Hitachi’s $18 billion divestment campaign has kept activists at bay

Long before activist investors landed in Japan to shake up conglomerates struggling with losses and legacy assets, Hitachi Ltd. managed to do it on its own, selling more than $18 billion worth of businesses over the past five years under the leadership of CEO Toshiaki Higashihara.

The result? A market value that more than doubled to 6.2 trillion yen ($54 billion), second only to Sony Group among Japanese electronics manufacturers and roughly equal to the next two competitors – Panasonic and Mitsubishi Electric – reunited.

“The activists never told us anything,” Higashihara, 66, said in an interview at Hitachi’s headquarters opposite Tokyo Station. Since taking office in 2016, the rail systems engineer is credited with turning a sprawling conglomerate, once the biggest loss-maker in the country, into a profitable business without the kind of outside intervention of activist funds such as Elliott Investment Management that forced change at Toshiba. and other companies in Japan.

He hasn’t finished either. Hitachi announced last week that it would sell about half of its majority stake in Hitachi Construction Machinery Co. for 182.5 billion yen. It is also seeking to complete a $3.3 billion stake sale in Hitachi Metals Ltd., a deal announced in April but delayed by regulators. There is also no need to keep the 20% of Hitachi Kokusai Electric Inc. that Hitachi owns, the CEO added.

Asked about the sale of a 40% stake in Hitachi Transport System Ltd., reported by Bloomberg News in December, Higashihara said he wanted to move forward with a sale “as soon as possible” and was looking for the right partner. industry that will bring “benefits to society and benefits to Hitachi.

“If these line up, then the deal will be done quickly; otherwise, we won’t be able to explain it to our shareholders, so it might take longer,” the CEO said of any potential deal with Hitachi Transport.

While Japanese companies had long resisted pressure from outside investors, that has changed in recent years amid a government campaign to attract more foreign investment by promising better corporate governance and investor engagement. . A steady march of activist funds have campaigned for change in Japanese corporations, trying to unlock value by urging them to untangle Byzantine cross-shareholdings and separate subsidiaries from big corporations, albeit with mixed results.

Take the case of Toshiba, the opposite of Hitachi, which is struggling to get back on its feet after an accounting scandal, huge losses from a mismanaged foray into nuclear power and the sale of its valuable memory chip business. . Activist investors demanding change at Toshiba have sparked an ongoing power struggle and debate in the boardroom over whether the company should be spun off. Toshiba shares are now trading at a third of all-time highs.

Higashihara says the company cannot simply depend on asset sales to bolster stocks, which he sees as still undervalued even though they have more than doubled during his tenure.

“You can’t make a premium from a conglomerate through a breakup,” Higashihara said. “It all depends on the leadership at the top. We are in a time where we have to provide solutions to customers.

Market values ​​of major Japanese electronics manufacturers:
sony 15.7 trillion yen
Hitachi 6.2 trillion yen
Electric Mitsubishi 3.2 trillion yen
panasonic 3.2 trillion yen
Toshiba 2.1 trillion yen
Sharp 811 billion yen

Hitachi’s businesses still cover power grids, nuclear power, auto parts, rail infrastructure and industrial products. It has also increased its software bets, acquiring GlobalLogic Inc. last year in a $9.6 billion deal, one of its biggest deals ever.

It has also invested heavily in software to connect its products and systems to sensors and computing power – an Internet of Things technology it calls Lumada – so customers can better monitor and manage the hardware they buy from Hitachi. The company has also been hiring aggressively to increase the number of programmers and data scientists, although large-scale cuts elsewhere mean its workforce of 351,000 is little changed from a decade ago.

Founded in 1910, Hitachi became one of the engines of post-war Japanese economic growth, producing everything from refrigerators and televisions to generators and railway systems. After posting four years of losses totaling nearly 1 trillion yen through 2010, the biggest ever for Japanese companies at the time, Hitachi embarked on a radical overhaul to improve profitability and make the more resilient business.

Higashihara and its predecessor began by selling off or ceasing production of most consumer electronics, focusing on large customers such as businesses and municipal governments. The company also used the proceeds from the divestments to strengthen its core offerings, buying the power grids division of ABB Ltd. and by acquiring the rail signaling branch of Thales SA.

The global push toward more sustainable energy policies bodes well for Hitachi’s power and transportation businesses, according to Higashihara, an engineer who has worked on computerized rail systems before.

There is still one major Hitachi subsidiary whose fate remains an open question – Hitachi Astemo Ltd., the auto parts supplier created last year when Hitachi merged three of its units with two of Honda Motor Co. Asked for Whether the combined company would eventually be sold or listed, Higashihara said, “The goal is to become the No. 1 in motors, inverters, brakes and suspensions by 2025. It depends on the market value at the time. If we cannot achieve these goals, we will have to make other choices.

Asked about risks ahead, such as China’s Covid Zero policy, which is already showing signs of disruption to global supply chains, the CEO said Hitachi is relatively isolated after bringing in much of the production for the local markets within national borders. The biggest problem is the continued difficulty in sourcing semiconductors, both for automobiles and other products, he said.

“It will take another year for chip supply constraints to ease,” Higashihara said.

Higashihara sees the greatest risk to the business as another natural disaster, such as the 2011 earthquake in Japan.

“How do you prepare for the worst case scenario? If Japan is down, where are we going to put the command tower? Where do we place the funding functions? the CEO said, adding that business continuity plans were in place but not complete. “We are not ready yet.”

© 2022 Bloomberg

Comments are closed.