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 Foxconn, formally known as Hon Hai Precision Industry Co, will pay
about $3.5 billion for a two-thirds stake, cutting its initial offer
by nearly $900 million following the emergence of previously
undisclosed liabilities at Sharp.
The deal marks the largest acquisition by a foreign company in
Japan's insular tech industry and the end of independence for a
100-year-old company that started out making belt buckles and
mechanical pencils.
It also gives the world's top electronics contract manufacturer
control of Sharp's advanced screen technology which it does not
have, and helps strengthen its pricing power with major client Apple
Inc.
Under the revised terms, Foxconn will pay 88 yen per Sharp share,
the companies said in a statement, a 35 percent discount to
Wednesday's close and likely reflecting in part Chinese obsession
with the lucky number eight.
Foxconn has also agreed to buy all 200 billion yen ($1.7 billion)
worth of preferred shares owned by Sharp's two main creditor banks,
a source familiar with the matter said on Wednesday.
It also has the option of increasing its stake in Sharp next year.
The firms had been on the verge of finalizing terms last month when
contingent liabilities at Sharp were suddenly revealed, causing
Foxconn to hit the pause button on the deal.
That revived ill will from four years ago, when Foxconn agreed to
take a stake in Sharp as part of a broader partnership. Sharp then
warned of losses and Foxconn walked away as shares in the Japanese
firm sank.
Analysts said that even without the history of distrust, there was
little assurance the combination will be able to deflect pricing
pressure in LCDs or beat rivals in OLED, a new screen technology
which Apple is expected to adopt for its iPhones by 2018.
"If you are talking about two years, it will be difficult. Three
years, there is potential. Five years, then definitely,” said Kylie
Huang, analyst with Daiwa-Cathay Capital Markets in Taipei.
She added that Samsung Electronics' display unit and LG Display
will for some time likely remain the preferred choice for OLED or
organic light-emitting diode screens which are thinner, lighter and
more flexible than other displays.
TECH SECTOR DECLINE
Shares in Sharp rose 4 percent on Wednesday ahead of the
announcement. Foxconn shares will resume trade on Thursday after
being suspended for the day.
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Analysts also said Foxconn, which reported record net profit for
last year, was taking on a significant financial risk, even though
it had driven down the price of its offer.
Highlighting Sharp's dire finances, the ailing display maker
estimated an operating loss of around 170 billion yen for the year
through Thursday in contrast to its earlier profit forecast of 10
billion yen.
Sharp and other Japanese electronics firms have struggled against
more nimble Asian rivals, with brands that were once synonymous with
cutting-edge technology, such as Sony Corp, losing their cachet
among global consumers.
Industry analysts trace Sharp's decline back to a decade ago, when
the company began spending hundreds of billions of yen to expand LCD
manufacturing facilities. It then failed to innovate enough, lost
ground to LCD rivals and was unable to engineer a turnaround despite
two bank-led bailouts since 2012.
The Yomiuri newspaper reported on Wednesday that Foxconn was
planning to overhaul Sharp's management including replacing its CEO.
Sharp has said Foxconn is set to pick a majority of its board. But
investors had expected most of management to remain in place for
some time. Sources said earlier this year that Foxconn Chief
Executive Terry Gou had offered to keep most of top management in
place, and to not fire employees.
Foxconn executives in Taipei declined to comment on plans for Sharp
CEO Kozo Takahashi, saying more details would be available at a
signing event and news conference on Saturday.
(Additional reporting by Hirotoshi Sugiyama and Chang-Ran Kim;
Writing by Ritsuko Ando; Editing by Edwina Gibbs)
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