Hitachi’s $18bn divestment drive kept activists at bay

The result? A market value that’s more than doubled to 6.2 trillion yen ($54 billion), second only to Sony Group.
Toshiaki Higashihara at the company's headquarters in Tokyo. Image: Bloomberg

Long before activist investors swooped into Japan to shake up conglomerates saddled with losses and legacy assets, Hitachi Ltd. managed to do it on its own, selling off more than $18 billion worth of businesses in the past five years under Chief Executive Officer Toshiaki Higashihara.

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

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

He’s also not done. Hitachi last week said it would divest about half of its majority holding in Hitachi Construction Machinery Co. for 182.5 billion yen. It’s also looking to complete a $3.3 billion stake sale in Hitachi Metals Ltd., a deal announced in April but delayed by regulators. There’s also no need to keep holding on to the 20% of Hitachi Kokusai Electric Inc. that Hitachi holds, 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 seeking the right industry partner that will bring “benefits to society and advantages for Hitachi.”

“If those are in alignment, then the deal will be done quickly; if not, we won’t be able to explain it to our shareholders, so it might take longer,” the CEO said of any potential Hitachi Transport deal.

While Japanese companies had long resisted pressure from outside investors, this has changed in recent years amid a government drive to attract more foreign investment by promising better corporate governance and investor engagement. A steady march of activist funds have agitated for change at Japanese enterprises, trying to unlock value by pressuring them to untangle byzantine cross shareholdings and separating subsidiaries from larger corporate entities, albeit with mixed results.

Take the case of Toshiba, Hitachi’s polar opposite, which has been struggling to get back on a stable footing after an accounting scandal, huge losses on a badly-managed foray into nuclear power and the sale of its prized memory-chip business. Activist investors pushing for changes at Toshiba have triggered an ongoing boardroom power struggle and debate over whether the company should be split up. Toshiba’s shares are now trading at a third of historic highs.

Higashihara says the company can’t just depend on asset sales to bolster the shares, which he sees as still undervalued even though they have more than doubled during his tenure.

“You can’t realize a premium from a conglomerate through a breakup,” Higashihara said. “It all depends on the leadership at the top. We’re in an era when we need to deliver solutions to customers.”

Market values of Japan’s top electronics makers:
Sony 15.7 trillion yen
Hitachi 6.2 trillion yen
Mitsubishi Electric 3.2 trillion yen
Panasonic 3.2 trillion yen
Toshiba 2.1 trillion yen
Sharp 811 billion yen

Hitachi’s business still spans power grids, nuclear energy, automotive parts, train infrastructure and industrial products. It has also increased its bets on software, acquiring GlobalLogic Inc. last year in a transaction worth $9.6 billion, 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 that customers can better monitor and manage hardware that they buy from Hitachi. The company has also hired aggressively to bolster the number of programmers and data scientists, although large-scale cuts elsewhere mean its headcount of 351 000 is little changed from a decade ago.

Founded in 1910, Hitachi became one of the engines of Japan’s postwar economic growth, churning out everything from refrigerators and televisions to generators and railway systems. After posting four years of losses totaling almost 1 trillion yen through 2010, the biggest ever seen in corporate Japan at the time, Hitachi embarked on a radical revamp to improve profitability and make the business more resilient.

Higashihara and his predecessor started by selling off or halting production of most consumer electronics, shifting their focus toward big-ticket customers such as businesses and city governments. The company also used proceeds from divestments to bolster its core offerings, buying ABB Ltd.’s power-grid division and acquiring the rail-signalling arm 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 once worked on computerised railway systems.

There’s still one major Hitachi subsidiary whose fate remains an open question — Hitachi Astemo Ltd., the car-parts supplier created last year when Hitachi merged three of its units with two from Honda Motor Co. Asked about whether the merged company would eventually be sold or listed, Higashihara said: “The goal is to become No. 1 in motors, inverters, brakes and suspensions by 2025. It depends on the market value at the time. If we can’t reach those targets, then we’ll have to make other choices.”

Asked about risks going forward, such as China’s Covid Zero policy, which is already showing signs of disrupting global supply chains, the CEO said that Hitachi is relatively insulated after bringing much of production for local markets within domestic borders. The bigger issue is ongoing difficulty in procuring semiconductors, both for automobiles and other products, he said.

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

Higashihara considers the company’s biggest risk to be that of another natural disaster, such as the 2011 earthquake in Japan.

“How to you prepare for the worst-case scenario? If Japan is out of commission, then where do we put the command tower? Where do we put financing functions?” the CEO said, adding that business continuity plans were in place but not complete. “We’re not ready yet.”

© 2022 Bloomberg


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