The second quarter of 2016 is yet to begin but it seems as if the wedding bells have been called off indefinitely for the harmonious takeover deal between Foxconn and Sharp. Foxconn’s refusal to sign the agreement on the current terms came like a bolt out of the blue as Sharp had previously rejected an equally competitive suitor which had gallantly offered to bail Sharp from its dismal financial situation.
The nitty-gritty bits of the deal:
Sharp Corp, one of Japan’s largest pioneering electronics companies has faced several brushes with bankruptcy in the past decade. In 2012, Foxconn extended its benevolent hand to invest in the firm when Sharp was on the brink of insolvency. This helping hand was turned down by Sharp. Instead, Sharp braved the next four years massively in debt and received two major bailouts courtesy of the Japanese government. Just last month, Sharp revealed a loss exceeding £450 million in a mere span of nine months.
In 2016, there was a brilliant reversal. Sharp agreed to Foxconn’s £3.08 billion proposal and turned down a bid from Japanese government-backed investment fund Innovation Network Corp of Japan. Sharp has also agreed to issue £2.2 billion worth of shares to give Foxconn a majority shareholding of 66%.
However, Foxconn has postponed the signing of any agreement after discovering some undisclosed liabilities of Sharp. This comes as a surprise following the immense amount of time that has been spent – approximately 5 years – negotiating a takeover deal that could potentially open up Japan’s insular technology sector to foreign investment.
Why this deal matters:
First and foremost, if the takeover were to materialise, it would be one of the first large-scale takeovers of 2016. The sheer sum that Foxconn has offered in exchange is concrete evidence of its scale. Foxconn, a Taiwanese multinational manufacturing company is responsible for assembling various electronic products. As the largest global contract manufacturer of Apple Inc. Foxconn have had a hand in the production of everyone’s ‘can’t live without’ item, the iPhone.
Secondly, this takeover could go down in history as the first foreign takeover of a major Japanese electronics firm. Japan’s technology sector has historically been impenetrable and there is heavy reluctance in granting foreigners access to this market. The Japanese struggle in sharing their technological expertise. Their reluctance in revealing the secrets of their trade is somewhat predictable as it is an expertise which they have spent decades building. A lesser-known fact of the Japanese corporate culture – which is most likely playing a part in this case – is that businesses generally refrain from airing their dirty laundry out in public. Foxconn’s breakthrough into the Japanese technological sector is a feat in itself that should be revelled by other companies seeking to or have sought to do the same and failed.
Why the deal makes sense:
If the deal does indeed follow through it would undeniably enhance Foxconn’s position as Apple’s main contract manufacturer. At the same time, Sharp’s lifeline would be extended and its technological know-how would finally be put to good use again. It is without a doubt that Sharp possesses the technological competency to outrival its main competitor Samsung as an Apple supplier. In particular, a slice of technological expertise that Foxconn is intending to employ is the organic light-emitting diode (OLED) screen, which is predicted to feature in the next-generation of iPhones. The takeover of Sharp will prove helpful for Foxconn if they wish to establish better pricing with Apple.
Foxconn’s visions are coincidentally aligned with that of Japan’s century-old technological giant. Sharp had previously stated that it aimed to be a global supplier of OLED screens, a thinner, lighter and flexible alternative to current displays. Foxconn’s proposal is a golden opportunity for Sharp to revive itself as a business and re-establish itself as the technological leader in its field. Amidst these times, it is particularly difficult for firms like Sharp that invest massively in research to reap equally massive profits. In fact, Sharp’s large investments in advanced liquid crystal plants ended in colossal failure amid price competition with rivals such as Samsung and LG. However, it is believed that the deal could restore Sharp to its former glory, if Foxconn can effectively apply efficient restructuring within the firm.
Will there be a happy ending?
No one knows for sure. Foxconn’s offer was viewed as beneficial not only for Sharp, it also benefitted Sharp’s creditor banks due to Foxconn’s agreement to purchase £6.26 million worth of preference shares held by the banks.
For a company which had to sell its head office in Osaka to recoup losses Foxconn has a tough job ahead. Whilst Foxconn has already leapt gracefully over a nationalistic hurdle with the power of business acumen; it remains to be seen whether Foxconn has the capability to transform Sharp into the prosperous firm it once was. With the withdrawal of the deal only fuelling more uncertainty it seems Sharp needs more than just a few swishes of a magic wand to escape their current danger.