Toshiba in peril?

Toshiba in peril?
Toshiba, has narrowly escaped getting delisted from the Tokyo Stock Exchange, after the company met the deadline to report its earnings results. The Toshiba Corporation..

Toshiba, has narrowly escaped getting delisted from the Tokyo Stock Exchange, after the company met the deadline to report its earnings results.

Background

The Toshiba Corporation, founded in 1875, has been one of the most successful multi-national conglomerates based out of Japan. It offers a number of diversified products and services that includes consumer electronics, household appliances, medical equipment and more. It is the second largest chip-manufacturer in the world.

In 2015, the company found itself in the middle of an accounting scandal. Details emerged that the company had inflated its profits in the previous seven years by over $1.2 billion. This resulted in the resignation of a number of senior members in the management. Hisao Tanaka, the Chief Executive at the time, also stepped down. The company acknowledged its actions noting, “It has been revealed that there has been inappropriate accounting going on for a long time, and we deeply apologize for causing this serious trouble for shareholders and other stakeholders.”

In 2016, the company incurred losses worth billions of dollars due to the investment it had made in the US nuclear unit Westinghouse. In 2006, the company had bought the nuclear unit seeking to diversify from electronics. However, this proved to be disastrous for its revenue. Westinghouse had to file for Chapter 11.

Analysis

In April 2017, Toshiba filed its financial results with a warning – it noted that the company’s future itself was at risk. Toshiba's president, Satoshi Tsunakawa apologized for the problems facing the company and admitted that the organization was at serious risk of being delisted.

According to its earnings results, Toshbia has incurred a loss of $8.8 billion for the last fiscal year. It did not get delisted because PricewaterhouseCoopers Aarata vouched for its accounting despite finding minor problems. Thus, Toshiba received a “Qualified Opinion” from the auditor.

Even though Toshiba has escaped getting delisted at the present, its problems continue. In June, it had been demoted from the first tier of the exchange. Toshiba has now reported negative net worth for two consecutive years. 

Assessment

Our assessment is that there is a still a chance for the company to be delisted in the near future. This is because there are now serious issues of corporate governance. What went wrong for Toshiba was the investment that it made in the US nuclear business. The fortunes of all nuclear business capable of generating power have waned after the Fukashima nuclear episode. Governments all over are insisting on more stringent liability clauses, which makes the business unsustainable. We are also witnessing resurgence in solar power at a much lower price. We believe that Toshiba provides us two insights –the first, even the best-managed companies are vulnerable to risk that emanate outside the company. The second, is that new or resurgent technologies can become disruptive and create existential troubles for well established companies. 

 Investors do not believe that the company will be able to successfully recover from its financial problems.  The company has until March 2018 to address its debts and that seems unlikely for the once-giant of the Japanese industry. 

Comments