Business / Corporate

Hon Hai seals deal with Sharp

by Kazuaki Nagata

Staff Writer

A foreign company is taking over one of the country’s leading electronics makers after Sharp Corp. and Taiwan’s Hon Hai Precision Industry Co. sealed an agreement Saturday following a monthlong delay in signing the deal.

Speaking to reporters gathered in Osaka, Hon Hai Chairman Terry Gou expressed confidence the partnership will work.

“We have been working so hard to make this day possible,” said Gou, who founded the world’s largest contract manufacturer of electronics products, including for Apple iPhones.

“This is a case of one global company investing in another global company because we know we can complement each other with our own unique resources,” he said during a news conference held at Sakai Display Product, an LCD panel maker in which both Sharp and Hon Hai have invested. The chosen venue was an apparent effort to showcase the two firms’ closeness.

“Through this new strategic alliance and new synergies, we will be able to increase sales, tap into new supply chains and use manufacturing capabilities that will strengthen our global competitiveness,” Sharp President Kozo Takahashi said. Takahashi reportedly plans to step down from his post to take responsibility for putting the company in the red.

While the two firms finally came together to sign the deal, the negotiation process was an excruciating one.

After months of talks with Hon Hai and Innovation Network of Japan Corp., a state-backed fund, Sharp eventually chose the Taiwanese company’s rescue plan on Feb. 25.

However, Hon Hai postponed sealing the deal after it obtained new information at the last minute, which was a list of about ¥350 billion in contingent liabilities at Sharp.

With the new information in hand, Hon Hai looked more closely into Sharp’s business performance and decided to slash its capital injection by ¥100 billion from ¥489 billion to ¥389 billion.

It also added a clause that Hon Hai can purchase only Sharp’s display business, which includes its signature LCD panels, in case the deal is canceled due to the fault of Sharp. The clause was a compromise on the part of Sharp, as the firm repeatedly said that it wanted to keep its businesses intact.

Asked how the deal could get canceled, a Sharp spokesman said it is difficult to predict and Sharp will make the utmost effort to make sure that situation does not occur.

“From the beginning, Hon Hai was not interested in Sharp’s businesses except for the display segment,” said Ryosuke Katsura, a senior analyst at SMBC Nikko Securities.

Asked why Hon Hai added this clause, Gou said this was “just in case.”

However, Gou noted that Hon Hai had already put down a ¥100 billion deposit for the Osaka-based firm, which reflected the Taiwanese company’s commitment.

With the deal sealed, Sharp can finally focus on its reconstruction under Gou’s strong leadership and Hon Hai’s capital.

But despite a stronger Hon Hai-Sharp alliance, it will find itself facing tough competition with other Asian rivals so it will not be easy, analysts say.

Until now, management at the cash-strapped Sharp basically focused on making business plans in order to convince banks to loan money, Katsura said.

It is a good sign that Sharp can get out of “this bank-governed management” and have someone like Gou who has a reputation as a capable business manager and strong leadership, he said.

At the news conference, Gou said he already has a reconstruction plan in mind.

“If I don’t have a road map in my heart, I would not be working so hard and come so far to make this important investment,” Gou said, adding that he would not go into detail at this point.

The focus will now move on to who will be on Sharp’s management team.

“Who is going to be appointed president? Will it be someone from Hon Hai or an appropriate Japanese. Even if it were to be the latter, Hon Hai is likely to send sev- eral people to be able to have an influence at board meetings,” said Toshiro Sato, an analyst at Kyokuto Research Institute.

Yet even with Gou’s leadership, Sharp’s business will face an uphill battle with tough global competition, especially in the display business.

About one-third of Sharp’s sales come from the display business, so strengthening competitiveness within this segment is a must for Sharp’s recovery, analysts said.

Using fresh capital injected by Hon Hai, Sharp plans to spend in the region of ¥200 billion developing organic light-emitting diode (OLED) panels since Apple Inc. is reportedly planning to incorporate them in its iPhones in the next few years.

However, South Korean rivals Samsung and LG are leaders in OLED panel technology and Sharp “is behind in terms of experience and technology to mass produce. But it’s not that they have no chance to catch up,” said Katsura of SMBC Nikko Securities.