Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

It took just five weeks for Foxconn to save itself about 100 billion yen ($890 million). And less than an hour for shareholders to lose a lot more.

After Sharp prematurely announced a deal on February 25 to sell a 66 percent stake to Foxconn, the would-be buyer uncovered a string of hitherto unknown contingent liabilities.  

Neither Foxconn nor Sharp have outlined what those were. Yet Bloomberg News reported that they amounted to about 300 billion yen of potential exposures which included possible costs for layoffs and restructuring.

While Foxconn successfully leveraged that revelation into a 25 percent haircut off its original 484 billion-yen offer in just 35 days -- albeit a smaller discount than the liabilities could have represented -- that victory was a one-off. 

In a statement on Wednesday, Foxconn Chairman Terry Gou crowed at having ended his multi-year battle for Sharp with his prize in hand:

"We have much that we want to achieve and I am confident that we will unlock Sharp’s true potential and together reach great heights”

Less than an hour after Foxconn proudly trumpeted its new, cheaper, deal at a Taipei press briefing Wednesday, Sharp reported to the Tokyo Stock Exchange that it would need to write down its inventory and reduce its sales expectations.

Sharp Loss
Sharp revised its 2016 fiscal operating profit forecast into a loss amid writedowns and weak sales
Source: Bloomberg, Sharp

Now, instead of expecting a slim, but welcome, 10 billion yen operating profit for the year which ends March 31, Sharp instead said on Wednesday it'll post a 170 billion-yen operating loss. No forecast was given for net income.

Sluggish liquid-crystal display panel sales and falling prices -- coupled with weak sales in China of various product categories including televisions and home appliances --  forced Sharp to uncover that 180 billion turnaround in earnings.

Of all the reasons Gou has given for spending shareholders' money on this wild ride toward controlling Sharp, it's been the LCD business and the potential for tapping into China's burgeoning electronics and home appliances market that rang loudest. This reversal of fortunes means that Sharp will now post an operating loss for a fourth time in five years, highlighting the depth of the structural problems the company is facing.

But with such a fundamental weakness in Sharp's business uncovered the very same day that Foxconn announces its takeover, there's a question begging to be asked about interests of the shareholders who are paying for it. 

A Large Liability
Operating losses at Sharp would drag on earnings of Foxconn Group units
Source: Bloomberg data, Foxconn, Sharp
Note: Loss is based on Sharp forecast for fiscal 2016, Foxconn deal to close early fiscal 2017

To put those losses in context, were the deal to have closed before the financial year ends on March 31, Foxconn affiliate Hon Hai would have been on the hook for 75.7 billion yen in non-operating losses. When translated into Taiwan dollars, that's about 15 percent of its expected net income for this year. 

Foxconn Technology Co., a smaller Foxconn unit that makes metal iPhone casings, would be forced to take on 22.1 billion yen in non-operating losses, or a staggering 59 percent of its expected net income for 2016. 

With the deal being signed on April 2, Foxconn will avoid taking those non-operating losses, this time. But the structural nature of such losses -- LCD pricing and China demand are both beyond its control -- mean that there's a slim chance Foxconn can turn things around before Sharp, and Foxconn's shareholders, have to wear even more losses.

Wild Ride
Shares of Foxconn's biggest affiliate gained after Sharp's announcement of a deal in February
Source: Bloomberg

What that means is that while Sharp and Foxconn claim they're "on the same page working towards the same goal," it's now time for Gou to consider if he's on the same page as his own shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net