- takeover bids. But even today, Tsunakawa and his colleagues are not entirely defenseless and may emerge with some form of autonomy intact.
A critical potential ally in the fight to maintain autonomy will be the Ministry of Economy, Trade and Industry, which has the authority under the Foreign Exchange and Foreign Trade Act to block the transfer of a designated national security asset like Toshiba to foreign control. The question for METI is whether it will spend its -- and the nation's -- finite resources to prop up and defend a long-standing, but failing, client company.
At what point will METI, with many other Toshibas in the pipeline, step aside and decide resources are better spent elsewhere?
Another card to be played is the threat by Toshiba management to sabotage and resist any takeover unless conditions are met, including assurances of job security and a share in future profits for Toshiba employees. It seems likely that a successful bidder will need to accede to some form of face-saving management buyout as a price of doing the deal. If positive management incentives can be structured, so much the better.
Toshiba is by no means unique. Failure to anticipate the shift of manufacturing offshore, the digital revolution, domestic demographic shrinkage; ill-advised and overpriced overseas M&A and accounting gimmicks to boost the top line; unrealistic five-year plans to reinvent the business in new realms of artificial intelligence, the Internet of Things and cloud computing are syndromes shared by dozens of other once-thriving Japanese companies that have tumbled out of the Fortune Global 100 in the past decade.
Outside Japan, the creative destruction that renders once-proud names like IBM, Kodak and Compaq obsolete is accepted as part of a natural process. Old names are replaced with a new generation of Apples, Amazons and Teslas.
In Japan, the lack of a new generation to replace the old makes pulling the plug, otherwise known as rational capital allocation, on end-of-life companies a grimmer but still necessary task.