Toshiba: Profit shock increases chances of a buyout deal

Three is a lucky number in Japan. Not for Toshiba it seems. Last week, the electronics conglomerate received a takeover bid at a discount to its market value, suffered the resignation of its chief operating officer over improper use of entertainment expenses, and reported worse-than-expected third-quarter results after the market close. Toshiba is increasingly faced with a buyer’s market of acquirers.

It gets worse. Toshiba lowered this year’s operating profit estimate for the second straight day on Tuesday. This comes after operating profit fell 88 percent to 5.3 billion yen (US$40.4 million) in December. Hard drive sales declined. It also booked impairments on its power and printer businesses. The resignation of COO Goro Yanase adds corporate governance concerns to an already tainted image.

But the timing is favorable for buyers. Toshiba received a $15 billion takeover bid last week from a consortium led by Japan Industrial Partners. This price was below Toshiba’s market value at the time. That has become a premium.

Shares are down a quarter from the June high. Of its six main businesses, its infrastructure systems division and power systems business, along with its 40 percent stake in chipmaker Kioxia, are already worth more than the group’s market value. Infrastructure and energy systems together make up only one third of the group’s sales.

Toshiba needs the restructuring that its buyers would help with. A sustained conglomerate discount will only get worse. The group has lost more than $2 billion since Bain’s acquisition plan first surfaced last year.

The ailing conglomerate has received eight takeover bids in recent years. But its eroding profits and loss-making units will eventually deter all buying interest. In this case, Toshiba has to be satisfied with a significantly lower price. Missing the market’s earnings expectations in such a dramatic manner should increase the chances of a deal.

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