$900 million has been cut from its initial offer arising out of the discovery of undisclosed liabilities at the very last minute.
Casting off doubts of whether the two companies can work together in a fiercely competitive market, Foxconn has agreed to acquire Sharp Corp, albeit after a steep discount.
Foxconn, also known as Hon Hai Precision Industry Co., will shell out $3.5 billion for a two thirds stake in Sharp, cutting its initial offer by around $900 million following the last minute discovery of undisclosed liabilities at Sharp.
The deal is significant, since it marks the largest ever acquisition by a foreign company in Japan’s insular tech industry. Significantly, it also marks the end of independence for the 100 year old Sharp that started out making mechanical pencils and belt buckles.
The deal gives Foxconn, the world’s top contract electronics manufacturer, control over Sharp’s advance display technology, which it lacks, and more significantly helps strengthens its pricing power with one of its major clients – Apple Inc.
Under the revised terms of the contract, Foxconn will pay 88 yen per Sharp share, which amounts to a 35% discount as of Wednesday’s closing and is reflective of the Chinese obsession with the lucky number eight.
As per a source familiar with the matter at hand, Foxconn has agreed to acquire all of the 200 billion yen ($1.7 billion) worth of preferential shares owned by Sharp’s two main creditors. Furthermore, it has the option of increasing its stake in the subsequent year.
Analysts think as a result of this deal, even with the technologies of the combined company Foxconn will struggle to deflect pricing pressures in OLED, a display technology 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, Taipei.
Comparatively, Samsung’s and LG’s display units will, until the near future, still remain as the preferred choice for OLED displays, since it is lighter, thinner and more flexible than other display technologies.
Analysts have said that Foxconn, which netted record profits in the previous year, is taking on significant financial risks by this acquisition. This only goes to highlight Sharp’s dire finances. Sharp had an estimated operating loss of nearly 170 billion yen for this financial year. This is in sharp contrast to its earlier profit forecast of 10 billion yen.
Industry analysts have traced Sharp’s dramatic decline to events which occurred a decade ago wherein Sharp funneled hundreds of billions of yen in expanding its LCD manufacturing facilities while losing ground to its LCD rivals. Unable to innovate, it failed to turnaround despite two bailouts by two major Japanese banks since 2012.
As per the Yomiuri newspaper, Foxconn is planning on overhauling Sharp’s management, which includes replacing its CEO. Reflecting this oncoming change, Sharp also disclosed that Foxconn is set to pick a majority of its board.
Executives from Foxconn in Taipei, declined comments on future plans for Sharp. The only information disclosed that was more details would flow at the signing ceremony followed by a news conference on Saturday.