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Foxconn woos Sharp with a more-than $5 billion offer; Innovation Network Corp no more the only potential buyer in the running

January 22
3:21 AM 2016

Foxconn has made an astounding offer of ¥625 billion ($5.3 billion) to take over the already-struggling Sharp Corp. The Taiwanese company assembles most of the world's iPhones and is extremely keen to absorb Sharp for its unparalleled expertise in display technology.

The offer from Foxconn came at a time when a Japanese, government-backed entity, Innovation Network Corp. (INCJ) had already secured its position as the buyer with its ¥300 billion ($2.5 billion) bid. Even though INCJ's bid amount is nowhere close to FoxConn's offer price, it still has an edge over the latter, as Sharp's top management tilts towards the Japanese bidder so that Sharp does not end up under foreign control and can remain within its country to do business with more Japanese companies.

INCJ also holds a 10% stake in Japan Display Inc., another leading display maker. If it manages to buy out Sharp, then the two Japanese display experts can join forces and together take on the next-generation mass production and panel technology with their billion-dollar know-how. "Japan's technology is leading the rest of the world and we would like to help make it even more competitive," said the industry minister Motoo Hayashi, as per The Wall Street Journal.

Despite the political reasons, Sharp cannot completely ignore Foxconn's generous offer this time. The world's leading electronics contract firm had offered to invest in Sharp in 2012 but the deal fell out due to disagreements over changes in top management. However, this time, Foxconn has rounded off their offer with an understanding to take care of all company debts and to not make any changes in management.

Sharp has been in troubled waters for quite some time now. Standard and Poor's reports show that the company is currently looking at a total repayment of ¥510 billion in borrowings, mainly to its creditors, Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. According to International Business Times, following Sharp's dismal credit status, its shares, quite expectedly, plunged by over 50% in 2015 after a 20% drop in 2014. With a mere 6% improvement very recently, the company's valuation stands at ¥218 billion ($1.8 billion), which is well below its bid offers.

Bloomberg revealed that Sharp is under great pressure to make a decision before the end of January. The company has already posted an operating loss of ¥25.2 billion in its most recent half-year results, which has eaten away at most of the Chinese demand for smartphone display. And now, it is almost on the verge of losing its most important customer Apple, who is looking to move to competition like LG, Samsung, and Japan Display by 2018 for the organic light emitting diode (OLED) display technology. This is certainly not good news.

The decision needs to be made based on deal economics and not on political grounds. Meanwhile, market speculation remains along the lines of "There need to be core products around which Sharp can build a market position. What those will be isn't clear, regardless of which side they join. Outside of short-term speculators, most investors will stay away from Sharp's shares until the final details are settled," as summed up by Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co. in Tokyo.

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