TOKYO Toshiba is one step closer to moving past the crisis that cost the company its prized memory chip unit and tarnished the reputation of one of Japan's most prominent businesses.
On Jan. 18, the troubled conglomerate announced it will sell assets related to bankrupt former subsidiary Westinghouse Electric to a consortium led by U.S. hedge fund Baupost Group. The company also said it will sell its stake in Westinghouse and related companies, including its holding company, to Canada's Brookfield group -- for $1.
These latest developments follow not only the sale of its semiconductor business but also a capital injection of 600 billion yen ($5.42 billion). Looking back, however, it is hard to argue that the company has anybody but itself to blame for what is perhaps the greatest crisis in its 140-year history.
At an internal Toshiba event held in Tokyo in November 2016, a former executive questioned then-Chairman Shigenori Shiga about Westinghouse's pricey acquisition of CB&I Stone and Webster (S&W), a U.S. nuclear construction company.
BLIND EYE The former executive was appalled to hear Shiga say that the plan had been to "conduct due diligence on the company after the acquisition."
Westinghouse purchased S&W in December 2015. Around that time, Westinghouse was engaged in legal battles with power utilities and nuclear plant builders over who would shoulder the bloated construction costs of four nuclear power plants being built in the U.S. In a bid to settle the lawsuits and make up for delays in the projects, Westinghouse decided to take a gamble: bring a nuclear plant builder entirely under its wing and move ahead on the projects themselves.
S&W's net worth was negative, and the company had gone under once before. But Westinghouse decided to put due diligence on the back burner. Ignoring the risks entailed in swelling the company's liabilities further, it set S&W's purchase price at zero and booked 10.5 billion yen worth of goodwill on the acquisition.
Toshiba's management council overlooked these troubling facts and approved the purchase. "We were told that the acquisition was the best way to resolve the complicated legal battle," said an official of a non-nuclear department, who was at the meeting. "Officials of other departments, like me, were unable to argue with that explanation."
A month after the former executive had questioned Shiga, his concerns proved well-founded. Toshiba abruptly announced that the company might incur a loss of several hundred billion yen from the U.S. nuclear plant business as costs at S&W ballooned, primarily because of delays in construction work. Toshiba's loss eventually surpassed 700 billion yen, putting the company's net worth at negative 550 billion yen.
"NO RISK, NO FUTURE" Toshiba began its overseas nuclear push in earnest in 2006 when it acquired Westinghouse for 600 billion yen. The move came at the prodding of then-President Atsutoshi Nishida, a charismatic leader with a tight grip over the company.
The "nuclear power renaissance" was at its height, and the auction for Westinghouse drew bids from Mitsubishi Heavy Industries and Hitachi, as well as Toshiba, boosting the purchase price well above Toshiba's initial estimate of 200 billion yen.
Some Toshiba directors voiced their objections to the acquisition at a board meeting. Even Masao Niwano, senior executive vice president in charge of nuclear power plants at the time, became somewhat hesitant, despite having advocated for the acquisition. "If the purchase price exceeds 280 billion yen, Toshiba will not be able to recoup its investment," he warned. Yet Nishida brushed aside such concerns, saying, "Unless we take a risk, we have no future." Director Norio Sasaki -- who reported to Niwano at the time and later succeeded Nishida as president -- supported the acquisition.
The Westinghouse purchase cost Toshiba dearly. The 350 billion yen in goodwill it booked for the acquisition apparently made it difficult for Nishida and subsequent presidents to think rationally.
Toshiba's net assets, which had been more than 1 trillion yen at the time of the Westinghouse acquisition, plunged to less than 450 billion yen in the wake of the global financial crisis, while its capital ratio fell to 8.2%. Toshiba executives feared that if the company was forced to write down the goodwill on Westinghouse, its shareholders equity would be wiped out and the company's credibility called into question. Feeling that the acquisition could not be allowed to fail, Toshiba executives scrambled to cover up Westinghouse's poor results and allowed the S&W purchase to pass without scrutiny.
On the surface, the company appeared to be faring well. After the Westinghouse purchase, Toshiba's stock price began trending upward. Deciding to halt development of next-generation DVDs around the same time as the acquisition, Toshiba was hailed as a leading example of the selection-and-concentration strategy. Nishida became even more vocal in declaring that the growing nuclear plant business would become a pillar of Toshiba's growth. The nuclear plant division, led by Sasaki, became something of an elite group within the company.
Even that elite division, however, was unable to control Westinghouse. Toshiba had severely underestimated Westinghouse's pride as one of the developers of the mainstream pressurized water reactor. The U.S. company would not listen to its Japanese parent on project management or anything else. After the Fukushima nuclear disaster in 2011, the Westinghouse acquisition began to backfire in a spectacular manner.
At a board meeting in fall 2013, then-President Hisao Tanaka was astonished to learn that Westinghouse's nuclear plant business would likely incur $1 billion to $2 billion in additional costs, due mainly to design changes in the aftermath of the Fukushima accident. Some directors proposed reflecting those costs in Toshiba's consolidated results, but Tanaka balked, arguing that if the issue became public, Toshiba would have to write down Westinghouse's goodwill. "Toshiba's expertise and experience in construction work can help Westinghouse," he said.
Even after learning that something was wrong at Westinghouse, Toshiba failed to take any meaningful action. Instead, the financial and legal departments attempted to cover up the problem, assuming that this was what Tanaka wanted.
It was against this backdrop that Toshiba approved Westinghouse's purchase in December 2015 of S&W for zero dollars.
Tanaka was caught in a trap of his own making: By suggesting that inconvenient facts be hidden from public view, he created an environment in which even he was unable to obtain accurate information from Westinghouse and Toshiba's nuclear plant department.
Desperate to hide the truth about its Westinghouse-related problems, Toshiba sent an email in April 2014 to all staff involved telling them to shred any relevant documents and not speak about the issue in public places. Those staff members, perhaps fearing for their positions in a fiercely competitive environment, were only too ready to obey their superiors. In this way, Toshiba as a whole turned into a runaway train.
In February 2017, after the revelation of the huge loss, President Satoshi Tsunakawa announced that the nuclear business would be put under his direct supervision. One month later, Westinghouse went under and filed for Chapter 11 bankruptcy protection in the U.S.