Hon Hai Precision Makes Play to Acquire Sharp

BREAKING NEWS

Sharp’s Stock Price Skyrockets on News – Up Over 8% in Trading Yesterday

The media in Japan is reporting that Hon Hai Precision Industry Co., a Taiwanese manufacturer mostly known for its Foxconn OEM division that is Apple Inc.’s largest supplier, has made a $2.5 billion offer acquire Sharp Corp., Japan’s troubled LCD display manufacturer. But Hon Hai’s offer has one very special condition of sale that won’t be popular in Sharp’s Osaka headquarters…

See what Hon Hai is demanding as a condition of the acquisition of Sharp…

Sharp must feel like they’ve emerged from the eye of the storm – only to get hit again. After barely surviving the initial blow of the storm front, where the company successfully negotiated a financing rescue package with its two principal banks, it now finds itself thrust into the dangerous reverse winds of the back side of the swirling hurricane – a hurricane known as Terry Gou, Hon Hai’s CEO.

As we reported last week, Sharp’s restructuring plans began to fall apart almost before the proverbial ink had dried, as their high-cost LCD operations are failing at a faster pace than anticipated. This has thrust the company into a death spiral that has their bank backers looking for a way out. There is speculation that Sharp won’t last the winter as it is quickly running out of cash.

A Repudiated Gou is Back

Enter Terry Gou, the colorful CEO of Hon Hai Precision. Hon Hai had already partnered with Sharp in one of their LCD factories, as the company struggles to satisfy the often insatiable appetite of its largest customer, Apple, Inc., for LCD displays used in various products, especially the highly successful iPhone.

As part of the negotiations for the factory partnership, Sharp and Gou had negotiated a deal for Hon Hai to make an investment in the overall company as well. However, the deal took a long time to negotiate, and when it was finally time to seal the deal, Sharp’s stock had tanked…further devaluing the company. Gou balked…seeking to renegotiate a new deal based on the then dramatically lower value of the company. Incensed, Sharp’s management backed away from Gou and sought other potential investment partners, an act of repudiation that infuriated Gou.

Has the Money and the Market Sharp Needs

Now, with the mortally wounded Sharp at death’s door, in swoops Gou – who had always been looming in the background. Gou has the money – and the market (via Apple) – that Sharp so desperately needs, and is ready to invest. But now Gou has one final condition – the current management of the company…must go. As the popular saying goes, payback’s a bitch…and this is payback time.

Gou has offered Sharp’s banks ¥300 billion or about $2.49 billion according to a story first reported by Kyodo News. But this investment is conditioned on top management, including President Kozo Takahashi, stepping down.

No Comment from Sharp’s Banks…Yet

While there has been no comment from Sharp’s banks, it is likely that the relationship between these banks – who had nervously agreed to a ¥200 billion convertible rescue loan, only to watch the business continue to crumble – and Sharp’s management – who has failed to execute their turnaround strategy – has become exceedingly strained. The bankers must surely be tempted by the opportunity to unload the increasingly risky loan guarantee for a quick and easy (and risk free) profit.

However, as we previously noted (see Japanese Media Speculates Sharp May Not Survive the Winter), other potential investors have entered the scene, including competitor Japan Display, Inc. and the Innovation Network Corp. of Japan. All of these partners have their own motivations, but one motivation is to try to prevent Sharp’s LCD manufacturing technology from falling into foreign hands. Hon Hai’s offer on the table will likely result in the other parties scrambling to put together offers of their own for Sharp.

We’ll have to stay tuned to see how this tech industry reality show plays out.