Japanese electronics and component manufacturer, Sharp, has just accepted a takeover buyout from Foxconn over and above a domestic (Japanese) investment fund. The takeover valued Sharp at approximately $6.2 billion and if the deal is approved, it will make Foxconn one of the largest suppliers of smartphone and tablet LCD panels. Foxconn will own one of the leading manufacturers of LCD panels but for one reason or another, has struggled in recent years: most of the reason is because Sharp has been uncompetitive compared with new display screen manufacturers typically from Korea and China. There is nothing wrong with Sharp’s products, but the new display manufacturers have flooded the market with inexpensive screens.
We understand that this is not the first time Foxconn has tried to buy Sharp. There are a number of reasons why Sharp should be a good fit into Foxconn. Firstly, Sharp manufacturer display panels for a number of the world’s smartphone manufacturers, perhaps most importantly Apple: Sharp have an entire factory devoted to Apple’s displays. However, Apple are expecting to report weakening revenue and are expected to put considerable pressure onto suppliers in order to cut their own costs. For Sharp, facing declining revenue itself, earning less from a significant contract puts the business into a difficult position: Sharp is already struggling with debt with almost $4.5 billion. Foxconn has high cashflow and has been growing revenue, but could face a cash drain as they absorb Sharp.
Foxconn Chairman Gou is reportedly anxious over the businesses prospects going forward because of slowing smartphone sales around the world. He has been repositioning Foxconn into other sectors in order to spread the business. Foxconn already have a display manufacturing business, Innolux, which has struggled for the same reasons as Sharp despite considerable investment from Foxconn. Apple are adopting new display panel technologies into their iPhone and this means Sharp must move with the times and adopt new technology: this will require considerable investment. An undisclosed person reputedly close to Foxconn said this on the subject: “For Foxconn though, it is trying to get into every new field ranging from cloud to driverless cars because Gou is very anxious about the faltering demand for smartphones across the globe, and he is trying to diversify sources of revenue.” Adding a struggling component manufacturer to a business expecting to struggle could help reduce internal costs in the shorter term and improve prospects in the longer term, as Foxconn will gain insight and access to Japanese technology. However, the deal needs to be approved by the Japanese government.
UPDATE: After confirming the deal, Foxconn has decided to put it on hold when the paperwork arrived. The company released an official statement on the matter: “After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night 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”.