Foxconn buys Sharp for $3.5bn

Tokyo / Bloomberg

Sharp Corp.’s President Kozo Takahashi and Foxconn Technology Group’s Chairman Terry Gou formally signed a rescue deal on Saturday, ending a takeover drama that spanned four years of often difficult negotiations.
Takahashi and Gou, flanked by the flags of Taiwan and Japan, shook hands in front of more than 300 reporters gathered at the Osaka-based company’s Sakai plant. The parent of Hon Hon Hai Precision Industry Co., is buying a 66 percent share in Sharp for 389 billion yen ($3.5 billion) in the first foreign takeover of a major Japanese electronics company.
“I have deep respect for Sharp’s 105-year history, its technological innovation and leadership,” Gou said at the briefing.
The deal’s consummation caps weeks of drama, when the acquisition repeatedly looked like it could fall apart. Gou had appeared on the verge of grasping his prize a month ago, when Sharp’s board chose Foxconn over a rival bid from the state-backed Innovation Network Corp. of Japan. But after learning about liabilities at Sharp, Gou pushed back the final agreement to negotiate a lower price. The Taiwanese company paid a 100 billion yen deposit on March 31.
Sharp also announced on Friday that it will cut borrowing costs for the current fiscal year by 7.2 billion yen, after reaching new debt deals with its main banks. Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. agreed to amend the terms of existing loans, Sharp said in a statement.

Tough environment
The cash infusion couldn’t have come soon enough. Sharp said on Wednesday it expects an operating loss of 170 billion yen for the fiscal year ended March 31, reversing an earlier forecast for a profit. The company is also set to report a net loss for the just-ended fiscal year, bringing total losses over the past five years to more than $10 billion.
“We faced an increasingly difficult business environment as the display market conditions worsened, leading us to consider drastic reforms,” Takahashi said at the briefing. “This agreement will not only contribute to expansion of our business but will also improve our financial standing, creating vast synergies for both companies.”
The Japanese company has bet big on large-size screens, investing 1 trillion yen to build factories in Kameyama and Sakai. As LCD prices fell and the currency rose to a post-World War II high, Sharp shifted attention to smaller sizes for high-end smartphones and tablets. It managed to capture Apple Inc. as a customer, but orders were cut after it struggled to consistently deliver volumes.

Sharp Goods
Sharp said its display business will be the biggest beneficiary of the Foxconn infusion. About 200 billion yen will be used to launch production of next-generation screens using organic light-emitting diodes. Another 60 billion yen will be spent to improve yield and increase production volumes of the existing LCD operations.
“There seems to be an agreement that the energy systems business, including solar panels, could be spun off,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co. “The component business is pretty viable and the household appliances could probably find a better fit outside the group.”
Combining Foxconn’s manufacturing prowess as the world’s largest assembler with Sharp’s electronics know-how could allow the companies to take the lead in the emerging market for Internet-of-things devices, Gou said. He also praised the quality of Sharp’s existing products.
“A friend of mine bought a Sharp fridge in 1986,” Gou said. “Thirty years later, it is still running at his Beijing home.”