Lessons From Toshiba's Enterprise Splitting
The corporate world is currently keeping a close eye on a bold strategy announced by the Toshiba Corporation earlier this month. Yes, the $29.4 billion Japanese tech giant known for its consumer and industrial electronic products is taking on a new form. More specifically, three new entities it would split itself into:
• Device Co: consists of Toshiba’s Electronic Devices & Storage Solutions business.
• Infrastructure Service Co: consists of Toshiba’s Infrastructure Systems & Solutions Energy Systems & Solutions, Building Solutions, Battery businesses, and Digital Solution.
• Toshiba: will retain its shareholdings in Kioxia Holdings Corporation (KHC) and Toshiba Tec Corporation. It bears the Toshiba brand name, making it an attractive option for those who want to continue investing in an entity that retains the name of one of Japan’s oldest companies.
Genesis of the split
The roots of Toshiba’s decision to split may date back to the 2015 controversy when the tech giant was ordered to pay Japan’s largest corporate penalty ever, for falsifying their financial statements. The company’s CEO Hisao Tanaka announced his resignation on July 21, 2015. Then the corporation agreed to sell its assets in Westinghouse Nuclear Unit in an effort to boost capital. Then in 2017, the company secured $5.4 billion cash injection from over two dozen overseas investors. While the move helped the company avoid delisting, it introduced activist shareholders such as Third Point, Elliot Management, and Farallon. Soon after, tensions began to rise between overseas shareholders and the company’s management.
A shareholder-commissioned investigation discovered that Toshiba was involved in a collusion with Japan’s trade ministry. The collusion was intended to block investors’ developing influence at the company’s shareholders meeting in 2020. Toshiba then released a separate report that discovered their former chief executive and other executives had behaved unethically. The cumulative effect of these scandals likely triggered Toshiba Corp’s decision to split up. The corporation stated the move was carried out to enhance value for shareholders. The official statement reads “The decision allows each business to significantly increase its focus and facilitate more agile decision-making and leaner cost structures”.
There are many other global investors who are uncertain about the company’s future. The company’s existing shareholders may be distraught at having to invest in the corporation’s smaller spinoffs. One may speculate about the ability of these smaller companies to produce steady profits and create value for shareholders. However, there are many reasons to believe they will perform better than their parent company. Toshiba’s decision to split may have been driven by Japan’s recent tax reform legislation. This legislation encourages spin-off companies by introducing tax deferral measures for them.
The Impacts from splits
The inefficiencies associated with large corporations are often difficult to stamp out, as they affect different branches and divisions collectively. By splitting up, each smaller company segment will be able to set up its own business lines. This includes individual resources, management, talent, regulatory networks, and capital financing sources. These separately managed firms are then able to conduct their operations more efficiently, and with fewer bloated costs following the transformation. This makes it easier for them to maximize their profits and deliver results consistently.
Toshiba’s decision follows that of other major enterprises, such as Hewlett Packard Company which split into HP Inc and Hewlett-Packard Enterprises in October 2015, and food-giant Kraft, which split into Kraft Foods Group and Mondelez International in October 2012.
Hewlett Packard demonstrated they were able to successfully produce steady profits when they split into HP Inc and Hewlett-Packard Enterprises in 2015. Each of the newly formed groups focused on different business models. HP Inc specialized in producing printers, personal computers and other devices for small and medium-sized businesses. Hewlett-Packard Enterprises focused on offering hardware and software solutions such as cloud computing and big data storage for large businesses. Following the split, shareholders were offered the option of investing in HP Inc, Hewlett-Packard Enterprises, or both following the split-up.
Kraft’s split into Kraft Foods Group and Mondelez International did not yield the positive results that Hewlett-Packard’s split-up did. The food giant initially split citing concerns about its ability to manage operations for North American and International markets. Following the split, the newly formed Kraft Foods Group focused primarily on producing and distributing grocery products such as Lunchables, Velveeta, and Jell-O for the brand’s North American market. Meanwhile, Mondolez focused on international snack brands and confections.
Unlike HP Inc and Hewlett-Packard Enterprises, Kraft Foods Group and Mondolez were less successful following the split. Kraft Foods Group’s net revenue fell by 0.3% in the following year, likely due to poor performance in the condiments, sauces, and dressings markets. Mondolez fared even worse in the year following its inception. The company’s revenue in the Asia Pacific region fell by 4%.
The Splitting Trends Perception
Toshiba was not alone in its recent announcement to split up. Other mega-corporations such as GE and J&J recently announced their decision to break up into smaller entities. The new spinoff companies may find success if they utilize the correct business model for their operations. However, external market forces may hinder their chances of succeeding.
A successful split allows each enterprise to focus on their respective market and potentially distance themselves from their parent brand’s reputation. For some of the brands, legacy does not cut ice with the younger consumers. Executing the split correctly requires excellent planning and management, along with a deep understanding of the company’s target markets.
Ambition – of newly split businesses will play a huge role in their growth trajectory.
Branding – of the new entity and how it positions itself and how much does it remind its customers of the older (larger) enterprise will impact its business.
Culture – When the large entity breaks up into multiple smaller ones, will it’s culture continue in the new entities? It’s a tricky challenge for the boards to debate them carefully and then start shaping the culture they want to have to serve their consumers.
Organisation: Enterprises after they are split up into smaller parts, need a robust and agile organisation to suit the new role they play; that of a smaller firm and not having the legacy or tag of belonging to a larger brand. Having the right talent and decision-making structure can help them scale profitably.
Anti-competition: Many believe that such splits are actually a trend away from monopolization. It is seen as a positive move because the existence of monopolies impairs the proper functioning of markets and makes them anti-competitive.
Regulators such as antitrust regulators will likely foster such developments in the future while discouraging proposals that inhibit them. We also anticipate global regulators wanting to “right-size” large firms that become unwieldy to enable supervising them and to offer investor protection.
Valuations: The trend of enterprise-splitting is inevitable in many cases, given that markets are currently overvalued. This creates conditions where small companies introduce more value to their respective market.
Summing up:
Toshiba’s decision to split may have been driven by Japan’s recent tax reform legislation. This legislation encourages spin-off companies by introducing tax deferral measures for them.
Stock market analysts believe the splits are occurring due to market pressure and that it indicates a trend away from monopolization. They view this as a positive move because the existence of monopolies impairs the proper functioning of markets and makes them anti-competitive.
Other analysts also believe the trend of enterprises splitting was inevitable, given that markets are currently overvalued. This creates conditions where small companies introduce more value to their respective market.
We will likely see more corporate splits in the future due to pressure from markets, government, and regulators. This move should create positive changes for shareholders and consumers. However, these spin-off companies will need to pay special attention to their business models if they wish to succeed in their new form.
One of the critical aspects in this agenda would be “how big is too big ?” and “are we dependent on the single leader to run an enterprise of this size ?”.
Ain’t it a new dimension to “size & scale do matter”?
#Culture #Enterprises #ESG #GlobalBoards #SplitEnterprises #Rightsizing #Leadership #Regulations
Authors :
Subrato Basu – Advisor to Fortune 500 & Next Gen Business Transformation Coach &
Srinath Sridharan – ESG Transformation Advisor & CXO coach