Foxconn Casts Doubt on Sharp Deal After Winning Board Vote

What Foxconn-Sharp Deal Delay Means for Corporate Japan
  • Directors voted for billionaire Gou's turnaround proposal
  • Sharp shares suffer biggest two-day drop in almost a year

Just hours after winning a board vote to take control of Japanese electronics maker Sharp Corp., Taiwan’s Foxconn Technology Group said in a surprise reversal that it would postpone signing a definitive agreement because of “new material information.”

The sticking point involves liabilities that Sharp would have to pay under certain circumstances, including restructuring or layoffs, according to people familiar with the matter who asked not to be identified because the matter is private. The contingent liabilities could exceed 300 billion yen ($2.7 billion) if they are all incurred, but they could also be much lower, according to people familiar with the matter. Shares tumbled in Tokyo trading.

Foxconn’s response cast uncertainty over a deal that Sharp had outlined in detail just hours before, and that the Taiwanese company had pursued aggressively for months. The board of the century-old consumer electronics maker had to choose between Innovation Network Corp. of Japan’s plan to restructure by spinning off businesses, or staying whole under a foreign parent. Foxconn, the main assembler of Apple Inc.’s iPhone, is aiming to take over one of the largest suppliers of screens for phones and tablets. 

“If they can confirm those details in the next few days, it shouldn’t materially impact the deal,” said Hideki Yasuda, an analyst at the Ace Research Institute in Tokyo. “There is no obligation under Japanese accounting rules to disclose contingent liabilities. The fact that Sharp didn’t have to set aside money for this suggests that the probability is low and more of a latent risk.”

Openness Test

Foxconn, the parent of Hon Hai Precision Industry Co., put out a one-paragraph statement late Thursday after Sharp disclosed the agreement terms.

It read in its entirety: “We acknowledge receipt of a notice today from Sharp’s board choosing us as their preferred partner. After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night (before their board meeting on 2/25) that we will have to postpone any signing of a definitive agreement until we have arrived at a satisfactory understanding and resolution of the situation.”

INCJ had already known about the liabilities and had accounted for them in its offer, the people said. Foxconn learned the full extent of the liabilities this week, they said.

Sharp had no immediate comment on Foxconn’s statement.

“It’s odd that after chasing a company for four years you wouldn’t do your due
diligence and find out about off-balance sheet contingent liabilities far ahead
of striking a final agreement,” said Alberto Moel, an analyst at Sanford C. Bernstein & Co.

Stock Decline

Under the agreement announced by Sharp, Foxconn would get control over the company by spending 484.3 billion yen to buy additional shares. Foxconn would control 65.9 percent of Sharp after buying new shares at 118 yen apiece, or 32 percent less than Wednesday’s closing price.

Sharp shares slumped 14 percent Thursday after details of the deal were announced, with the stock finishing at a nine-month low of 149 yen. Shares fell another 15 percent to 126 yen at 10:23 a.m. Tokyo trading.

“It isn’t a victory for Sharp shareholders. And I’m not at all sure if this is a victory for Foxconn and its shareholders may see that money simply evaporate,” said Atul Goyal, an analyst at Jefferies Group LLC.

Chairman Terry Gou is seeking to broaden Foxconn’s remit, transforming it into a company that also makes key electronics components and devices. Foxconn had proposed a total rescue plan worth about 660 billion yen, a person familiar said previously.

As part of the deal announced by Sharp, Foxconn would buy 100 billion yen of preferred shares owned by Mizuho Financial Group and Mitsubishi UFJ Financial Group, or half of each bank’s holdings. Mizuho ended 2.7 percent higher while MUFJ closed up 1.8 percent.

Sharp would remain an independent company and keep the brand under new ownership, it said in a statement. The Japanese company, which pledged to maintain employment levels, would work with Foxconn on next-generation high-end flexible displays for smartphones and other devices.

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