Toshiba Inks Acquisition Deal with Bain-led Group

　　Toshiba Corp. said it inked an $18 billion agreement to sell its semiconductor business to the consortium led by private equity firm Bain Capital — a deal structured to proceed even if Toshiba is still engaged in litigation and arbitration with Western Digital Corp. on the matter.

　　However, Toshiba added that the sale will not be consummated if the shares of Toshiba Memory Corp., the subsidiary it established to facilitate the sale of the chip business, is blocked by an injunctive order. Western Digital has said it will seek such an order and that a decision could be handed down early next year.

　　Western Digital and Toshiba are engaged in litigation in multiple venues and arbitration at the International Chamber of Commerce on the question of whether Toshiba can transfer assets used in the joint ventures between the firms to a third party. Western Digital, which last year acquired SanDisk, Toshiba's longtime partner in NAND flash memory development and manufacturing, maintains that the agreements specify that Toshiba cannot sell the assets without its permission.

　　Western Digital said earlier this week that an arbitration request it filed in May seeks an injunction that would require Toshiba to unwind the transfer of its semiconductor assets to Toshiba Memory and prevent Toshiba from selling the assets until the matter is resolved. A ruling on the request for an injunction is not expected until early next year, Western Digital said.

　　Western Digital tried for months to hammer out a deal to acquire Toshiba Memory along with partners, but lost out to the Bain-led consortium. Toshiba board members were reportedly concerned about the size of the stake that Western Digital might ultimately hold in Toshiba Memory.

　　The legal tussle between Toshiba and Western Digital may jeopardize the longstanding partnership between Toshiba and SanDisk if the sale to the Bain-led group is consummated. But Jim Handy, principal analyst with market research and consulting firm Objective Analysis, believes that a deal would not necessarily spell doom for the partnership.

　　"If you pull it apart, the people that approved the consortium's offer, they are Toshiba Corporation, not Toshiba Memory," Handy said. "These are not the people that SanDisk and Western Digital are going to be dealing with. The JV could hold together because their might be a very good relationship between SanDisk and Toshiba Memory."

　　But Handy points to something else that may undermine the joint venture and Toshiba Memory. The Nikkei news organization reported last week that the bidding process over Toshiba Memory has paralyzed the unit and caused employees to bolt for competitors including South Korea's Samsung Electronics and sk Hynix.

　　"The rank and file Toshiba employees have lost faith in management," Handy said. "Meanwhile you have China's Yangtze River Storage Technology dangling huge incentives at established NAND flash manufacturers to get them to defect. The longer this is unsettled, the more likely it is that there will be people who flee from Toshiba."

　　The Bain-led consortium also includes sk Hynix as well as several Japanese and U.S. firms.

　　Under the structure of the agreement announced Thursday (Sept. 28), Japanese firms will hold more than 50 percent of the common stock in the new firm — an important consideration for the Japanese government. Toshiba itself will provide about 18 percent of the capital for acquisition and would hold about 40 percent of the shares. Japanese photomask maker Hoya Corp. will provide about 1 percent of the funding but own about 10 percent of the shares, according to the terms of the deal.

　　A group of U.S. firms — including Apple, Dell, Seagate Technology and Kingston Technology — would provide about 21 percent of the funding but would not acquire any common stock or voting rights in the firm under the terms of the deal.

　　Handy called the structure of the deal — in which Japanese firms get a sizable percentage of the voting rights in exchange for a relatively lower level of investment — "a very Japanese thing to do." But he said that he was surprised that Bain would agree to such a structure.

　　"Bain probably wants to find a way to get a quick return," Handy said. "They are probably already lining up someone that is going to acquire their share or they believe the stock price is depressed enough that they will get a quick return."

　　Toshiba said sk Hynix would be "firewalled" from accessing proprietary information about Toshiba Memory and would not be permitted to own more than 15 percent of the common stock or voting rights in the venture for a period of 10 years. Hynix will provide about 20 percent of the funding for the acquisition, according to the terms of the deal.

　　A special purpose acquisition vehicle known as Pangea, formed and controlled by Bain Capital, intends to finance about 30 percent of the purchase price of Toshiba Memory through obtaining about 600 billion yen (about $5.3 billion) in loans from financial institutions and banks, Toshiba said.

　　Innovation Network Corp. of Japan (INCJ) — a public-private partnership between the Japanese government and 19 Japanese corporations — and the state-backed Development Bank of Japan will not initially participate in the acquisition consortium, but "have expressed interest in investing" at a later time, Toshiba said. These organizations have been weary of the legal challenges posed by Western Digital, and Toshiba said last week that they would invest in the venture after the arbitration and litigation is resolved.

　　Toshiba said it hopes to close the deal by the end of its fiscal year in March 2018.