After months, indeed years, of speculation and negotiation, Taiwan-based Foxconn, officially known as Hon Hai Precision Industry Ltd., will acquire a 66 percent stake in Osaka, Japan-based Sharp Corporation.
The two companies began discussing such a deal in 2012, following some financial struggles for the Japanese’s electronics firm (see “Sharp Refutes Reports That It Will Sell Copier Business”). While Foxconn did not acquire outright or pick up a majority stake in Sharp back then, the Taiwanese firm did invest enough to acquire just under 10 percent of Sharp’s shares (see Sharp press release). Sharp later received two bailouts and had been seeking a third in January 2015 as the firm’s financials continued to disappoint (see “Another Bailout for Sharp as Japan’s Electronics Industry Struggles”).
Around that same time, news reports once again indicated that Foxconn was making a bid for Sharp, a deal Sharp seemed to prefer to another bailout (see “Foxconn Offers $5 Billion for Sharp”). Then, in late February, Foxconn put the deal on pause, saying it needed time to study new information about an estimated $2.7 billion in liabilities that Sharp had not previously disclosed (see “Foxconn Falters at the Altar; Sharp Waits Expectantly”). Last week, we reported that the deal was still being discussed, but Foxconn wanted to shave ¥100 billion ($890 million) off its original ¥650 billion ($5.8 billion) offer for Sharp (see “Foxconn’s Acquisition of Sharp Still on Hold, Foxconn to Lower Offer”).
Now, the two firms have finally been able to hammer out an agreement. On March 30, Foxconn and Sharp issued a joint press release proclaiming, “Today both Foxconn and Sharp are pleased to announce the historic strategic alliance of two global technology leaders.”
The deal calls for Sharp to issue a combination of new common and Class C Preferred shares to various Foxconn entities in exchange for ¥389 billion (U.S. $3.5 billion). This is not ¥100 billion less than Foxconn’s original ¥650 billion offer, it is a whopping ¥261 billion ($2.3 billion) less.
In the press release, the companies say they “are committed to restoring profitability and strengthening operations to once again make Sharp a leader in the global electronics arena and a world-class company with a positive outlook.”
Terry Gou, founder and CEO of Foxconn, said in a press release statement, “I am thrilled by the prospects for this strategic alliance and I look forward to working with everyone at Sharp. 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.”
Kozo Takahashi, president and CEO of Sharp, said in the same release, “I am pleased with our decision today to form a strategic alliance and merge both forces between Sharp and Foxconn to accelerate innovation with the “creativity and entrepreneurial spirit” of both our companies.”
On the same day that it announced the deal with Foxconn, Sharp revised its financial results outlook downward to account for declines in its LCD panel business and the deterioration of market conditions in both China and Japan. For the year ending March 31, 2016, Sharp had been expecting ¥2.7 trillion in net sales and ¥10.0 billion in operating income. It now expects ¥2.45 billion in net sales and an operating loss of ¥170.0 billion.
What Will Happen to Copier/MFP Business?
According to numerous sources, including the Wall Street Journal and the New York Times, Foxconn’s primary interest in Sharp is its screen business. Apple iPhones use Sharp screens, Foxconn assembles Apple’s iPhone and iPad devices, and the deal with Sharp will presumably make Foxconn a more valuable partner to Apple.
This begs the question most pertinent to our industry: What does Foxconn’s move mean for Sharp’s copier/MFP business? The short answer appears to be a cash infusion, at least for now.
According to a lengthy notice from Sharp about the Foxconn deal, ¥40.0 billion ($355.5 million) of the funds from Foxconn will go to investment in Sharp‘s Business Solutions Company, the division in charge of its MFP business.
Sharp states, “With regard to Business Solutions Company, we are currently strengthening the solution business with MFP (digital multi-functional printer) products and display products as a core for global expansion of the solution business through utilizing our existing products and customer base, as well as effective expansion in investment. Also, as the MFP business is expected to face a maturing market due to a change in business environment, with a shift to paper-less, we are facing a challenge in developing new business where markets are expected to expand, such as robotic business, etc.”
Sharp says that in the Business Solutions Company, it will spend ¥20 billion on “expanding MFP sales distribution, in order to expand and stabilize the revenue base in North America and Europe,” ¥8 billion will be invested in robotics and digital signage displays, and ¥12 billion will go to automating production lines and reducing labor forces at plants in Japan and China.
While all this sounds good for Sharp’s MFP business, it is still early days, and it remains to be seen how Foxconn’s big investment in Sharp will pan out. And it is important to bear in mind that Sharp’s own assessment of the MFP business isn’t rosy, as indicated by terms in the statement such a “maturing market” and “shift to paperless.”
Thus, we don’t think it is out of the question that Foxconn may look to sell certain Sharp businesses somewhere down the road, especially those businesses that provider fewer synergies for Foxconn and less growth potential. And if that were to happen, the industry may very well see yet another MFP and supplies business goes up for sale.
Originally published on www.action-intell.com
