Toshiba Splits in Three

After 146 years of expansion and one dismal decade, the conglomerate calls time on diversification

2 min read

The Toshiba logo is seen 3 times
Pavlo Gonchar/SIPA/AP

Last Friday, Toshiba announced "a bold and ambitious plan to separate into three standalone companies," an unprecedented move by a large Japanese corporation, let alone one with such a storied history as Toshiba, established in 1875. The decision comes after a lack of governance resulted in more than a decade of self-induced troubles, including illicit accounting practices covering huge losses over seven years, the untimely purchase of Westinghouse Electric that turned sour after the Fukushima Daiichi nuclear plant disaster occurred, and more recently strife with activist foreign shareholders that saw top executives resign.

The same week Toshiba made its announcement, an iconic counterpart in the United States, General Electric, said it would divide into three new companies. And in the recent past, two other tech titans, Hewlett Packard and Philips, decided to split up after becoming too unwieldy to manage well. Such mismanagement becomes apparent through the conglomerate's poor overall economic performance, which drags down its value for shareholders, a phenomenon known as conglomerate discount in the business world.

"Toshiba followed a diversification strategy similar to GE," says Yoshihito Takahashi, a professor of business strategy at Senshu University in Tokyo. "But the synergistic results at both companies have been poor or not met expectations, resulting in conglomerate discount." In addition, he says, "Toshiba has suffered from governance issues, as well as a poor acquisitions strategy, especially in its nuclear power generation business, which was influenced by a relationship too close to the government."

Under the new plan, Toshiba will spin off its energy systems, infrastructure systems, building, digital, and battery businesses to create one entity called Infrastructure Service Co. A second entity will comprise electronic devices and the memory storage business under the name Device Co. The aim, says Toshiba, is to "reduce its conglomerate discount by eliminating much of the company's structural complexities, while enabling both entities to "pursue growth strategies and reforms," and management to "be much more focused."

Meanwhile, the third entity, Toshiba, will become a holding company, retaining its shares in Kioxia Holdings (previously Toshiba Memory) and Toshiba Tec, a manufacturer of office equipment such as digital copiers and printers, and business machines like POS terminals and electronic cash registers. But in the case of Kioxia, which manufacturers flash memory (invented by Toshiba), solid state drives, SD memory cards, and USB flash drives, Toshiba intends to sell the share and return "the entire net proceeds to shareholders as soon as practicable."

The radical decision to divide up the conglomerate is the result of an investigations by a strategic review committee set up by the Toshiba board in June. The committee consists of five board members who are independent outside directors, together with independent financial and legal advisors. Its mission was and is (for the plan is open to review after shareholder feedback) "to part ways with the past and explore afresh the various strategic alternatives available to Toshiba, in order to enhance its corporate value."

"The new entities can succeed because they will have a narrower focus, which should eliminate conglomerate discount," says Takahashi. "However, they will also have to eliminate the bureaucratic conditions that held back Toshiba, and also solve the governance issues."

Toshiba expects the separation to be completed by the second half of 2023 and estimates the cost to be around ¥10 billion or $87 million.

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