Hedge Funds, It’s Time To Do Some Real Activism
(Bloomberg Opinion) -- Toshiba Corp is self-medicating with a dose of activism. Nice try, but the almost century-and-a-half-old company will need something a lot stronger.
After a run of accounting scandals, a near brush with bankruptcy and scathing findings earlier this year that Toshiba had worked with the government to block shareholders from exercising their rights, the storied Japanese conglomerate has come up with yet another way to reimagine itself and pacify investors. But the new plan, released last week, isn’t really what investors and shareholders had asked for, nor is it entirely in keeping with apologetic promises made in June this year.
In an activist-style presentation, Toshiba laid out its blueprint to split the business into three segments. The neatly spliced take on the sprawling conglomerate looks nice on paper, but the 36-pager seemed to miss one major point: how a breakup will address poor governance, a history of rampant mismanagement and missteps that have consistently broken shareholder trust.
Along with the presentation, the board’s strategic review committee put out a letter to shareholders that includes details of how it arrived at the break-up plan. The first thing they did, it says, was “to listen to the shareholders’ voices.” They address various options, including bringing in a minority investor while remaining publicly listed and full privatization. While the letter goes to great lengths to appease investors, it’s worth wondering how earnest this process really was.
If the board and management wanted the best path forward, their plan would have been transparent. They would’ve released details of their findings — including comparative prices, timing, asset valuations and discount rates. They didn’t. In fact, the letter seems to confirm that the company isn’t looking to actively rebuild shareholder trust and governance — the crux of Toshiba’s problems — or envisage how real change would happen.
Of the options considered, privatization could have been a game-changer. It was seen as the best way to resolve the problems that have plagued Toshiba without being a public spectacle and was what investors had asked the committee to consider, according to the letter. Some private equity houses had wanted this even before the June scandal: In April, CVC Capital Partners offered $20 billion to take the company private. The stock soared at the time. Shortly after, other global firms got involved but eventually the company thwarted the offers.
This time, instead of seeking out new, non-binding offers that could be used to evaluate the feasibility of such a plan, the committee said it had determined that the range of prices “was not compelling relative to market expectations expressed to date in the media,” without giving numbers. It also said “a carefully orchestrated competitive auction process with proper due diligence had not yet been conducted,” but that there was enough existing information for the committee to have made this decision. It added that management had expressed concerns “regarding the potential negative impact of privatization on the businesses.”
To explore the minority investment plan, the letter said, they had more than 25 meetings but concluded it would be challenging for a host of reasons, including gaining support from existing shareholders.
So they deemed the separation plan would be “highly attractive” to shareholders and that management thought it would be “accretive.” This way, the letter notes, “Toshiba’s value could be enhanced beyond the price levels potentially achievable if an auction process were to be commenced today.”
Whether the proposed split is the best way forward is unclear. There’s already some skepticism around whether the suggested divisions will bring out the most value.
What’s more, at no point has there been a real discussion of the numbers or details around the comparative value of the businesses arising from the different options. The presentation and letter barely scratch the surface on reforming leadership roles or discuss how the company will be run, even though “focused and agile management” is presented as a key rationale for the business separation.
Ultimately, make-ups, break-ups and some additional capital will do little to regain shareholder trust. The firm needs to go further and deeper. Showing shareholders that they can create smaller businesses with a bunch of upward pointing arrows won’t help — they’ve seen plenty from Toshiba’s plans over the years. It’s on the company to give details on how the firm will be run, who will run it and under what governance structure. Any healthy turnaround will depend on breaking bad, entrenched habits — and that starts with getting in fresh blood.
The next test for Toshiba’s sincerity will be how it chooses to get approval for its plan: Will it try to get a two-third shareholder majority?
All of this is painful and requires lots of back and forth with stakeholders. But as a public company, that’s what it signed up for. The alternative — just go private — is a lot easier when private equity comes knocking, ready to clean house. Toshiba, though, ruled that out before it even got started.
The board and management need to face the fact that palliative care won’t cut it anymore; only deep, surgical change will.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
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