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Toshiba selects consortium as buyer of chip unit as distrust of Western Digital lingers

Toshiba's head office is pictured in December 2015. (Mainichi)

Toshiba Corp.'s decision to sell its chip unit to a Japan-U.S.-South Korea consortium has brought some seven months of meandering since Toshiba first initiated procedures to sell the entity to an end.

Major U.S. semiconductor manufacturer Western Digital Corp., which was also vying to purchase the unit, Toshiba Memory Corp., made concessions in the final stage of its purchase bid, but was unable to bridge the gap with Toshiba. However there remain many hurdles for Toshiba in selling the entity this fiscal year, such as a lawsuit from Western Digital opposing the sale to the consortium.

At a meeting of Toshiba's board of directors at the company's headquarters in Tokyo's Minato Ward on the morning of Sept. 20, a new proposal from Western Digital that had arrived in the predawn hours of the same day was reported. Disappointment ran through those at the meeting. It had been expected that Western Digital, which was fixated on acquiring a controlling interest in Toshiba Memory Corp., would make major concessions, but its proposal fell short of expectations. It was at this moment that Toshiba settled on selling the chip unit to the Japan-U.S.-South Korea consortium led by U.S. investment fund Bain Capital, rather than to the Western Digital camp.

On June 21, Toshiba decided to give the consortium preferential negotiating rights, but then it meandered back and forward.

Within Toshiba, there was a strong sense of distrust toward Western Digital, which filed a lawsuit opposing the sale of Toshiba Memory while jointly running a plant with Toshiba in Yokkaichi, Mie Prefecture. Yet if Toshiba were to sell the entity to a buyer other than Western Digital, depending on the outcome of the lawsuit, the contract could be annulled.

The Innovation Network Corporation of Japan (INCJ) and the Japanese government-backed Development Bank of Japan (DBJ), which had planned to join the consortium, said they couldn't invest if the risk of a lawsuit from Western Digital did not dissipate. Toshiba's management accordingly swung like a seesaw between Western Digital and the Japan-U.S.-South Korea consortium.

In August, when negotiations with the consortium hit a snag, Toshiba switched to talks with Western Digital. However those negotiations reached a standstill because of Western Digital's fixation on obtaining a controlling interest in the chip unit. At this point the consortium once again appeared on the scene and presented a new bid that dropped the INCJ and DBJ, which were concerned about a lawsuit, and instead brought in new players including U.S. firm Apple Inc.

The total amount raised for the bid, meanwhile, increased to 2.4 trillion yen including research and development costs, surpassing Western Digital's 2 trillion yen. The consortium also indicated that it would guarantee up to 50 billion yen in costs relating to the lawsuit with Western Digital. As a result of this thrust, Toshiba on Sept. 13 began leaning toward the consortium, and signed a memorandum to speed up negotiations. The decision on a buyer thus reached a countdown.

Making a final effort to turn the tables for Western Digital was the INCJ, which prioritized alleviating the risk of a lawsuit with the U.S. firm. On Sept. 15, the day before a long weekend in Japan, it joined U.S. private equity firm Kohlberg Kravis Roberts & Co. L.P. (KKR), and presented a plan with major concessions, including assurance to Toshiba that Western Digital would not seek future control of the chip business. On Sept. 19, it presented a plan with additional concessions. Voices were thus raised among the parties concerned to give the nod to Western Digital.

However, the gap between Toshiba and Western Digital was still not filled. Not only did Toshiba harbor a strong sense of distrust toward Western Digital, if the American company easily compromised, then it could face criticism from investors. It is believed that Western Digital presented a certain level of concessions in a proposal in the predawn hours of Sept. 20, but it was unable to sweep away the distrust at Toshiba.

Toshiba had no time to wait for further concessions from Western Digital. Banks had set conditions for continuing to extend loans to Toshiba, asking that it improve its finances through the sale of Toshiba Memory by the end of March next year. Sept. 20 was the last moment to reach a decision on the sale. Toshiba faces a general shareholders' meeting on Oct. 24 at which the company will seek approval of its sale of Toshiba Memory, and on Sept. 20, a senior bank executive pointed out that Toshiba made the final decision because they had run out of time. "At this late stage, even if Western Digital presents some concessions, it won't be possible to discuss them," the bank executive said.

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