UPDATE 1-Former Shimada aircraft designer may find a silver lining in Toshiba gloom

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(Add rejection percentage to paragraph 2, clarify in paragraph 24 that the classification was part of the rejected plan)

By Makiko Yamazaki

TOKYO, March 28 (Reuters) – Toshiba Corp’s crisis could be a ray of hope for new boss Taro Shimada, allowing him to retain – at least for now – businesses critical to his digital strategy that his predecessors had planned to sell.

Investors last week rejected management’s plan to spin off Toshiba’s devices unit with nearly 60% opposition, along with a rival shareholder proposal to solicit takeover offers. This left the struggling 146-year-old conglomerate without clear immediate direction.

But it could give Shimada, a former aircraft designer and Siemens AG executive, leeway for his plan to boost subscription revenue by tying software to hardware.

It also allows him to hang on to equipment manufacturer Toshiba Tec Corp, which was considered “non-essential” in the now rejected spin-off. Shimada has praised some Toshiba Tec ventures for marrying digital to hardware and sources say he didn’t want to sell it.

It’s unclear whether Shimada will be able to appease the hedge funds that own about 30% of Toshiba and are eager for a private equity buyout. But as Thursday’s vote shows, they don’t have enough support to decide completely.

The vote result gives Shimada “carte blanche” to show he can deliver on his promises, said veteran Japanese analyst Jesper Koll of Monex Group.

“For the first time in over a decade, you have a CEO at Toshiba who is actually a technologist, who understands technology, who has hands-on experience,” he said.

Major manufacturers are increasingly pushing towards higher-margin digital services. Shimada’s former employer, Siemens, wants to expand its customer base through digital services that improve factories, buildings and rail systems.

Shimada says he’s the first Toshiba executive to understand digital. He was appointed chief digital strategy officer in 2018 by then-CEO Nobuaki Kurumatani, also an outsider to the company, who wooed him for ramen noodles in Tokyo’s Shimbashi district.

Kurumatani stepped down last year amid a governance scandal and shareholder opposition. Toshiba later said the former boss violated ethical standards. Shimada became the third CEO in about a year when he took over this month from Satoshi Tsunakawa, who remains chairman of the board.

CONSTANT TURMOIL

Toshiba has been in turmoil since an accounting scandal in 2015 and the subsequent bankruptcy of US nuclear unit Westinghouse. Foreign investors injected $5.4 billion and saved it from delisting, but that brought in hedge funds as shareholders.

Four years of dealings with foreign activist hedge funds — and their various demands for takeovers, board reshuffles and the resumption of takeover talks — have left management distracted, sources say.

The company’s market value has fallen to around $18 billion, half of a peak in the early 2000s.

Shimada says Toshiba can no longer sell hardware alone and must add digital services to improve both revenue and margins.

He repeated that message “again and again” in internal meetings upon his arrival, he told Reuters in an interview two years ago.

“I try to show what digital transformation means,” he said in the interview.

Meanwhile, rival Hitachi Ltd has been transforming for a decade already, selling off low-growth businesses and investing in its digital and services platform. Last year it bought US software company GlobalLogic for $9.6 billion including debt.

Toshiba’s operating profit margin was 3.42% last fiscal year, less than half of Hitachi’s 9.38%, according to Refinitiv.

SKEPTICAL

Investors remain skeptical about the company’s ability to turn around on its own.

While Toshiba is an “incredible company with incredible technology inside”, it has become “less than the sum of its parts”, said Brian Heywood, CEO of Taiyo Pacific Partners, which does not own Toshiba stock. .

The company “hasn’t defined how its pieces go together,” Heywood said.

Shimada cites Toshiba Tec’s “Smart Receipt” app, which works with its point-of-sale systems, as an example of digitization.

The app replaces paper receipts with electronic receipts and sends coupons to users’ phones. Retailers get data for advertising and promotions.

Shimada declined to comment this month when asked about classifying Toshiba Tec, part of a since-rejected plan, as “non-essential”. He said business was “extremely good”. The company controls about half of the domestic POS systems market.

He also sees potential for a quantum computing-based cybersecurity subscription service that protects users against advanced cyberattacks.

Shimada has not publicly stated its stance on a potential private equity buyout that hedge fund shareholders are clamoring for.

If that happens, he could still continue with his strategy – provided the existing leadership is allowed to stay. (Reporting by Makiko Yamazaki Additional reporting by Kevin Buckland and Rocky Swift Editing by David Dolan and Shri Navaratnam)

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