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What’s Really at Stake in the Foxconn-Sharp Takeover Bid?

Posted by Jenina Borromeo | February 29, 2016

On February 25, board members at Sharp voted and agreed to a buyout by Taiwan’s Foxconn Technology Group. How will the move affect manufacturing for Foxconn? 

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Under the US $6B deal announced by Sharp, it would raise around Japanese Yen 484B (US $4.3B) by issuing new shares to Foxconn. This would allow the Taiwanese company to gain a controlling stake of about 65.9% in Sharp. However, hours after the board meeting, Foxconn released a statement saying it would postpone signing a definitive agreement after receiving new material information about the Japanese company.

Japan and Foreign Acquisitions

The Foxconn-Sharp deal is being closely watched as it could play a major role in opening up Japan’s insular economy, particularly the electronics industry, to foreign investments especially to its East Asian neighbors. If it goes through, the deal will be the fourth largest foreign acquisition of a Japanese company, following Vodafone’s US $6.5B deal to acquire Japan Telecom in 2001. Other major foreign investments in Japan include Citigroup’s US $13.9B takeover of Nikko Cordial in 2007 and General Electric’s purchase of Japan Leasing in 1999 for US $6.9B. The Japanese government has often favored domestic capital investments in various struggling industries including consumer electronics, oil, and steel. As in Sharp’s case, state-backed Innovation Network Corporation of Japan (INCJ) was seen as a frontrunner to save the ailing Japanese electronics group. However, Sharp eventually decided in favor of Foxconn under a deal to purchase preferred shares held by Sharp’s two main creditors, Mizuho Financial Group and Mitsubishi UFJ Financial Group, for Japanese Yen 100B (US $877.8M).

Foxconn as Apple’s Supplier

But what would the takeover mean for the companies? While the deal remains stalled, analysts say it would greatly benefit Foxconn and Apple Inc. The takeover would place Foxconn in a better position as the main assembler of Apple’s iPhones and iPads since Sharp is one of the largest suppliers of screens for phones and tablets. According to estimates, the screen is by far the most expensive part of an iPhone. With Sharp’s display technology, Foxconn would earn a bigger part of the overall bill of materials by supplying the screen display for the iPhone, while Apple would no longer need to purchase screens from other electronics companies, including competitors like LG and Samsung. The merger would essentially allow for cheaper manufacturing costs of iPhone products amid slowing iPhone sales and new assembly groups entering the market.

The Stumbling Block

Foxconn’s statement of delaying the deal came as a surprise after a long courtship between the two companies. Foxconn recently disclosed that it received new documents that had never been previously submitted by Sharp. According to reports, the documents include a list of about 100 items of contingent liabilities worth a total of approximately Japanese Yen 350B (US $3.7B). While analysts say the amount could be much lower, the issue has raised concerns regarding Sharp’s financial position.

Recent reports indicate that the two companies are working on a possible revision to the previously approved terms of the deal. While some analysts still remain uncertain about the deal’s outcome, Sharp’s board will still need to vote again if there is any material change to the takeover bid.

If the deal pushes through under the current terms, Sharp would remain as an independent company under a new ownership—Foxconn has pledged not to split up the company and to maintain employment levels. The electronics industry would see one of the biggest foreign acquisitions in Japan and the takeover could streamline the industry’s manufacturing and assembly market in Asia.

 

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