In a Month of Major Mergers and Divisions, Toshiba Splits Into Three Companies
While Samsung is combining business divisions, Toshiba is splitting in three to sharpen its focus and compensate for recent business failings.
After 140 years of growth, the Japanese multinational conglomerate Toshiba recently announced a strategic reorganization into three standalone companies. This is the first-ever spin-off scheme for a Japanese company of its size. The reorganization involves the creation of a new device business, which includes hard disks and semiconductors.
Toshiba's strategic review committee has been in talks about new initiatives since this summer. Image (modified) used courtesy of Issei Kato and Reuters
This announcement came in the same week that U.S. industrial giant General Electric also revealed its plans to split into three public companies. Then today, South Korean manufacturing conglomerate Samsung announced that it will be combining its mobile and consumer electronics businesses. While each of these events involves a high-level corporate reorganization—whether it be a division or a merger—it eventually impacts the resources and focuses on hardware-level research and development.
Zooming in on Toshiba, specifically, how might this division affect the company's hardware developers and the engineers who commonly use Toshiba's components?
Details of the Reorganization
In the reorganization, Toshiba Corporation plans to separate into three standalone companies. These companies have unique business characteristics, and the separation will allow each of them to increase their focus and facilitate agile decision-making. The hope is that the companies will be better positioned to capitalize on their market positions and deliver sustainable growth. The three standalone companies will be:
Infrastructure Service Co. 1
This will consist of Toshiba’s Energy Systems and Solutions, Infrastructure Systems and Solutions, Building Solutions, Digital Solutions, and Battery businesses. The new company aims to lead industries in realizing carbon neutrality and infrastructure resilience.
Device Co. 2
This company will include Toshiba’s Electronic Devices and Storage Solutions business; its products will include power semiconductors, optical semiconductors, analog integrated circuits, high-capacity hard disk drives for data centers, and semiconductor manufacturing equipment. The aim is for the company to support the evolution of IT infrastructure.
Toshiba intends to maintain its shares in both KIOXIA and Toshiba Tec Corporation. In addition to growing the new business, Toshiba intends to monetize shares in KIOXIA and return net proceeds to shareholders. The aim is to improve governance and management structure.
KIOXIA focuses on flash memory solutions. Image used courtesy of KIOXIA
Toshiba hopes that it will be able to unlock substantial value and create more focused investment opportunities by capitalizing on the tax-qualified spin-off structure via the recent tax reform legislation in Japan. This split forms a significant inflection point for Toshiba and looks beyond the confines of past Japanese business practices. If successful, it will enhance long-term value and advance the intent of recent legislation to open up and revitalize Japan’s economy.
What Events Lead Up to the Split?
It isn't common for a large domestic company with over 300 subsidiaries to split. However, Toshiba isn’t labeling this event as a disassembly of its business, but rather a reorganization. Still, this division seems to be a result of several significant business failings over the past years, at least in part.
In 2006, Toshiba declared it would become a developer of world standard-setting nuclear reactors and acquired the American power plant Westinghouse. The drive toward nuclear was based on its promise as a zero-emission alternative to fossil fuel.
However, the nuclear disaster at Fukushima in 2011 changed all of that as the public demanded increased nuclear safety regulations; Toshiba’s reluctance to adjust its strategy led it to insolvency. While the company escaped from the business crisis by raising money from investment funds, the event also tainted the opinions of shareholders.
Storage tanks for contaminated water at the Fukushima Daiichi site. Image from IAEA Imagebank [CC BY-SA 2.0]
Meanwhile, Toshiba has faced been multiple financial issues. 2015 saw massive accounting fraud as successive presidents padded profits by more than 200 billion yen. In 2020 there was a subsidiary issue scandal with 43.5 billion yen in fictitious sales. And, most recently, hedge funds have piled into the company, resulting in pressure for a strategic review.
After prolonged management turmoil and negative net worth caused by the losses from nuclear and shareholder conflict, the separation plan was unanimously approved by the board. The separation represents a significant milestone in Toshiba’s history; the company hopes to improve corporate governance in line with global standards and, by doing so, to reestablish its ethos.
How Will Hardware Development Be Affected By the Split?
Toshiba hopes that each new company will be able to make faster decisions. Each business will also focus on increased transparency and competitiveness. What’s more, money can then be devoted to capital investment and R&D. Researchers in Toshiba’s Research and Development Center in Kawasaki City will be able to do research without being tied to a specific business. This includes research on technologies such as AI that will drive future hardware development forward.
Toshiba's M4G group of Arm Cortex-M4 MCUs released in September. Image from Toshiba
On the other hand, there is always a risk that technology will be leaked overseas as the company becomes smaller. And nothing is certain about what will happen to Toshiba’s 118,000 employees' salaries and whether their employment will be maintained. Ultimately, the major focus of the split is shareholder value in the hope of resolving the conflicts of recent years.
The Trickle-down Effect of Corporate Reorganization
Toshiba’s breakup is a rare move in a country dominated by conglomerates, but it isn’t entirely unprecedented. As mentioned, this announcement came in the same week that GE also announced a split into three distinct sectors: aviation, healthcare, and energy.
The reasons for GE's and Toshiba's respective breakups vary. Through the creation of three public companies, GE hopes that it can tailor capital allocation. Meanwhile, Toshiba hopes to encourage activist shareholders to sell their stocks, enhance competitive positioning, and give each business greater flexibility. The ultimate objective of both is to create value for stakeholders and to focus more on single markets.
At the same time, Samsung is merging two of its three business divisions and reorganizing leadership positions. According to Bloomberg, the consolidation of consumer and mobile electronics businesses will better equip Samsung to go head-to-head with Apple. The newly-appointed Kyehyun Kyung over Samsung's Device Solutions group plans to drive forward the company's semiconductor business lines, including chipmaking, memory, and logic processors.
Toshiba has always strived to stay ahead of the times, so the new announcement follows suit in that respect. The reorganization is expected to be completed in the second half of 2023. If the turmoil in management can be put to an end, perhaps the company can work to build its reputation and develop new products and solutions.