Foxconn To Buy Stake In Sharp After Cutting Initial Offer

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Foxconn and harp have finally come to an agreement under which the former will buy a two-thirds stake in the latter for approximately $3.5 billion. The announcement comes after about a month of talks and after Foxconn slashed $900 million from its first offer it was revealed that Sharp had some liabilities that had not been disclosed previously.

Big acquisition for Sharp

According to Reuters, Sharp’s deal with Foxconn is the biggest acquisition of a company in the Japanese insular tech industry by a foreign company. It also marks the end of the century-old Sharp’s independence. Additionally, Foxconn gains control over a display technology owned by Sharp which it currently doesn’t have, which should improve its pricing power, particularly with Apple, which is one of its biggest clients.

The revised terms of the deal state that Foxconn will pay 88 yen per share of Sharp for a two-thirds stake. That represents a 35% discount to the Japanese electronics manufacturer’s closing price on Wednesday and, Reuters suggests, probably reflects “in part Chinese obsession with the lucky number eight.”

Foxconn will reportedly buy all of the $1.7 billion (200 billion yen) worth of the preferred shares which are currently owned by the two banks Sharp has most of its debt with, Reuters said, citing an unnamed source. Foxconn may up its stake in the Japanese company next year, according to the terms of the agreement.

Foxconn to pick Sharp’s board

According to the Japanese newspaper Yomiuri, Foxconn intends to replace Sharp’s CEO and further shake up the company’s management. Also Sharp said the Taiwanese firm will pick most of its board of directors, although investors had been expecting the majority of the management team to remain onboard. Reuters’ sources said earlier this year that Foxconn CEO Terry Gou offered keeping the majority of Sharp’s top management in their positions and not fire the company’s employees.

More information about the deal is expected to be released at a news conference and signing event scheduled for Saturday.

Foxconn and Sharp wrangle with each other

Last month the two Asian electronics firms had been close to sealing a deal, but then undisclosed contingent liabilities were uncovered, which resulted in the Taiwanese company stepping back to renegotiate. It looked like the deal was in jeopardy as Foxconn called off another deal four years ago in connection with a partnership with Sharp. However, at that time, Sharp warned the Apple supplier that it was going to post losses, so Foxconn walked away from the agreement, sending the Japanese company’s stock into a nosedive.

But even without the bad history between the two companies, many analysts were skeptical that any partnership between them would enable them to hold off pricing pressure on LCD screens or successfully battle competitors in OLED screens, which is the newest display technology that Apple is expected to incorporate into its iPhone models within the next two to three years.

Daiwa-Cathay Capital Markets analyst Kylie Huang told Reuters that two years wouldn’t be enough time to succeed in these years but that three years might be enough and five years “definitely.” She believes Samsung and LG Display will continue to be the favored OLED suppliers for the time being.

Foxconn taking on risk

Sharp shares climbed 4% today before the announcement was announced, and Foxconn shares will resume trading on Thursday after being halted today.

Analysts believe that buying a sizeable stake in the Japanese company means that Foxconn is taking on a large heap of financial risk despite the fact that it slashed the amount it will pay for the stake. Sharp expects to post operating losses of about 170 billion yen for the year which ends on Thursday, which is sharply lower than the previous guidance for 10 billion yen in profits.

Many analysts believe Sharp started declining about ten years ago at the time it started investing hundreds of billions of yen to expand its LCD factories. Most agree that following that time, the Japanese firm didn’t innovate enough and began losing share to rivals in the LCD display. Next, analysts say management was unable to successfully turn things around even though the electronics giant has had two bailouts led by banks since 2012.

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