Bain Capital buying Toshiba could be a big deal for Japan

JOSHIBA WAS once synonymous with Japan’s industrial might. Lately, the conglomerate, which has made everything from memory cards to nuclear reactors, has become synonymous with drama. The Japanese business press speaks of the “Toshiba Theatre”, which began with an accounting fraud ten years ago and has continued to the present day in a series of “burlesque” fights between management and shareholders. Toshiba’s stock price underperformed domestic and foreign rivals, as well as the broader Japanese stock market (see chart).

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The latest plot twist comes amid talk of a takeover led by Bain Capital, an American private equity group. This raised hopes among investors of some sort of resolution to the saga. Toshiba’s market value has risen by a quarter over the past month.

The opening act of the Toshiba show was tragic. The company prepared its accounts to inflate its profits by $1.2 billion between 2007 and 2014. The executives involved took a deep bow in apology. A new generation of leaders had to apologize again two years later when a big bet on Westinghouse, an American nuclear energy company, turned sour. To stay solvent, Toshiba sold its valuable memory chip unit to a consortium led by Bain and issued a block of new shares. Foreign activist investors spied on the opportunity. Effissimo Capital Management (ECM), a Singaporean asset manager, acquired a nearly 10% stake, making it the company’s largest shareholder.

This set the stage for an extended second act of tragicomedy. As shareholders demanded better returns and more transparency, Toshiba executives squirmed. Some have colluded with the Japanese government to block activists from getting board seats in 2020, an independent investigation has found. A year ago, a surprise bid to privatize the company collapsed, CEO, Kurumatani Nobuaki, down. Tsunakawa Satoshi, a former boss who took over after Mr Kurumatani was ousted, instead argued that the group should be split up.

This plan also failed, and on March 1, Mr. Tsunakawa fell on his sword. At an extraordinary general meeting three weeks later, shareholders rejected management’s proposal for a split into two businesses, one focused on electronics, the other on infrastructure. At the same time, they also rebuffed calls from Toshiba’s second largest investor for the group to court takeover offers.

The stalemate set the stage for act three. March 31 ECM announced that it had signed an agreement to sell its stake to Bain if regulators gave the U.S. company a nod. An agreement would be heavy. Toshiba’s market value is $17.5 billion; a bounty could add a few billion, putting it within striking distance of the top ten leveraged buyouts in history. Given Toshiba’s history (which dates back to 1875) and its notoriety (it employs nearly 120,000 people), the transaction would also mark a big step forward for foreign investors and private equity in Japan, which does not has never been hospitable to either.

Obstacles remain. Japan’s laws governing foreign investment were amended in 2020 to strengthen oversight of industries important to national security. Toshiba has interests in several, including nuclear power, defense, microchips and quantum computing. Regulators have helped derail past takeover bids. Bain appears to have learned from these experiences and is said to be in talks with Japanese funds and companies to form a consortium that would be acceptable to the government. But “many issues” still need to be resolved, Bain acknowledged. The curtain is far from closed.

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This article appeared in the Business section of the print edition under the title “In search of an end”

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