Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> has had a tough time of things for years, but they have been problems largely of the company's own manufacture. Ill-fated investments led to accounting mishaps, which led to management and internal control issues, which when cleaned up led to more significant tone at the top issues, and in its zeal to remain listed when it probably should have arranged for a take-private rescue in 2017-2018, it ended up being owned to a level of more than 50% by foreign activist investors. The company did a giant buyback, re-upped its dividend, and eventually returned to the TOPIX Index this past spring as it returned to the TSE First Section. But "new management" in the form of Nobuaki Kurumatani, who was looking for something to do after not making the top slot at SMBC, was somewhat autocratic, and eventually that triggered the problems which come when not-as-powerful-as-they'd-like autocrats have to rely on others (in this case, regulators) to do their dirty work for them. About 18 months ago when it looked like the activists might decide to oust Kurumatani from his Board seat (and by default, CEO-ship), the company went into Entrenchment Mode and undertook activity about which some activists eventually complained. An internal investigation by the Parents pretended to look under the bed and decided there were No Monsters There. Activists knew what they had experienced was not reflected in that No Monsters Review and demanded an EGM to call an independent review, which The Parents (management) opposed. They got it, then they got the review, and partway through, Kurumatani-san was running out of internal support, so the Board was apparently going to give him the axe. Magically, he found someone - his old shop - to say "hey, we'd like to buy out Toshiba, but only if Kurumatani-san stays" (discussed in <a href="https://www.smartkarma.com/insights/toshiba-the-ceo-gets-his-mbo-bidder-and-toshiba-will-get-interestinger" target="_blank" data-smartkarma-citation="insights:50058" rel="noopener">Toshiba - The CEO Gets His MBO Bidder and Toshiba Will Get Interestinger</a> and <a href="https://www.smartkarma.com/insights/gaming-out-a-cvc-bid-for-toshiba-the-right-noises-the-wrong-price-and-toast" target="_blank" data-smartkarma-citation="insights:50229" rel="noopener">Gaming Out a CVC Bid for Toshiba - The Right Noises, The Wrong Price, and Toast</a> (the first of which, coincidentally, followed on exactly a year after I wrote <a href="https://www.smartkarma.com/insights/an-mbo-for-toshiba-not-as-silly-as-it-sounds" target="_blank" data-smartkarma-citation="insights:38199" rel="noopener">An MBO for Toshiba? Not As Silly As It Sounds</a>)).  The board looked at that and decided that was a little too coincidental, and Kurumatani-san was gone (discussed in <a href="https://www.smartkarma.com/insights/toshiba-the-king-is-dead-long-live-the-king" target="_blank" data-smartkarma-citation="insights:50309" rel="noopener">Toshiba - The King Is Dead, Long Live the King</a>). The chatter of an MBO/LBO died down somewhat but did not die as earnings came out, a capital return became possible, then just two weeks before the AGM (one where Kurumatani-san was surely going to have problems if he had stayed) the Independent Report came out (<a href="https://www.smartkarma.com/insights/toshiba-s-2020-agm-investigative-report-is-damning" target="_blank" data-smartkarma-citation="insights:52868" rel="noopener">Toshiba's 2020 AGM Investigative Report Is Damning</a>). The report made it absolutely clear that indeed, there were lots of Monsters Under the Bed, and some of them were actually the Parents themselves, and there were tapes and emails, and a few conveniently destroyed mobile phones. In the interim, about 10% of the company had been bought by TOPIX trackers, and that shifted the mix of voting rights for the AGM, but when the damning report came out, some directors were livid because it turned out some directors and old management had effectively lied to them in presenting the first report. It was mayhem. The result? A bunch of directors were ousted and/or not re-elected. Toshiba now has fewer directors than it needed, the former CEO and one-time chairman is back as interim CEO and a search is on for a new CEO and new Chairman, more directors and a Strategic Review for the business is under way. There are noises of either an IPO (more likely) or a take-private of the <a href="https://www.smartkarma.com/entities/kioxia" target="_blank" data-smartkarma-citation="entities:29243:1" rel="noopener">Kioxia (6600 JP)</a> unit, but given global sensitivity to access to semiconductors and memory, I think an IPO much more likely. A couple of weeks ago, Toshiba made a <a href="https://www.global.toshiba/ww/news/corporate/2021/09/news-20210908-01.html" target="_blank" rel="noopener">press release</a> regarding the progress the Board was making in its strategic review, saying that any talk of a take-private situation would need to wait until that review was finished. This seemed to upset some investors but it makes utter sense from the standpoint of a Board lacking a full-time CEO, a complete complement of Board members, and a professional Chairman. It also needed some time to deflate expectations and upset on both sides after the Independent Report came out blaming both Toshiba and METI, saying illegality by one or both might have been committed, and METI came out very much defiant because of natsec concerns (which really only affect a small portion of the business). <h2>Today's News Is BIG</h2>The FT posted an <a href="https://www.ft.com/content/8c1c3cf0-951d-4032-9826-8c4576824db5?shareType=nongift" target="_blank" rel="noopener">article</a> this evening Tokyo time, saying that famed US-based activist firm Elliott Management Corp had bought a significant stake in Toshiba and held talks with management and the Board and advisers. "people close to Toshiba said that Elliott's stake did not exceed 5 per cent." Bloomberg touched base with Elliott who said that Elliott confirmed they were a "large shareholder." Generally, in Japan, that means a 5% stake, but we will see. If they are not over 5% in a Large Shareholder Report by next Thursday, then they aren't a 5% stakeholder today. But the FT article is super-interesting, and deserves to be read closely.And I have some more thoughts about that below the fold.

Toshiba Corp (6502 JP) has had a tough time of things for years, but they have been problems largely of the company's own manufacture. Ill-fated investments led to accounting mishaps, which led to management and internal control issues, which when cleaned up led to more significant tone at the top issues, and in its zeal to remain listed when it probably should have arranged for a take-private rescue in 2017-2018, it ended up being owned to a level of more than 50% by foreign activist investors. The company did a giant buyback, re-upped its dividend, and eventually returned to the TOPIX Index this past spring as it returned to the TSE First Section. But "new management" in the form of Nobuaki Kurumatani, who was looking for something to do after not making the top slot at SMBC, was somewhat autocratic, and eventually that triggered the problems which come when not-as-powerful-as-they'd-like autocrats have to rely on others (in this case, regulators) to do their dirty work for them. About 18 months ago when it looked like the activists might decide to oust Kurumatani from his Board seat (and by default, CEO-ship), the company went into Entrenchment Mode and undertook activity about which some activists eventually complained. An internal investigation by the Parents pretended to look under the bed and decided there were No Monsters There. Activists knew what they had experienced was not reflected in that No Monsters Review and demanded an EGM to call an independent review, which The Parents (management) opposed. They got it, then they got the review, and partway through, Kurumatani-san was running out of internal support, so the Board was apparently going to give him the axe. Magically, he found someone - his old shop - to say "hey, we'd like to buy out Toshiba, but only if Kurumatani-san stays" (discussed in Toshiba - The CEO Gets His MBO Bidder and Toshiba Will Get Interestinger and Gaming Out a CVC Bid for Toshiba - The Right Noises, The Wrong Price, and Toast (the first of which, coincidentally, followed on exactly a year after I wrote An MBO for Toshiba? Not As Silly As It Sounds)).  The board looked at that and decided that was a little too coincidental, and Kurumatani-san was gone (discussed in Toshiba - The King Is Dead, Long Live the King). The chatter of an MBO/LBO died down somewhat but did not die as earnings came out, a capital return became possible, then just two weeks before the AGM (one where Kurumatani-san was surely going to have problems if he had stayed) the Independent Report came out (Toshiba's 2020 AGM Investigative Report Is Damning). The report made it absolutely clear that indeed, there were lots of Monsters Under the Bed, and some of them were actually the Parents themselves, and there were tapes and emails, and a few conveniently destroyed mobile phones. In the interim, about 10% of the company had been bought by TOPIX trackers, and that shifted the mix of voting rights for the AGM, but when the damning report came out, some directors were livid because it turned out some directors and old management had effectively lied to them in presenting the first report. It was mayhem. The result? A bunch of directors were ousted and/or not re-elected. Toshiba now has fewer directors than it needed, the former CEO and one-time chairman is back as interim CEO and a search is on for a new CEO and new Chairman, more directors and a Strategic Review for the business is under way. There are noises of either an IPO (more likely) or a take-private of the Kioxia (6600 JP) unit, but given global sensitivity to access to semiconductors and memory, I think an IPO much more likely. A couple of weeks ago, Toshiba made a press release regarding the progress the Board was making in its strategic review, saying that any talk of a take-private situation would need to wait until that review was finished. This seemed to upset some investors but it makes utter sense from the standpoint of a Board lacking a full-time CEO, a complete complement of Board members, and a professional Chairman. It also needed some time to deflate expectations and upset on both sides after the Independent Report came out blaming both Toshiba and METI, saying illegality by one or both might have been committed, and METI came out very much defiant because of natsec concerns (which really only affect a small portion of the business). Today's News Is BIGThe FT posted an article this evening Tokyo time, saying that famed US-based activist firm Elliott Management Corp had bought a significant stake in Toshiba and held talks with management and the Board and advisers. "people close to Toshiba said that Elliott's stake did not exceed 5 per cent." Bloomberg touched base with Elliott who said that Elliott confirmed they were a "large shareholder." Generally, in Japan, that means a 5% stake, but we will see. If they are not over 5% in a Large Shareholder Report by next Thursday, then they aren't a 5% stakeholder today. But the FT article is super-interesting, and deserves to be read closely.And I have some more thoughts about that below the fold.  

Semiconductors, Memory and SSDs Specialist, Objective Analysis

Jim Handy

Semiconductors, Memory and SSDs Specialist

Objective Analysis

Objective Analysis offers third-party independent market research and data for the semiconductor industry and investors in the semiconductor industry.

Semiconductors, Memory and SSDs

Equity Bottom-Up

Micron Technology just announced near-record revenues and strong earnings, but cautioned that the current quarter will come in lower than the most recent quarter.  Overall, the company expects to see a record fiscal 2022, owing partly to a market that will benefit all players, and partly to Micron's new leadership in process technologies.

Micron Technology just announced near-record revenues and strong earnings, but cautioned that the current quarter will come in lower than the most recent quarter.  Overall, the company expects to see a record fiscal 2022, owing partly to a market that will benefit all players, and partly to Micron's new leadership in process technologies.

Micron Posts 2nd-Best-Ever Quarter.  Outlook Positive

If you look at Western Digital's NAND flash margins in comparison with those of Kioxia it becomes difficult to rationalize the recent rumor that WDC will acquire Toshiba.  This Insight hypothesizes that the rumor was created in an effort to sway another negotiation.

If you look at Western Digital's NAND flash margins in comparison with those of Kioxia it becomes difficult to rationalize the recent rumor that WDC will acquire Toshiba.  This Insight hypothesizes that the rumor was created in an effort to sway another negotiation.

Why a WDC Kioxia Acquisition Seems Unlikely

Kioxia posted solid revenue growth in its most recent quarter, and the market timing is good for an IPO.  All that is left is for the company to take advantage of this situation, but they haven't yet disclosed their intents.

Kioxia posted solid revenue growth in its most recent quarter, and the market timing is good for an IPO.  All that is left is for the company to take advantage of this situation, but they haven't yet disclosed their intents.

Kioxia Solid in Latest Quarter - Time for an IPO?

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

The <a href="https://www.wsj.com/articles/western-digital-in-advanced-talks-to-merge-with-kioxia-in-20-billion-plus-deal-11629914820?mod=hp_lead_pos3" target="_blank" rel="noopener">WSJ reported</a> that Kioxia and Western Digital had been continuing their previously rumoured talks and that discussions appear to be heating up. Details included a potential mid-September timeline, $20bn valuation and the deal being for shares rather than cash which would make sense given WDC’s market cap and leverage.

The WSJ reported that Kioxia and Western Digital had been continuing their previously rumoured talks and that discussions appear to be heating up. Details included a potential mid-September timeline, $20bn valuation and the deal being for shares rather than cash which would make sense given WDC’s market cap and leverage.

Toshiba – Possibility of a Kioxia-Western Digital Deal

Japan

Kioxia Holdings Corporation manufactures semiconductor memory products. The Company develops, produces, and sells flash memory cards, solid state drives, secure digital memory cards, and other products. Kioxia Holdings also operates group management strategy formulation and management.

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Kioxia Holdings (285A JP)

Toshiba - Elliott Jumps Into The Fray

Elliott has joined the fray. They probably own 10-20mm shares to start. The rest of the register has changed by an additional 38mm shares since...

Travis Lundy

Micron Posts 2nd-Best-Ever Quarter. Outlook Positive

While Micron announced its second-highest quarter ever, the outlook for the following quarter is down. Still the CEO expects a banner fiscal...

Jim Handy

Why a WDC Kioxia Acquisition Seems Unlikely

Recent rumors of a WDC/Kioxia acquisition don't make sense when considering WDC's profit margins. Is something else at play?

Jim Handy

Kioxia Solid in Latest Quarter - Time for an IPO?

Kioxia is poised to post historically high revenues in the fourth quarter. Does this imply that the long-awaited IPO is imminent?

Jim Handy

Toshiba – Possibility of a Kioxia-Western Digital Deal

As Kioxia nears either an IPO or a merger with WDC we believe there is moderate short-term upside for Toshiba though an all share deal by WDC could...

Mio Kato

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