On October 24, 2017, Toshiba Corporation held an extraordinary shareholder’s meeting where Toshiba’s shareholders approved the Share Purchase Agreement (SPA). Toshiba had agreed to enter this agreement with K.K. Pangea, a special acquisition company formed to buy all shares of Toshiba’s wholly owned subsidiary, Toshiba Memory Corporation (TMC). K.K. Pangea (Pangea) consists of a consortium of companies, most notably Bain Capital Private Equity, Apple, Dell Technologies Capital, and SK Hynix. This deal, which may or may not close, has several issues that could prevent success. The deal’s value ultimately comes out to an estimated $18 billion.
Since filing it’s 10-K in March of 2017, Toshiba has been under fire from shareholder’s due to massive losses attributable to its bankrupt U.S. wholly-owned nuclear subsidiary company, Westinghouse. At the end of the fiscal year, Toshiba reported a 950 billion yen ($8.6 billion) loss. Costs in the nuclear industry have ballooned since the March 2011 nuclear disaster in northeastern Japan, causing safety requirements to become tougher and increasing time tables for the construction of Westinghouse reactors. Toshiba’s earnings reports failed to receive endorsements from auditors, given the companies volatile U.S. projects. Subsequently, Toshiba’s earnings reports are being given as projections rather than results. Accumulated losses from the U.S. nuclear unit, Westinghouse, has put downward pressure on Toshiba’s balance sheet. If it is unable to fix its finances by March 2018, the end of the Japanese fiscal year, Toshiba could potentially be delisted from the Tokyo Stock Exchange.
What exactly are memory chips? Well, they are chips that store and retrieve information in devices such as smartphones and tablets. Market demand for faster and more efficient chips is continuously growing as we move to a market economy driven by internet-based interactions. Toshiba Memory just so happens to be the industry’s No. 2, right behind Samsung Electronics. Toshiba, which originally invented the technology behind the modern (NAND flash memory), is being forced to sell its most lucrative business line. This lucrative business line attracted many suitors such as Western Digital, Broadcom Ltd. (a U.S. company that bid about 2.2 billion yen), and a group led by private equity kingpin KKR & Co.
The deal itself draws on both national and competitive concerns that could jeopardize the deal’s closing. The Japanese government wants to keep the memory chip technology, an integral part of national defense, out of the hands of foreign parties, particularly China. Hon Hai founder Terry Gou has vowed to press his case on an unfair process occurring behind the sale. In the 1990s, Japan was the dominant power in semiconductors. Toshiba Memory represents that dying legacy. On the other hand, there are concerns with Western Digital, Toshiba Memory’s partner company. Toshiba memory provides Western Digital with the majority of its revenue and was prepared to offer a 2 trillion yen (~$18 billion) buyout; however, Toshiba ultimately turned down the offer due to concerns over the financing and conditions. Western Digital has sought out an injunction with the International Court of Arbitrage, arguing that no deal can be performed without its consent (due to the partnership natures of the two companies).
Toshiba, ultimately, does believe that the deal will close regardless of Western Digital’s claims. Bain Capital has already agreed to close the deal even if Western Digital’s legal issues are yet to be resolved. Yuji Sugimoto, head of Bain Capital’s Japan operations, has already stated that the private equity fund will “invest hundreds of billions of yen in Toshiba Memory every year”. Bain aims to take the prized flash memory unit of the struggling Toshiba Corp. onto the Tokyo Stock Exchange within the next three years.