Foxconn’s Gou determined not to lose Sharp

Mar 07, 2016

 

For an executive with a reputation as a control freak, Terry Gou corralled an astonishingly large battalion of advisers in his $6bn battle to buy the Japanese technology group Sharp.

The charismatic and unpredictable founder of Foxconn, accustomed to conducting his own deals, supplemented his ranks with influential Japanese megabanks and hired JPMorgan to help in its dealings with Sharp and the powerful Japanese Ministry of Economy, Trade and Industry (Meti).

The advisory army is testament to Mr Gou’s determination to ensure Sharp, which makes screens for mobiles and TVs, does not slip from his grasp as it did four years ago.

It remains to be seen if he will succeed. Mr Gou and his advisers have gathered at Sharp’s Osaka headquarters in a bid to salvage a deal that stalled at the last-minute in late February when an extra Y350bn ($3.1bn) of contingent liabilities at the Japanese group were revealed.

Mr Gou had manoeuvred for months to win round the key parties in spite of the government’s initial concerns about Sharp’s display technology falling into foreign hands.
He expects to have a revised deal signed by Monday, according to people familiar with the matter. “Things are on the right track,” said one.

During the negotiations that have lasted about a year, Mr Gou realised that “making friends” with Sharp’s two main banks — Mizuho and Bank of Tokyo-Mitsubishi UFJ — would be key to beating a rival offer by a Japanese state-backed fund, according to three people familiar with the matter.

In mid-January, the two banks had informally agreed to back an offer by the state-backed Innovation Network Corporation of Japan (INCJ), which included a Y300bn investment and a request for Y300bn in bank assistance, according to one of the people.

The preference for INCJ came amid a desire by Meti to create a national champion by spinning off Sharp’s display business and merging it with rival Japan Display, which was also partly owned by INCJ.

The fund had been negotiating with Sharp since the summer, when Foxconn was not yet considered a serious bidder, according to a person involved in the talks. “Sharp and the banks were not sure if Hon Hai was serious. That’s why the INCJ was called in,” the person said.

But the tide gradually turned as Foxconn disclosed it was planning to buy Y225bn worth of preferred shares held by the two banks, making its offer “virtually painless” for them.

Sharp said last week that Foxconn was expected to buy Y100bn of Sharp’s preferred stock owned by the banks.

The most enthusiastic backer of Mr Gou’s offer was Mizuho, which had ties with Foxconn dating back to 2000, according to three people familiar with the matter.

It was harder for Mr Gou to charm Bank of Tokyo-Mitsubishi UFJ. But its attitude changed when it appeared Mizuho might not provide any support if INCJ won the deal. That pushed BTMU to back Mr Gou’s offer, according to one of the people.

State backing for INCJ’s bid also seemed to shift after suggestions in the media portrayed the deal as a test case of both the country’s openness to foreign business and a corporate governance overhaul that has been pushed by Prime Minister Shinzo Abe, according to two people with knowledge of the government’s thinking.

One official said Meti could not publicly intervene in the matter since Sharp’s display technology did not warrant a case for protecting national security interests. Mr Gou also visited Meti officials on almost every visit to Japan to build trust. “Terry and Meti are friends,” one person with knowledge of the meetings said.

The final push came as Mr Gou delivered a passionate presentation of his offer to Sharp’s board on January 30, according to two people with knowledge of the meeting. “INCJ is using the government’s money, but I’m putting in my own money. The commitment level is completely different,” Mr Gou said, according to one of the people.

Seven of Sharp’s 13-member board turned in favour of Foxconn’s deal. These included the two bank executives on Sharp’s board and five external directors, two of which belonged to Japan Industrial Solutions, a corporate turnround fund partially owned by Mizuho and BTMU.

At the end of January, Foxconn raised its offer from Y625bn to Y659bn. It also promised Kozo Takahashi, Sharp’s president, that the company would not be broken up and management would remain in place.

What Mr Gou did not anticipate was just how big Sharp’s liabilities could potentially be.

On February 24, the Japanese company’s officials unexpectedly submitted a list of about 100 items in contingent liabilities involving intellectual property lawsuits and patent infringement claims, according to one person with knowledge of the list.

A clearly upset Mr Gou told Sharp to hold off from voting on the deal until the issue was clarified, while he called his advisers to come to meet him in Shenzhen, China.

But the next day, Sharp’s board voted unanimously in favour of Foxconn’s bid, sparking fresh tensions between the two companies.

“It was disingenuous,” one person close to Foxconn said.

But the “material information” that Sharp revealed did not require formal disclosure. They are worst case scenarios that Foxconn officials now believe have a low possibility of turning into actual liabilities, said one person familiar with the latest talks.

“I think this deal will be materialised. If not, there will be a bigger risk of bankruptcy for Sharp and that would mean a bidding from zero for Hon Hai,” says Ryosuke Katsura, analyst at SMBC Nikko Securities.

 

Source: Financial Times