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Semiconductor spinoff leaves Toshiba's financial future cloudy

The board of directors of ailing Toshiba Corp. came under fire from shareholders at an extraordinary meeting on March 30 over its decision to spin off its lucrative memory chip division.

"You had said you'd maintain the semiconductor and nuclear power divisions as the two cores of your business, right?" one stockholder asked at the meeting.

However, the electronics giant -- which has stated fiscal 2016 losses may hit 1 trillion yen due to the failure of its U.S. nuclear technology arm Westinghouse Electric Co. -- has no choice but to sell off its semiconductor division to secure enough funds to survive.

The decision was approved at the shareholder meeting after heated debate that lasted for nearly 3 1/2 hours, and a grim-faced Toshiba President Satoshi Tsunakawa bowed deeply to attendees.

Toshiba announced at a news conference on Jan. 27 that the company had decided to spin off its semiconductor division and sell off some of the new company's shares. At the time, Tsunakawa said the company would sell less than 20 percent of shares in the new company to retain control over the firm.

Toshiba has the second largest share in the world market for flash memory, which brings in about 70 percent of the company's profits.

However, Toshiba's efforts to find companies that will buy shares in the new company bogged down only two weeks later, as a 20 percent stake would not be of much benefit to investors. At a news conference on Feb. 14, the Toshiba president said that the company could sell off all shares in the new firm.

"If we were to stick to control over the semiconductor company, it'd jeopardize Toshiba in its entirety," said another executive.

About 10 companies had decided to bid on Toshiba's semiconductor unit by the March 29 deadline. Tsunakawa said the unit is worth at least 2 trillion yen and displayed confidence in selling its shares at a high price.

Toshiba's debts are feared to have surpassed its assets by approximately 620 billion yen as of the end of March. However, if Toshiba can sell its semiconductor unit for over 2 trillion yen, it can write off that capital deficit.

However, there is no guarantee that Toshiba can smoothly find a company to take over its semiconductor unit. The Japanese government has recently indicated that it would be undesirable for Toshiba semiconductor technology, which could be used for cyberattacks and military purposes, to spread overseas.

Economy, Trade and Industry Minister Hiroshige Seko told a news conference on March 24 that Toshiba's semiconductor technology is crucial from the viewpoint of information security. If a Chinese company were to make a successful bid, for example, the government would consider advising the electronics giant to review the decision in accordance with the Foreign Exchange and Foreign Trade Act. The law requires the government to conduct a preliminary review of any overseas company that is to buy a Japanese business that could affect the country's security.

Most of the companies that will participate in the bidding for Toshiba's semiconductor unit are overseas firms, including Taiwan's Hon Hai Precision Industry Co., which has factories in China.

Those concerned with the rehabilitation of Toshiba have expressed fears that if the scope of companies that will take over Toshiba's semiconductor unit were to be severely restricted due to government intervention, it could deal a fatal blow to the firm.

"Such a move could kill Toshiba," an official with one of Toshiba's main creditor banks said.

"We have no leeway to even consider the national interest," a Toshiba board member admitted.

A plan for the Toshiba semiconductor sale has surfaced within the government under which the government-backed Development Bank of Japan and Innovation Network Corporation of Japan -- a public-private partnership aimed at promoting innovation and enhancing the value of businesses in Japan -- would join hands with a U.S. firm that would raise little concern about national security.

A source concerned with the spinoff said, "It'd be the best for Japanese companies to participate in the deal."

However, Japanese electronics manufacturers are hesitant to buy Toshiba's semiconductor unit because many of them have fared badly in competition with overseas semiconductor companies. Some business leaders have voiced concern over Japanese companies' tendency to avoid risk.

Toshiba spun off and sold its home appliance division and rapidly growing medical equipment subsidiary after its financial condition deteriorated following revelations of accounting irregularities in 2015.

After splitting off its core semiconductor and nuclear power units, Toshiba's annual sales, which had peaked at 7.6 trillion yen, will likely to decline to just over 4 trillion yen.

One cannot help but wonder from which sector Toshiba, which is no longer a comprehensive electronics company, will earn money. Prospects for Toshiba rehabilitating itself remain unclear.

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