(Yicai Global) Nov. 20 -- Toshiba Corp. [TYO:6502], founded 143 years ago, developed Japan's first domestic fridge, washing machine and microwave oven as a pioneer in the country's manufacturing industry. However, the company's business has been in decline over the past 11 years, Tech Sina reported.

Hisense Electric Co. [SHA:600060], an affiliate of Hisense Group will acquire a 95 percent stake in Toshiba Visual Solutions Corp. for USD115.0 million (JPY12.9 billion), the company said on Nov. 14.

The acquisition includes Toshiba TV products, brands, and operations service, as well as global brand authorization related to TV for a period of 40 years.

This is not the first time that Toshiba has transferred its business. Toshiba sold 80.1 percent stakes in its household appliance business to Midea Group Co. [SHE:000333] for JPY53.7 billion in March 2016. In Sept. 2017, Toshiba agreed to transfer its storage chip business to a consortium led by Bain Capital for JPY2 trillion.

Serious Setbacks

Toshiba reached an agreement with British Nuclear Fuels Limited (BNFL) in February 2006 to acquire BNFL's nuclear power equipment company Westinghouse Electric. The deal's value was three time higher than the initial offer of USD1.8 billion due to a bidding war with Mitsubishi Corp. [TYO:8058] and Hitachi Ltd. [TYO:6501]. The sky-high acquisition price was just the beginning of Toshiba's decline.

Atsutoshi Nishid, a leader in promoting M&A and restructuring, joined Toshiba as president in June 2005. Toshiba achieved a turnaround under his leadership in its PC business. Nishid led a series of major investments in semiconductor businesses, including the acquisition of a Sony Corp. [TYO:6758] semiconductor production line for USD835 million in February 2008.

Thanks to Nishid's leadership, Toshiba's operating income rose from JPY5.83 trillion when he took office to JPY7.77 trillion in 2008, a surge of 30 percent. However, good times didn't last long. The worldwide financial crisis that broke out in 2008 hit the global semiconductor market and Toshiba was inevitably implicated.

Japan's electronics industry suffered a complete collapse in 2008. Sony suffered its greatest loss in fourteen years at JPY98.9 billion, while NEC lost more than JPY290 billion. Losses at Hitachi were JPY787.3 billion, while Sharp lost JPY125.8 billion.

Nishid handed over his presidency position to Norio Sasaki, the head of the nuclear power division, in May 2009.

The new president strengthened the firm's nuclear power division. However, the 9.0 magnitude earthquake that hit Japan on Mar. 11, 2011 triggered a radioactive leak at Fukushima Daiichi Nuclear Power Station. Toshiba, the main constructor of the Fukushima Daiichi Nuclear Power Station, saw its nuclear dream shattered.

After the nuclear power plant incident in 2011, the development of nuclear power plant business globally declined significantly. Four of the eight Toshiba nuclear power plant construction orders agreed in the US were put on hold and other countries have also suspended plans for nuclear power plants.

To make matters worse, only eight of the twelve nuclear power station construction projects signed by Toshiba in 2009 remained and all of them were postponed. Four power plant projects undertaken through subsidiary Westinghouse Electric in China were also substantially delayed.

Toshiba's Sanmen No.1 generating unit, currently being developed in China's eastern Zhejiang province is three years behind schedule, Japanese media outlet Nihon Keizai Shimbun reported. Delays for the other three generating units also face delays of at least three years.

The Chinese market has bottomed out faster than other countries with the government attaching more importance to independent intellectual property rights. Westinghouse Electric's third generation technology has been introduced through State Nuclear Power Technology Corporation (SNPTC), a central government-led company under State Power Investment Corporation (SPIC).

Toshiba has received only a few nuclear power plant orders since 2009, Nihon Keizai Shimbun reported. This indicates that the firm has very few potential customers in the nuclear power field and is also unable to record profits from current orders.

Accounting Fraud

After the financial crisis in 2008, Toshiba's financial report showed that its profitability rapidly returned to a normal level. After Fukushima Nuclear Power Station leaked radioactive materials in 2011, the company's reported profit hit new highs in 2012 and 2013. However, its strong results were a product of accounting fraud that came to light in 2015.

Toshiba's financial scandal surprised many. It spanned from 2008 to 2015, involved at least four business departments and overstated profits by JPY156.2 billion. Japan's largest semiconductor manufacturer and second largest motor manufacturer had been caught in the country's biggest accounting fraud case and outdone Olympus Corp.'s [TYO:7733] 2011 scandal.

The firm fudged numbers to conceal its struggling nuclear power business and executives' disputes. By the time Hisao Tanaka took over as President of Toshiba in 2013, former Toshiba Presidents Atsutoshi Nishida and Norio Sasaki, who had a good relationship in 2009, were on bad terms.

The Mainichi Newspapers once quoted Nishida as saying that Sasaki, who focused on the nuclear power business, was not capable of heading all businesses within the company.

"I have brought the company back on track," Sasaki responded, noting that he ended the era of Nishida's losses.

On July 21, 2015, a report released by Toshiba's third-party panel pointed out three chiefs proposed challenging targets to improve profits. After Tanaka took the helm, he remained loyal to Nishida, having the latter continue to run the company despite no longer serving as a chief.

Nishida placed high expectations on Tanaka, who had 14 years of work experience abroad and hoped Tanaka would lead the team to revive its TV business. However, Chinese TV makers surprised the global TV market with their pricing strategy in 2014. Chinese brands such as TCL Corp. [SHE:000100], Hisense Co. [HK:921; SHA:600060], Hong Kong Skyworth Digital Holdings Co. [HK:0751], Konka Group Co. [SHE:000016] and Sichuan Changhong Electric Co. [SHA:600839] moved into the industry's top ten list, as Panasonic Corp. [TYO:6752; NAG:6752; PSE:PMPC] and Toshiba lost their spots in 2014, per a WitsView survey.

Facing pressure from Nishida's unrealistic targets, Tanaka had to follow the same route as Sasaki by cooking the books. Toshiba usually accomplished this by channeling profits for the next fiscal year or including the loss for the current year in the next fiscal year.

Dead End

Driven by strong performance of its memory chip business, Toshiba registered growth of 76 percent in operating profits in the second quarter this year, per the groups' financials. However, Toshiba decided to dispose of its memory chip business in September.

Toshiba's nuclear power business suffered over JPY10 billion in losses in the past four years. It may have been reasonable to keep the semiconductor business and dispose of the nuclear power business. Toshiba was confident about the future of the nuclear power business. Tsunakawa, the new chairman, believed that the company's ongoing divestment from civil construction caused the nuclear power business' losses, but the fuel and service business that accounts for over half of nuclear power sales was still profitable, Nikkei reported.

Toshiba entered into a debt guarantee totaling nearly JPY800 billion for Westinghouse Electric Co. in March last year, meaning if Westinghouse Electric failed to meet its payment obligations to customers, Toshiba, as its parent company, would assume such obligations.

Toshiba's nuclear power strategy was driven to a dead end. Toshiba had no choice but to sell off its nuclear power business as it stumbled again in 2015, going against its original plan of weathering bad times for the nuclear power business with highly profitable memory chip business.

Toshiba acquired a nuclear power subsidiary of US-based Chicago Bridge & Iron Co. [NYSE:CBI] through Westinghouse Electric in 2015. Westinghouse Electric and CB&I had been the partners for years. They were jointly contracted to operate two nuclear power stations in Georgia and South Carolina in 2008.

Following the leak at Fukushima Nuclear Power Station, the US government enhanced standards for nuclear power station safety. Construction of four nuclear power stations was cancelled, and the remaining four nuclear power stations saw rising construction costs and delays. Their construction budget was upped to JPY2.6 trillion from JPY2 trillion. 

With rising construction costs and delayed progress, Westinghouse Electric ran into a serious dispute with CB&I about cost sharing. They ultimately took it to court. To avoid further delays and solve the disputes as soon as possible, Toshiba acquired the debt-ridden nuclear power subsidiary of CB&I for USD0 through Westinghouse Electric in 2015. 

Toshiba intended to manage disputes and reduce transaction costs through the deal. The acquisition got Toshiba entangled, but failed to contain the continuously increasing construction costs.

Since then, Westinghouse Electric's liabilities have been on the rise. The loss recognized by Toshiba amounted to JPY977.4 billion, breaking the record of the biggest loss in Japanese manufacturing industry, per the group's financial report for last year, which was delayed twice. Hitachi set the previous record of JPY787.3 billion in 2008 amid financial crisis.

To minimize losses, Toshiba applied for bankruptcy protection for Westinghouse Electric with the New York Federal Bankruptcy Court on March 29 after careful consideration and multilateral negotiation. Toshiba claimed that bankruptcy protection for Westinghouse Electric would be the first step for the reconstruction of Toshiba, helping mitigate additional risk caused by the operation of its nuclear power business overseas.

Selling Businesses

Under the rules of the Tokyo Stock Exchange, Toshiba must conclude the two-year insolvency by the end of March next year or it will be forcibly delisted.

To make up for the significant loss of its nuclear power business, Toshiba began to try to sell off its principal chip business from last year. The deal was finalized on Sept. 20 this year. A Japan-US-South Korea consortium that Bain Capital LP led and Apple Inc. [NASDAQ:AAPL] and Dell Inc. participated in bought Toshiba's semiconductor flash memory division for JPY2 trillion.

To gain access to China, the main market for memory, the deal has to pass a Chinese antitrust review, for a forced acquisition by ignoring Chinese authorities may face the risk of being banned in the Chinese market.

When Toshiba sold its medical system company to Canon Inc. [TYO:7751; NYSE:CAJ] last year, the Japan Fair Trade Commission's review took about three months, while the Chinese counterpart took nine months. Panasonic's acquisition of Sanyo Electric Co. in 2009 and Marubeni Corp.'s purchase of US Gavilon in 2013 underwent China's antitrust review for 12 months and 14 months, respectively.

To protect its own industries, China usually requires an information submission and the review typically lasts at least 6 months. Since the semiconductor sector is a strategic industry for China, the antitrust review on the deal will be more stringent.

Due to concerns about the later-than-expected disposal of its semiconductor business, Toshiba will consider including a market exit plan into the scope of its operational restructuring for the personal computer and television businesses, which have not performed the way the group hoped, Japanese media reported earlier this month. Less than one week later, Toshiba confirmed it was hiving off its television business.

The computer business may be next. Toshiba has started to withdraw its business-to-customer (B2C) computer sales business form some regions from fiscal year 2014. Starting in fiscal year 2015, its computer business has centered on the B2B field, and its B2C computer sales business is only active in Japan and North America.

Toshiba's PC business posted a loss and a 16-percent annual decline in sales turnover in the groups interim financial report for this year.

Toshiba held talks to sell its personal computer business to Taiwan's Asustek Computer Inc. [TWSE:2357; LSE:ASKD], and Lenovo Group Ltd. [HK:0992] expressed interest in the unit, Nikkei reported.

Uncertain Future

Although Toshiba has increased its stake and investment in Westinghouse Electric multiple times since 2006, it still cannot manage this leading nuclear power group.

Westinghouse Electric employees pride themselves on being part of the "world's number one nuclear power company" and do not obey the instructions of Japanese technicians, Nikkei reported. Even upper-level personnel "ignore orders from their parent company and act as if Westinghouse is an independent kingdom."

Westinghouse Electric's deficit was a clear problem in 2013, but Toshiba executives may have not done enough to intervene. "Westinghouse was acting like a semi-independent kingdom, its Tokyo parent company failed to bring it under control." 

Toshiba tried to take action, a former executive at Toshiba's nuclear power department told the Nikkei. "From 2013 to 2014, we planned to arrange 100 technicians from Japan's top five construction companies to help Westinghouse."

Although the Great East Japan Earthquake has provided Japanese experts with unique insights on design and construction, the scheme did not play out as planned, the executive said. "Westinghouse did not like Toshiba's intervention and flatly rejected people they disliked. At last, only 10 people were assigned there, and the Japanese-style engineering model they suggested was very different from the American-style model. Therefore, their suggestions were ignored."

After Westinghouse filed for bankruptcy and reorganization, Toshiba had to shoulder a huge burden of debt and losses at once. They won back the control of their nuclear power business, but this led to a new problem.

PricewaterhouseCoopers (PwC), which was responsible for auditing Toshiba's financial reports for last year, had a serious disagreement with Toshiba regarding Westinghouse's losses.

Although PwC ultimately endorsed the financial report and provided an extensive guarantee for it, the Big Four auditor issued an adverse statement on the company's internal controls.

Since its 2015 accounting scandal, Toshiba has been close to being delisted. Japan's Securities Regulatory Commission once again opened an investigation into Toshiba's accounting behavior last month (less than 10 days after the firm was removed from the Tokyo Stock Exchange's delisting watch list) after the company's financials for last year were delayed twice.

Toshiba aims to achieve operating profits of JPY210 billion by 2019, but this goal will be very challenging, industry insiders said. As Toshiba has sold its most profitable business, it has lost its biggest source of revenue and has few businesses to left sell, they said.