Deals

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Last March, Toshiba Corp. sold its medical business to offset deep losses. Two months later, the new CEO Satoshi Tsunakawa likened the disposal of the unit he once ran to the way a father feels when giving his daughter away in marriage: You know it's the right thing to do but that doesn't mean there won't be tears.

The same goes for selling part of its prized memory-chipmaking business.

Reports Monday that Canon Inc., Tokyo Electron Ltd. and others are interested in a 20 percent stake that could fetch as much as 300 billion yen ($2.6 billion) sent shares in the beleaguered company up as much as 11 percent.

Surge Protector
Toshiba's shares shot up 11 percent after reports several companies are interested in a stake in its prized chipmaking unit
Source: Bloomberg
Intraday times are displayed in ET.

That implies a valuation for the unit of about $13 billion, more than Toshiba's total market capitalization. While it's always painful to jettison part of a profitable business, for Toshiba it may be the least bad option.

Chipping Away
Toshiba's market cap has dwindled because of an accounting scandal and losses from its nuclear business
Source: Bloomberg

And the clock's ticking. 

Before Monday, Toshiba's stock was down almost 50 percent over the past two years as the company reeled from one of Japan's biggest accounting scandals that led to record losses and claimed the scalps of several top executives. A surprise announcement last month that a write down of its U.S. nuclear business would run into the billions of dollars, versus the $87 million initially estimated, didn't exactly restore investor confidence.

Toshiba has already laid off thousands of employees and pared various businesses. Because of the accounting embarrassment, it's barred from raising equity on public markets. But striking a deal now -- while its chip arm still commands a powerful reputation -- puts Toshiba in a stronger position than if it waits and its finances worsen.

The move would also give investors confidence that Tsunakawa has the corporate governance chops to do the right thing by them. Furthermore, any cash infusion should help ensure a planned $7.5 billion investment in the chip business through 2019 stays on track and flash-memory production doesn't fall behind fast-moving rivals such as Samsung Electronics Co.

A transaction that involves private equity, as opposed to a Canon or Western Digital Corp. that may attract antitrust scrutiny, could be the quicker option. Regardless, Toshiba should take pains to hold on to as much of the unit as possible.

Earnings Expansion
Toshiba is expected to turn a profit again in the fourth quarter
Source: Bloomberg

Exposure to flash-memory chips, used in smartphones and solid state disk drives, is lucrative and one of the reasons investors are attracted to Toshiba in the first place. As soon as the firm can right other parts of its business, sales and earnings should ramp up. Toshiba is expected to return to profitability in the fourth quarter, thanks in no small part to that unit.

Tsunakawa will have his work cut out striking a timely deal that sets the company, and shareholders, up for a more prosperous future. As in all unions, Toshiba needs to choose its future partner wisely.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net