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Departure from Tokyo exchange after 74 years follows shareholder revolt and leveraged buyout

After almost a century and a half in business and 74 years as a public company, Toshiba was delisted on Wednesday by the Tokyo Stock Exchange — a warning to global investors, said one of its outgoing board members, of “what does and does not work in Japan”.

Toshiba’s departure from public markets is the result of the country’s biggest-ever leveraged buyout: a ¥2tn ($14bn) deal led by private equity group Japan Industrial Partners.

That deal followed eight years of turmoil that included an accounting fraud scandal, a financial crisis, an asset fire sale and a bitter war between management and activist shareholders. 

Over those years, Toshiba exhibited governance shortcomings and an institutional reluctance to act in the interests of shareholders, according to fund managers who held its stock during the period, former board members who are still restricted from speaking publicly and bankers and lawyers who advised the company through its many trials.

“I felt that, in the end, a lot of Toshiba’s governance issues were just not fixable,” said one outgoing board member, adding that the Japanese industrial giant’s exit into private hands was probably the only context in which it could be forced to restructure, sell-off non-core assets and become a more efficient user of its capital.

“Toshiba is like a state-owned enterprise, it has never had a shareholder-focused mindset,” said the person of the conglomerate that makes everything from batteries and chips to nuclear and defence equipment.

Toshiba declined to comment. The company said in a statement on Tuesday that it was taking “a major step towards a new future with a new shareholder” and would “strive to further enhance its corporate value and contribute to society”.

Its protracted ordeal, said a private equity executive connected with Toshiba, should be “required reading” for any investor looking at the Japanese market in the belief that billions of dollars worth of trapped value can easily be unlocked.

“Financial institutions like private equity and hedge funds see Japan as a great opportunity, and no doubt that will continue. But Toshiba is a case study of how far management and shareholder expectations can differ,” said one former board member. “A lot of time was spent convincing Toshiba management that shareholders were partners, not the opposition.”

But others, including Nabeel Bhanji, the senior portfolio manager at the activist fund Elliott who was appointed to the Toshiba board as an independent director in 2022, said he hoped that the Toshiba saga would “prove to be a case study of a renewal of a Japanese icon”. 

Board members departing the company this week questioned whether the many red flags raised by Toshiba’s eight-year ordeal would now be heeded. In its final year as a public company, Toshiba was overseen by a board that included women, non-Japanese and activist shareholders. By contract, all six of the new directors nominated by JIP are Japanese males, and only chief executive Taro Shimada will retain his job.

Another former board member predicted that, without the glare of scrutiny associated with being a public company, Toshiba would ultimately be split into several companies — a plan that was proposed by advisers in 2021 but rejected by shareholders in an atmosphere of intense mistrust. 

Its sale instead to private equity was the culmination of a process that began in 2017 when, as a means of averting bankruptcy, the company was convinced by Goldman Sachs to issue $6bn worth of new shares. 

These were mostly bought by hedge funds, which meant that after years of dealing with largely docile domestic institutions, Toshiba was confronted by a shareholder register suddenly populated with aggressive foreign funds pushing the conglomerate to unlock value trapped in non-core businesses. 

“The problem you had was that Toshiba had built into its DNA the idea that it just would always seek to expand, so its management saw the company as a growth story. The new shareholders, however, saw it as a value play, and that was a long source of mistrust and conflict,” said one adviser to the company. 

Four outgoing board members said that while the situation between shareholders and management did reach a stage in 2021 where it was becoming difficult to find any way forward, the impasse was resolved once representatives of activists Elliott and Farallon had joined the board.

“I hope that what has happened with Toshiba heralds an era where shareholder value is more highly prized and where independent directors on other boards start exercising their power more rigorously than they have in the past,” said one former board member.

Protectionists paved the way for Nippon’s takeover of U.S. Steel.

We have to admit to a smile as Washington’s protectionists howl about Japanese steel manufacturer Nippon Steel’s $14.1 billion deal to buy U.S. Steel. They apparently miss the irony that their tariffs and industrial policy have resulted in the foreign takeover of an iconic U.S. manufacturer.

U.S. Steel put itself on the auction block this summer and sought to strike a deal while the irony is hot. Trillions of dollars in Washington spending on public works and green energy are goosing domestic demand for steel while tariffs protect U.S. manufacturers against foreign competition. U.S. Steel’s best assets are political creations.

President Trump in 2018 slapped 25% tariffs on foreign steel under the pretense of protecting national security. Domestic steel producers lobbied for the tariffs, which they said would protect American workers from cheap foreign imports. Yet U.S. Steel’s workforce had shrunk to 22,740 at the end of 2022 from 29,000 in 2018.

The evidence shows that the tariffs have resulted in fewer downstream manufacturing jobs and raised prices for consumers, all while padding the bottom line of domestic steel makers. Washington’s industrial policy is also helping to boost demand for domestic steel and U.S. manufacturers’ profits.

Federal spending in the 2021 infrastructure bill includes conditions requiring contractors to use U.S.-made steel. The Inflation Reduction Act provides additional tax credits for wind producers that use domestic steel. Both laws are also spurring construction of new factories, at least for a time.

The U.S. iron-and-steel-mill order backlog is currently at a 15-year high. Because U.S. steel makers can’t meet demand, projects will be delayed or contractors will have to pay higher prices for foreign steel. That’s bad for consumers. But the cosseted U.S. steel makers will benefit from higher prices and profits.

You can understand why Nippon wanted to get in on the Washington spending action, especially as manufacturing flags in Europe and much of the world. Nippon’s $14.1 billion bid is roughly double what Cleveland-Cliffs offered to pay for U.S. Steel this summer, which underscores the economic value of tariff avoidance.

The U.S. Steel Workers supported Cleveland-Cliffs’ courtship, but it was opposed by auto makers worried about the potential behemoth’s pricing power. The combined company would have controlled 100% of blast furnace production in the U.S. and 65% to 90% of domestic steel used in vehicles.

U.S. Steel rejected Cleveland-Cliffs’ offer, and it may have been smart to hold out for a better deal. Nippon’s offer doesn’t appear to present antitrust concerns. Although the acquisition would make Nippon the world’s second largest steel maker after China’s Baowu, it has a relatively small footprint in the U.S.

The deal could even provide an American-Japanese counterweight to China’s steel powerhouse. Yet the same politicians who support higher tariffs and industrial policy to counter China now are raising doubts about the deal for purported national security reasons.

“Steel is always about security,” Pennsylvania Democratic Sen. John Fetterman declared. Ohio Sen. J.D. Vance chimed in: “Rest assured that I will interrogate the long-term implications for the American people, and I will do everything in my power to protect the future of our nation’s security, industry, and workers.” Do they think the Japanese are going to bomb Pearl Harbor?

U.S. steel making has been declining for decades owing to the higher labor costs of unionized production. American human and financial capital have been put to better work elsewhere such as advanced manufacturing. There are nearly one million more U.S. manufacturing jobs than a decade ago, and there probably would be more if not for Mr. Trump’s tariffs.

Some politicians, including presidential front-runners from both parties, want to take the U.S. back to the days of 1930s protectionism and industrial policy. But if the Japanese want to invest in the U.S., shouldn’t Washington welcome them with open arms?

The terminated Figma-Adobe merger is an example of an extended acquisition process

It took 15 months between the announcement of the definitive agreement by Adobe to buy Figma and the deal’s termination. Add to that the time from the start of conversations, and it is a protracted period.

Drawn-out merger processes strain private companies.

“It’s really hard for a company to live in this limbo,” said Tomasz Tunguz, general partner at Theory Ventures. Tunguz served on the boards of Kustomer, which was bought by Meta, and Looker, acquired by Google.

Boards can spend hours weekly working on responding to regulatory authorities, and on integration issues. Recruiting and sales get more complicated while potential employees and customers are unsure about what they are dealing with—a stand-alone startup or a company that is about to become part of a much bigger one, Tunguz said.

Dylan Field, Figma’s co-founder and chief executive, addressed some of the strain the company experienced in his announcement of the deal’s termination. Adobe was due to pay $20 billion in cash and stock for the startup. The deal was called off in a mutual decision due to regulatory challenges, the companies said.

“It’s not the outcome we had hoped for, but despite thousands of hours spent with regulators around the world detailing differences between our businesses, our products, and the markets we serve, we no longer see a path toward regulatory approval of the deal,” Field wrote.

The day the Figma-Adobe deal was terminated was also the first day of a two-week holiday time off for Figma employees, said a person familiar with the situation. The company’s management held a virtual town hall to discuss the news on Monday, the person said.

Despite the challenges of the acquisition process, Figma continued to ship products and added about 500 employees to total about 1,300 now. It also acquired another startup, Diagram, earlier this year.

Acquisitions are now taking longer and are much less likely to close than two years ago, and it isn’t just because of regulatory scrutiny, said Aly Love Simons, corporate partner at the law firm Debevoise & Plimpton, and a member of the firm’s mergers and acquisitions and technology groups.

“Buyers are doing more diligence,” she said. “On the private equity side, it’s taking longer to get the debt together.”

Two years ago if a venture-backed company got a term sheet from an acquirer, it was virtually assured the deal would be completed, Love Simons said. Today, “if you have a signed term sheet, there’s maybe a 50% or 60% chance that the deal will get to the definitive agreement, and then only an 85% chance that the deal closes,” she said.

Often, during deal deliberations, the culture at a startup has to change, from openness to increased confidentiality.

For example, venture-backed company CEOs often have calendars that are visible to other company employees, Love Simons said. When an acquisition is being discussed, the CEO’s calendar is no longer visible.

Even open-floor offices can be reconfigured. “There are new rooms with locked doors and no windows,” she said.

Companies that are considering selling must account for both the time and the cash required to sustain their business during that process, and the distraction on management and employees that it takes, Love Simons said.

While selling a business has gotten more onerous, many boards are forced by the market to explore those options, Love Simons said. Acquirers, both strategics and private equity, are still interested in buying, she said, especially now that startup valuations have begun declining. And startup boards that face a worsened venture fundraising market often consider acquisitions as a necessary path forward, she said.

Still, when a deal like this falls apart, “it’s an emotional loss,” Tunguz said.

Employees who expected a payout no longer get one. Venture investors who marked their holdings closer to the acquisition price likely need to adjust.

“The management has to reinvigorate the business somehow,” Tunguz said.

One way Figma may consider going about that, he suggested, is by making its own acquisition and telling the market about a new direction the business is taking.

Stand-alone businesses, of course, have the advantage of being in greater control of their product and other plans.

Figma should receive $1 billion in a termination fee it could use to rebound. That could help the company figure out its next move.

Discussions threaten to widen split between the group’s political leaders in Doha and its militant wing at war with Israel

DOHA, Qatar—Hamas’s political leaders have been talking with their Palestinian rivals about how to govern Gaza and the West Bank after the war ends, a fraught negotiation that threatens to put them at odds with the militant wing fighting Israel.

The talks are the clearest sign that Hamas’s political faction is starting to plan for what follows the conflict.

“We don’t fight just because we want to fight. We are not partisans of a zero-sum game,” Husam Badran, a member of Hamas’s Doha-based political bureau, told The Wall Street Journal during an interview at a villa on the outskirts of the Qatari capital. “We want the war to end,” he said.

The Hamas leader’s statement marks a sharp turn from Oct. 7, when the militant wing of the group led an assault that killed more than 1,200 Israelis. Now, after more than two months of war, and about 20,000 Palestinian casualties in Gaza, according to health authorities there, Hamas’s political wing is talking about an end to the conflict.

“We want to establish a Palestinian state in Gaza, the West Bank and Jerusalem,” Badran said.

Hamas’s Doha-based politburo is, on paper, in charge of the group’s affairs around the world, including in Gaza. But the divisions between the politburo and its officials inside Gaza, which includes a military wing, have sharpened since the war began.

According to the people familiar with the discussions and an Israeli official, the political leadership’s talks with Fatah have created tensions with Yahya Sinwar, the head of Hamas’s military wing based in Gaza. Sinwar, according to those people, doesn’t want Hamas to continue to govern Gaza, but believes the war isn’t lost yet and says it is too early to compromise.

Sinwar, who wasn’t informed about the political leadership’s talks, demanded they be stopped when he found out they were taking place, according to the people familiar with the talks.

The U.S. has been pressing Israeli and Palestinian leaders to begin thinking about what happens after the conflict in Gaza ends. Israel has said it doesn’t want to reoccupy Gaza, but that means putting in some other security force.

Some of the options being considered are a multinational peacekeeping force involving Arab nations, which Hamas and the Palestinian Authority reject. Another option is a revitalized Palestinian Authority with its own security force.

While Hamas has long had a conflicted relationship with the Palestine Liberation Organization, which represents Palestinians at the United Nations and other international meetings, Badran and other Hamas political leaders now say they want to join its umbrella of political groups.

The entrance hall of the villa—lined with the portraits of Palestinians killed by the Israelis—speaks to that vision. It includes founder Yasser Arafat’s second in command, Khalil al-Wazir; the leaders of two Marxist groups; and Hamas founders Sheik Ahmed Yassin and Abdel Aziz Rantisi.

In recent days, Hamas has been secretly reaching out to the leaders of Fatah, the dominant faction of the Palestinian Authority in the West Bank. Badran and other Hamas officials say the talks have also included Mohammed Dahlan, a former Gaza security chief with close Emirati and Egyptian connections, and former Palestinian Prime Minister Salam Fayyad. Dahlan said in a separate interview he is in daily contact with Hamas.

“I am no friend of Hamas,” he said. “But do you think anybody is going to be able to run to make peace without Hamas?”

Senior Hamas political leaders, including Ismail Haniyeh and Khaled Meshaal have been directly involved in those talks, which on the Fatah side include Hussein Al-Sheikh, the No. 2 in the PLO, people familiar with the discussions said. Al-Sheikh is in charge of its negotiations as well as the top liaison to the Israeli government, and is regarded as a potential successor to Mahmoud Abbas, the current head of the organization. Al-Sheikh declined to comment. Badran said Al-Sheikh hadn’t met Hamas’s political leaders in Doha.

Badran said being part of a coalition would facilitate talks with the international community, particularly European nations reluctant to work with Hamas, which is under sanctions.

The Hamas political leaders in these talks indicated that they would be willing to join the PLO and support negotiations under a unity government for a Palestinian state within 1967 borders.

But Badran said that Hamas had no plans to demilitarize or change its stance on Israel, which it refuses to recognize, at least as long as the occupation continues. “The world has no right to ask when people are being killed,” he said. “It’s not logical to ask this question at this time.”

For some, Hamas’s outreach is a sign of desperation as Israeli operations expand and Gaza slips away from the group’s military control.

“The political leadership thinks that Gaza may be lost,” said Ehud Yaari, a fellow with the Washington Institute for Near East Policy. “They don’t believe that Sinwar and his people can withstand the Israeli offensive for long, so they want to make a deal now.”

Badran denied any rift between Hamas’s Gaza branch and its political leadership in Doha. “The leadership of Hamas, both inside Gaza and outside it, is in complete agreement on strategies and political positions across various issues,” he said.

Publicly, the political and militant wings of Hamas say they agree on the issues. A spokesperson for the militant wing in Gaza couldn’t be reached for comment.

For now, Badran says Hamas is seeking a full-scale cease-fire with Israel, rather than a truce, which would lead to talks to exchange all remaining Israeli hostages for all Palestinian prisoners. “If there is a cease-fire, our stance is crystal clear: We want an exchange of all-for-all,” he said.

Badran, who learned Hebrew while in an Israeli jail, said his impression from reading Israeli reaction online was increasingly critical of Prime Minister Benjamin Netanyahu, particularly after the death of three hostages accidentally killed by the Israeli army in Gaza.

Badran said 60 hostages had been killed during the fighting in Gaza out of the 150 Israel says were still held hostage after the first exchange, and that Israel would need to negotiate with Hamas to get them out. “The Israeli army is not suited to retrieve the prisoners alive,” he said. “It can only be achieved through negotiations.”

But any power-sharing agreement between Hamas and Fatah might face opposition from Mahmoud Abbas, 88 years old, who has run the Palestinian Authority since 2005 even after his mandate expired in 2009. The Palestinians “have been deprived of any choice for long, long years,” Badran said, adding that Hamas had held talks with neither Abbas nor the Palestinian Authority.

Years of attempts by Hamas and Fatah to reconcile their differences and form a unity government have failed partly over Hamas’s refusal to disband its military wing. The two sides have also fought over the mechanisms to oversee and enforce national elections.

But the biggest obstacle to any agreement between the Palestinian Authority and Hamas on governing Gaza would likely be Israel, which has consistently said its goal is to destroy the militant group. Asked about the possibility of Hamas joining the Palestinian Authority and playing a role in postwar Gaza, an Israeli official said the idea was “unrealistic.”

The idea could also face opposition from the U.S., which wants a Palestinian Authority security force to crack down on Hamas after the war and to administer Gaza, said Diana Buttu, a former Palestinian peace negotiator. “They essentially want the PA’s role as Israel’s security subcontractor in the West Bank to be expanded into Gaza,” she said.

Buttu said the U.S. is willing to pump more money into the cash-strapped Palestinian Authority, but neither side has presented a sustainable political framework. “There is a longstanding and continuing false promise of Palestinian statehood,” she said.

Buttu places the blame on Americans for pressuring the Palestinian Authority not to work with Hamas, and expresses doubts about the stated goal of destroying the group.

“They have always been part of the political landscape since their founding,” Buttu said. “It’s a fantasy that they can be eliminated.”

Financial Conduct Authority sets out proposals aimed at encouraging companies to float in London

The UK’s top financial regulator has set out plans to press ahead with an overhaul of its stock market listings rule book in the latest stage of a drive to encourage companies to float their shares in London. 

In comments echoing those of government ministers, the Financial Conduct Authority suggested the changes could lead to more UK-listed groups collapsing but argued that this was justified in pursuit of more economic activity. 

“The proposals could entail an increased possibility of failures, but the changes set out would better reflect the risk appetite the economy needs to achieve growth,” the FCA said on Tuesday. 

The plans, which include abolishing the distinction between London’s premium and standard listing segments and removing a requirement for shareholders to approve some large transactions or those with “related parties”, are aimed at boosting the UK’s attractiveness to international companies. 

The proposals come against a backdrop of companies dropping their London listings and a dearth of new companies joining the stock exchange amid an extended decline in initial public offerings globally. 

Tui, Europe’s largest tour operator, this month became the latest high-profile company to consider dropping its UK listing, saying it may shift to a single listing in Frankfurt. 

Dublin-based packaging group Smurfit Kappa, building materials group CRH, plumbing supplier Ferguson and miner BHP are among the companies that have decided to leave the FTSE 100 for primary listings in the US or Australia over the past two years.

Gambling company Flutter is preparing a US listing, opening the door for it to follow suit.

The changes, previously proposed in May and now open for consultation until March 2024, are aimed at simplifying London’s listing regime and making it easier for UK companies to compete as bidders for international businesses. 

Current requirements for advance shareholder approval for large transactions left the UK’s premium listed companies at a disadvantage when bidding for assets in competitive sales processes, the FCA said.

The situation “means UK premium listed companies believe they have to pay a premium, agree to high break fees or lose out on competitive opportunities”, the watchdog added. 

Fund managers and investor groups have previously expressed concern that diluting their voting rights would leave them exposed to more risk. 

But the FCA said its proposed “disclosure-based regime” would give investors enough information and enable them to “influence company behaviour and decide how they want to invest”.

Companies would still need shareholder approval before a reverse takeover or delisting their shares.  

The changes are part of a wider series of government-commissioned reviews and moves to pare back regulations in an effort to make the UK more attractive to international companies and investors. 

The planned listing rule changes were published alongside proposals to increase transparency in bond and derivatives markets, including the creation of a “consolidated tape” to give investors a live database of debt market information.