Foxconn, Sharp deal in danger due to financial liabilities

JC Torres - Feb 29, 2016, 4:30 am CDT
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Foxconn, Sharp deal in danger due to financial liabilities

The unfolding events feel as if they have gone from mere business case to TV drama, with a potential spouse mulling over leaving the other due to past dark secrets. The deal between Japan’s Sharp and Taiwan’s Foxconn almost seemed ready to be inked but, at the last minute, Sharp may have revealed a bombshell that had Foxconn executives going berserk. That bombshell was just how much potential financial liabilities that Sharp will be bringing along when it moves in with Foxconn, amounting to no less than $3.1 billion.

Just last week, Sharp practically accepted the offer made by Foxconn to buy a majority stake in the company for a still unconfirmed amount of around 700 billion yen, roughly $6.2 billion. It was nearly double what government-backed Innovation Network Corporation of Japan (INCJ) had attempted to offer the ailing manufacturer, most known for its display making business. Foxconn, for its part, has long been eying Sharp as part of its efforts to diversify its business and get into the component and device making biz itself. Foxconn is the much-publicized assembler of Apple’s devices.

It seemed that things were going both companies’ way until Sharp reportedly disclosed to Foxconn at the 11th hour the total amount of possible liabilities it had, around 350 billion yen or $3.1 billion. Those would come from possible tax claims, intellectual property lawsuits, and damages from patent infringement lawsuits. Coincidentally, INCJ also computed Sharp’s liabilities but ended with a lower value than that. As expected, Foxconn was reportedly none to happy with the sudden turn of events.

The disclosure has even analysts a bit perplexed. On the one hand, they wonder why Sharp would choose the last moment to tell Foxconn of these details. It is known that Sharp has been experiencing financial difficulties, but it has never disclosed those liabilities, especially not to the public. It didn’t feel the need to publicize such risks. On the other hand, some wonder if this is all a negotiating attempt, whether by Sharp or by Foxconn, to alter what has been commonly regarded as the terms of the deal. Foxconn stated that it would let Sharp keep its management, perhaps in an attempt to appease Japanese government onlookers. Some analysts consider that arrangement “counterintuitive”.

Should the deal fall through, Sharp would be in worse trouble than it already is right now. Without formally and legally accepting Foxconn’s offer, Sharp’s public endorsement of the Taiwanese company’s deal practically ended INCJ’s interests. The latter even dissolved its deal team, which would leave Sharp with no Plan B.

Foxconn is said to be still committed to the deal, though it is “reviewing” the new data coming from Sharp. Considering Sharp has much more to lose, some wonder if this tactic has been Foxconn’s plan all along.

SOURCE: Wall Street Journal


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