Toshiba board agrees to sell memory business to Bain-led group

Wednesday, the board of reeling technology giant Toshiba announced that it has approved the $18 billion sale of the company’s flash memory operation, Toshiba Memory Corporation (TMC), to a group of buyers that includes American venture capital firm Bain Capital, and a pair of government-owned Japanese organizations, the Innovation Network Corporation of Japan, the New York Times reports.

The Financial Times says the Japanese government’s involvement in the deal evinces the integrality of Toshiba’s success to the Japanese economy.

Toshiba is fighting to stay afloat after its nuclear power subsidiary, Westinghouse Electric Company, lost money on a number of ill-fated American nuclear projects. Westinghouse, which Toshiba acquired for $5.4 billion in Spring 2006, filed for bankruptcy protection in March.

Toshiba has entered survival mode, draining its cash reserves to remain operational. With the sale of TMC, the company is seeking to generate a short-term cash infusion that will facilitate a recovery.

According to the New York Times, Toshiba was in danger in March of being barred from the Tokyo Stock Exchange unless the company generated new capital.

Though Toshiba just created TMC in April, the company has been a major player in the flash memory sector since the inception of the technology.

A Toshiba engineer invented flash memory in 1980, and the company introduced the technology to the world in 1987. Since, Toshiba’s memory business has provided an integral revenue stream. Today, the company is the world’s second-largest producer of microchips, by volume, second only to South Korean competitor Samsung.

Flash memory is solid-state, meaning it stores data electronically rather than mechanically. Unlike RAM, another solid-state storage system, flash memory does not require power to preserve data, making it ideal for use in portable devices like digital cameras, video game consoles, smartphones, etc.

Even after the sale, Toshiba will likely maintain a significant amount of control over the business, though the buyers will take the lion’s share of the profits.

Toshiba has indicated plans to partner with Bain to create the special purpose company that will purchase TMC.

The new company—which Bain has dubbed Pangea, according to the Financial Timeshas received financial support from Apple, Dell, and others.

Analysts expect Toshiba to hold a minority stake in the new company, and to have considerable decision-making power.

The shareholder structure, the New York Times says, could allow Toshiba to maintain control of the new company’s operations. Buyers will get “a mix of regular shares, preferred shares — which normally do not carry voting rights — and bonds that could eventually be converted into shares.”

The sale awaits antitrust review and has attracted legal opposition from Western Digital, an American company that co-runs a joint microchip-production operation with Toshiba in Japan.

Western Digital claims that the partnership gives it a vested interest in Toshiba’s memory business and that Toshiba is not authorized to sell TMC without Western Digital’s approval. The American firm has initiated legal action to block the sale. The International Court of Arbitration is now reviewing the case.

Western Digital issued a statement Wednesday calling Toshiba’s pursuit of the selloff “troubling” and expressing confidence that the court would side with Western Digital.

Because the sale has yet to be finalized, the door remains open for Toshiba to negotiate with and field offers from other buyers.

A bidding war has been ongoing for the past several months.

Earlier this month, Taiwanese tech behemoth Foxconn, with the support of Apple, venture capital firm SoftBank and others, made a bid to buy TMC. The New York Times’ source says Foxconn offered a healthy sum, but that Japanese authorities feared selling to Foxconn would compromise the country’s leadership in the global technology market.

Western Digital been among TMC’s suitors.

Toshiba stock has dropped about 50 percent since April 2013. As of Thursday afternoon, shares are down 2.9 percent on the news.

Featured image via Wikimedia Commons

Banking on E.U. Commission Aid

The European Union Commission approved plans to support the struggles of two Italian banks through financial aid in order to maintain confidence in Italy’s banking system. The plans provide 4.8 billion euros in cash and 12 billion euros in guarantees to protect those that utilize the service provided by Banca Popolare di Vicenza and Veneto Banca. These events occurred as a reaction to the European Central Bank predicting that the two banks had failed or were likely to fail.

The two banks account for a sum total of 2 percent of Italian deposits, which on its own does not explain the large commission aid the banks are receiving. What motivates the compensation is the risk that the troubles afflicting these two banks could impose by undermining confidence in other Italian banks. Many other banks are suffering from portfolios swelling due to problem loans and thin capital cushions that act as a meek safety net.

The money in the rescue plan will come out of a €20 billion fund established by the Italian government for the banking system. While the fund has received preliminary approval from Brussels, the fund has received far less support and more criticism from the populace in Italy. This is due to the fund being at odds with vows made by the government authorities not to spend taxpayer money to save sick banks.

There is a fear that imposing pain on middle-class depositors and investors, including those who own senior bonds in Banca Popolare di Vicenza and Veneto Banca, might drive people who suffered losses into the arms of extremists of the left or right, adding to political turmoil in the country. This has been used as a justification for both the use of taxpayer revenue to help alleviate tensions that sick banks face, as well the large aid coming from the European Comission.

This aid that protects the two banks is another example of the newly implemented system to dissolve underperforming or overburdened banks with minimal disruption to the European Union financial system.  The new system faced its first test three weeks ago in order to smoothly facilitate the failure of Banco Popular, Spain’s fifth largest bank. Markets faced little tension and were for the most part calm as Banco Popular was sold and acquired by their much larger rival, Banco Santander. However, there is a difference in reaction to how Spanish banks and Italian banks respond to tension, with Spanish banks being considered generally more resilient.

As previously mentioned, a large motivator in the aid for two smaller Italian banks was the risk of market turmoil, which resulted in both speed and a large upfront injection of aid considerably larger than the Italian government’s anticipated amount of 5.2 billion euros. The Spanish government on the other hand did not spend any taxpayer revenue to rescue Banco Popular when it failed.

By late Sunday, the European Central Bank along with the European Commission and Italian authorities moved to ensure both Banca Popolare di Vicenza and Veneto Banca would operate as per usual. In addition to protecting depositors from losses, the aid also plans to spare owners of senior bonds in both banks. Bonds that in their nature that are safest from losses in cases of debt. Owners of junior bonds, which earn a higher rate but are riskier, as well as shareholders in the banks will lose their money, which will eventually be liquidated. Intesa Sanpaolo, Italy’s second largest bank, is expected to acquire the operations of the two banks which are deemed healthy for a symbolic purchase price.

The European Commission approved the rescue plan for Banca Popolare di Vicenza and Veneto Banca, but stated that it was up to the Italian government to liquidate the lenders, not the European bank resolution agency, in order to ensure the public interest was being served.