Buyout barons salivate at Toshiba job cuts

Layoffs are on the horizon in Japan. Toshiba may cut up to 5,000 roles, 7% of its domestic workforce, as part of its medium-term business plan that it aims to finalise by mid-May, the Nikkei, a news outlet, reported last week. It’s a turning point in a country where workers typically stay with one company for life - and it might open up another way for financial investors to juice their returns.

Toshiba badly needs to cut fixed costs. The loss-making conglomerate was taken private last year in a 2 trillion yen($12.9 billion) leveraged buyout. Its new owners led by Japan Industrial Partners are aiming for a 10% operating margin as soon as possible, up from -0.5% after provisions in the nine months to December. Job cuts are an obvious way forward.

Private equity investors already extract world-beating returns from Japan. KKR KKR generates its best private equity returns in Asia in the country. Overall, Japanese buyouts generate a median multiple of 2.8 times invested capital, compared to 2 times in the United States, before adjusting for currency conversion, per consultancy Bain & Co.

Yet that success often comes without trimming headcount. So sensitive is the job cuts issue that some foreign investors insist they don't cut jobs at all or do it quietly, carefully, and with very generous severance pay of up to 36 months.

However, Japan may be ready to accept large job cuts for several reasons. Toshiba for one is in obvious trouble. What's more, the employment market is tight: the jobless rate was 2.6% in February, lower than other advanced economies, and the worker shortage is increasingly a source of national angst. The number of firms bankrupted due to labour shortages in the second half of 2023 is around eight times the level a decade ago, data compiled by Morgan Stanley MUFG Securities show.

If Toshiba opts for such big cuts to boost profitability, it could potentially soften the blow by upping financial incentives to motivate its remaining employees. It raises the prospects that financiers can finally — and without as much shame and backlash - factor job cuts into their buyout models or offer lower, more reasonable severance. All that points to higher returns, and to acquirers paying more for companies too.

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CONTEXT

Toshiba is considering cutting 5,000 jobs in Japan, equivalent to about 7% of its workforce there, the Nikkei reported on April 17, citing people familiar with the matter.

The main targets of the job cuts are back-office departments in the company's headquarters; Toshiba will also encourage voluntary retirements, the report added.

Toshiba was taken private last year by a consortium led by Japan Industrial Partners, and the shares were delisted in December. The 2 trillion yen ($12.9 billion) deal was one of the country's biggest leveraged buyouts.

The company said in a statement that it is developing its medium-term business plan and no specific measures have been decided at this time. Earlier, Toshiba said it plans to achieve an operating profit margin of at least 10% as early as possible.