Makiko Yamazaki

TOKYO (Reuters) – The Toshiba crisis (OTC) Corp could have a silver lining. It will allow Taro Shimada to retain – at the very least, for now — businesses crucial to his digital strategy.

Last week, investors rejected management’s plans to spin-off Toshiba’s device unit. They also rejected a competing shareholder proposal that would have allowed them to seek buyout offers. The conglomerate, which is now in trouble for its 146-year history, was left without any clear direction.

However, it may give Shimada, an ex-engineer and Siemens AG CEO, some leeway in his plans to increase subscription revenue through the tying of software to hardware.

He can also keep Toshiba Tec Corp equipment maker, which was rejected in the spin-off. Shimada has spoken highly of some Toshiba Tec businesses for marrying digital and hardware, but sources claim he did not want it to be sold.

The ability of Shimada to please the 30% hedge fund owners who hold Toshiba shares is not clear. They are eager for private equity buyouts. However, Thursday’s vote showed that they do not have sufficient support to fully control the outcome.

According to Jesper Koll, a veteran Japan analyst with Monex Group, the outcome gives Shimada “carte blanche” to prove he can deliver.

His statement was: “Toshiba’s CEO is now a technology expert who has had hands-on experience with the technologies for the first time in more than 10 years.”

More big companies are moving into digital services that offer higher profits. Siemens, Shimada’s ex-employer, is looking to increase its customer base with digital services that enhance factories, buildings, and train systems.

Shimada claims he is the first Toshiba chief strategy officer to fully understand digital. Nobuaki Kurumatani brought Shimada in 2018, as the company’s chief strategy officer digital.

Last year, Kurumatani was forced to resign due to shareholder resistance and a governance scandal. Toshiba said that Kurumatani had violated the company’s ethical standards. Shimada, the company’s third CEO within a year after taking over from Satoshi Tsunakawa (who remains chairman of the board), Shimada was named.

CONSTANT TURMOIL

Toshiba’s financial troubles began in 2015 with an accounting scandal that led to the delisting of its stock and then, later, the collapse of Westinghouse Nuclear Unit. Hedge funds were added to the mix by overseas investors, who injected $5.4 Billion and kept Toshiba from being delisted.

Sources say that four years of dealings with foreign activist hedge fund – along their various demands for buybacks or board reshuffles as well as resumption buyout negotiations – have left management disoriented.

Half of the early 2000s peak stock market value for this firm has been lost to $18 billion.

Shimada states that Toshiba is no longer able to sell only hardware. It needs digital services as well to boost both sales and margins.

That message was repeated “over and again” in internal meetings, he said to Reuters two years ago.

He said that he was trying to demonstrate what digital transformation looks like in an interview.

Hitachi Ltd, a rival, has been transforming for ten years now, while selling low-growth businesses off and investing in the digital and service platform. It bought the U.S.-based software company GlobalLogic last year for $9.6billion, including all debt.

Refinitiv found that Toshiba’s operating profit margin in fiscal year 2013 was 3.42 percent, which is less than Hitachi’s 9.38%.

SCIENTIAL

Investors are still skeptical about the company’s abilities to make a turnaround by itself.

According to Brian Heywood (CEO of Taiyo Pacific Partners), Toshiba has “become less than the sum its parts” despite being an “incredible corporation with incredible technology within”.

Heywood explained that the company had not defined “how its parts fit together”.

Shimada cites Toshiba Tec’s Smart Receipt app which integrates with their point-of-sales system as an example of digitalization.

This app can replace paper receipts by electronic ones, and it sends coupon codes to the users’ smartphones. Data is available to retailers for marketing and promotion purposes.

When Shimada was asked this month about Toshiba Tec’s “non-core” classification, he declined to respond. However, he did state that the business is “extremely strong”. About half the country’s point-of-sales market is controlled by this company.

Additionally, he sees the potential to create a subscription service that provides cybersecurity protection against advanced cyberattacks based on quantum computing.

Shimada isn’t yet openly stating his position on the potential buyout of private equity by hedge fund investors.

In that case, his strategy could be continued – provided that existing management is allowed to continue.