Toshiba takeover tests corporate Japan

Toshiba’s board has an unenviable task ahead. Three private equity firms are circling the venerable Japanese conglomerate, which is said to be operating in a state of “civil war” that this week claimed the company’s chief executive.

The industrial powerhouse was already feuding with activist investors. Now directors will have to consider not just a $20bn offer from CVC, which has close ties to departing CEO Nobuaki Kurumatani, but possibly competing bids from KKR and Brookfield.

In some ways, the Toshiba fight is a one-off. Lingering fallout from a 2015 accounting scandal means the company’s shareholder register includes a group of activists who participated in a 2018 emergency fundraising. There are also fewer traditional passive funds as a counterweight due to Toshiba’s temporary banishment from the Tokyo Stock Exchange’s main market. 

That means Toshiba has investors that can and want to get involved in bolstering the company. They demonstrated their strength last month, when a majority of shares were voted in favour of launching an independent inquiry into voting irregularities at 2020’s annual general meeting. It was the first victory for a shareholder-proposed motion at a major Japanese group.

After years of dismal governance and infighting, the 145-year-old group might well benefit from an outside buyer. But plans for Japan’s largest ever buyout would be complicated by the fact that Toshiba is both a household name and plays a vital role in the country’s nuclear power sector.

The potential bidding war also comes as a growing number of private equity houses are targeting Japan. The way this contest is handled will send a signal to overseas investors on whether Tokyo really is serious about attracting foreign investment and modernising its corporate sector.

Former prime minister Shinzo Abe argued that higher governance standards would improve investor confidence and boost corporate returns. He brought in a new corporate code in 2015, but critics say its lack of sanctions failed to change behaviour. Revisions proposed this month would strengthen the role of independent directors, make boards more diverse and improve environmental disclosures.

Now the onus is on both Toshiba’s board and the Japanese government to handle these competing bids in a way that is both transparent and fair to shareholders. Before Kurumatani’s resignation, some feared the purchase would be a management stitch up because of his close ties to the private equity house, and now his departure is seen as part of an “old guard” boardroom coup to block a sale to CVC.

The Japanese establishment also has a long record of thwarting outside efforts to gain control of companies, as when a government backed fund blocked a takeover of lossmaking chip group Renesas by KKR in 2021.

A Toshiba deal would pose national security concerns because it is cleaning up the Fukushima nuclear disaster site. But those can be addressed. When Toshiba sold its flash memory business, now called Kioxia, the 2018 deal was structured to ensure majority-Japanese ownership. Something similar would be possible here.

Toshiba should conduct an open process, allowing various buyers to explain how the company can reform and succeed. The board should then pick the best option. That would benefit Toshiba and demonstrate that Japanese corporate governance really has changed. If a back room deal allows incumbent management to escape from shareholder pressure, rather than address its problems, then it would do the reverse.