Supply Chain Matters has been continuously updating our readers regarding the on-again, off-again acquisition of Japan based advanced electronic display provider Sharp Corp. by Foxconn Technology. Today, The Wall Street Journal and other news outlets report the approval of this takeover deal, but at a lower price than originally planned.
This ongoing deal has special significance for high tech and consumer electronics focused supply chains.
First, both of these players are major players within Apple’s value-chain of products and product development. As noted in our earlier commentaries, LCD screen suppliers such as Sharp have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs. LCD screens account for a considerable amount of COGS not only in smartphones and tablets, but increasingly in other products that want to cater to needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.
There were business cultural implications to this deal as noted in our January commentary. Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same stake that was announced today. The issue of concern behind this investment option was having Japan based Sharp come under foreign control. Innovation Network already has controlling stake in the remnants of three other Japan based LCD producers.
Finally, the deal itself represents another step by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp Chairman Terry Gau gets the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches.
According to today’s reports, the boards of both Sharp and Foxconn have now approved the takeover plan but at a value of $3.5 billion, considerably less than the estimated $5.5 billion deal size that was originally pursued. The terms reported today call for Sharp to issue new equity to Foxconn in exchange for a cash infusion of ¥389 billion, representing a 66 percent stake in Sharp, somewhat lower than the prior offer of ¥489 billion of cash infusion. The definitive agreement for this deal is expected to be signed on Saturday, followed by a news conference.
Foxconn’s plans for Sharp reportedly include investment in organic light emitting or OLED screen technology. Samsung Electronics is the current supply leader in this technology.
More details of this deal and its implications with obviously unfold in the coming weeks. However, the deal itself is by our lens, no slam dunk for either of these suppliers and will provide some noteworthy challenges moving forward. This case study will continue, along with the various financial, product development, branding and business cultural implications.
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