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Not So Sharp? Foxconn Casts Doubt on Deal After Winning Board Vote

Feb. 25, 2016
Though the deal appeared to be final, Foxconn postpones signing a definitive agreement for its $4.3 billion acquisition of Sharp because of “new material information”, leaving the door open to back out.

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.”

Under an agreement announced by Sharp, Foxconn would get control over the company by spending 484.3 billion yen ($4.29 billion) to buy additional shares. The Taiwanese company said it won’t finalize a deal until the situation with the new information is resolved.

Foxconn’s response cast uncertainty over a deal that Sharp had outlined in detail just hours before, and was seen as a sign of Japan’s growing openness to foreign acquisitions. 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. 

“That puts the entire deal in jeopardy,” Atul Goyal, an analyst at Jefferies Group LLC, wrote in a report.

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.”

The new information is a list of about 350 billion yen ($3.10 billion) of contingent liabilities at Sharp, the Wall Street Journal reported, citing unidentified people familiar with the matter. 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.

Under the announced deal, Foxconn would control 65.9% of Sharp after buying new shares at 118 yen apiece ($1.05), or 32% less than Wednesday’s closing price. Sharp shares slumped 14% after details of the deal were announced, with the stock finishing at a nine-month low of 149 yen ($1.32). Hon Hai’s shares closed 2.6% higher on Thursday, before Sharp outlined details of its deal.

“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,” Goyal said by phone.

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 ($5.85 billion), a person familiar said previously.

As part of the deal announced by Sharp, Foxconn would buy 100 billion yen ($885.87 million) of preferred shares owned by Mizuho Financial Group and Mitsubishi UFJ Financial Group, or half of each bank’s holdings. Mizuho ended 2.7% higher while MUFJ closed up 1.8%.

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.

By Pavel Alpeyev and Takashi Amano

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