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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.