Japan nationalism wins Toshiba battle, loses the war

Now that Toshiba Corp. has chosen the preferred buyer for its chip unit, Japan Inc. needs to watch exactly what the new owner will do with the business.
No doubt partnering with influential local names strengthened the hand of Bain Capital Private Equity LP in beating out rivals such as Western Digital Corp., Broadcom Corp. and Foxconn Technology Group. Any of those competing consortia would have been logical choices,
offering solid strategic
synergies.
Less so for Bain. Up against a leading global chip designer, a disk-drive maker and the world’s largest electronics manufacturer, it’s hard to see what the US investor and partners bring to the table. Money and promises, for sure, but really it’s nationalism. Toshiba’s statement said as much.
Toshiba has determined that the Consortium has presented the best proposal, not only in terms of valuation, but also in respect to certainty of closing, retention of employees, and maintenance of sensitive technology within Japan.
It’s no coincidence that Innovation Network Corporation of Japan is named first among consortia members, ahead of Bain and Development Bank of Japan.
INCJ lost out to Foxconn in the battle for Sharp, mostly because of Foxconn Chairman Terry Gou’s sheer grit and determination. It would be a slap in the face not only to INCJ, but the Japanese political and corporate establishment (aka Japan Inc.), for them to lose again.
The state-backed fund almost jumped in bed with KKR & Co., but reports suggest that Bain may have won favor by offering to keep management in place and give them a slice of the equity.
While staffing and protecting secrets were listed in the statement, there’s no mention of future investment, expansion, or support for technology development.
Manufacturing chips is a notoriously expensive business, requiring billions of dollars in capital expenditure year after year merely to keep up with competitors. Bain is one of the world’s best private-equity firms, but spending buckets of money for the long-term future is anathema to the PE strategy of buy and flip in a time frame of about eight years.
Semiconductor companies have sunk in less time without continued investment, and Bain’s track record in chips is sparse. While it lists 13 companies in the technology, media and telecoms sector on its website, most of those are in software; not one is in semiconductors or hardware.
That’s why Toshiba, and Japan’s government, need to understand that while a private-equity deal for Toshiba Memory Corp. may preserve employees on the payroll and technology in Japan for now, only continued investment and industry synergies will keep it that way.
Japan may have chosen an expedient way to keep the flag flying, but that doesn’t mean it’s found a long-term solution.

— Bloomberg