TOKYO (BLOOMBERG) - To understand how Taiwan's Foxconn Technology Group outmaneuvered a Japanese government-backed bidder and acquired Sharp Corp for 389 billion yen (S$4.67 billion), it pays to know two things about founder Terry Gou. He's relentless, totally relentless.
Gou, whose Taipei-based manufacturing empire makes iPhones for Apple and the PlayStation 4 for Sony, has been in hot pursuit of Japan's largest maker of liquid-crystal displays for more than four years. He overcame stiff cultural resistance, politically connected Innovation Network Corp of Japan; and deadline disclosures that prompted him to call a last-minute timeout.
The agreement on Wednesday (March 30) capped weeks of shuttle negotiations between Gou and Sharp President Kozo Takahashi in Japan and Greater China, with one meeting in Taiwan spanning 13 hours, according to local media. In the end, Gou's aggressive dealmaking and nonstop intensity opened the way for Foxconn, the parent of Hon Hai Precision Industry Co, to acquire a 66 per cent stake in Sharp - a deal with huge symbolism for Japan Inc.
"It's a bellwether transaction," said Nicholas Benes, representative director of the Board Director Training Institute of Japan. "I sense that someone woke up and realized what a bad signal it would send not only to foreign investors, but also to voters in an election year, if they spent taxpayer money when there was a better deal on the table."
The deal talks almost fell apart more than once. Perhaps the riskiest moment came a month ago when Sharp and Foxconn were closing in on a rescue plan valued at about 600 billion yen. The day before Sharp's board was to vote on the two bids, the Japanese company surprised Foxconn with a list of potential liabilities that could have reached about 300 billion yen, people familiar with the matter have said.
Gou was stunned. He knew he couldn't proceed with his original proposal - and quickly informed Sharp. The Japanese company's board went ahead and voted on Foxconn's proposal anyway, opting for its bid over the one from INCJ. Within hours, Foxconn put out a statement saying it wouldn't proceed until after studying "new material information." Sharp shares plummeted. Investors fretted the deal may never happen.
Gou, 65, has come a long way. He started his company with a US$7,500 loan from his mother in a Taipei suburb called Tucheng, which means "Dirt City." He bought a couple of plastic molding machines and started making channel knobs for black-and-white TVs.
His first break came in 1980, when he started supplying Atari with connectors that linked the joystick cable to its 2600 video-game console. He then applied for patents on technology his company developed and, in the early 1980s, made his first big push into the US.
Sharp is even older. Founded in 1912 by a metalworker named Tokuji Hayakawa, the company was named after an always-sharp mechanical pencil he developed. A massive earthquake in 1923 destroyed the factory in Tokyo, and Hayakawa lost his wife and children. He rebuilt the business in Osaka and turned it into a major manufacturer of radios, TVs and calculators.
In the era of televisions and computers, Sharp made its reputation with big bets on cutting-edge technology. It invested in flat-panel displays and pioneered the development of mobile phones with built-in digital cameras. The company ran into trouble when it borrowed to build factories in Kameyama and Sakai, a 1 trillion-yen investment that weighed on the company as LCD prices fell and the currency rose to a post-World War II high.
In February 2012, Sharp forecast a record loss because of the stronger yen, weaker demand for TVs and more competition from rivals like Samsung Electronics. When the company reported earnings two months later, that loss ballooned by 30 per cent.
"Sharp wanted to be the biggest, investing in larger and larger screens until they went beyond economies of scale," said Alberto Moel, a technology analyst at Sanford C. Bernstein & Co. "They overdid it."
Sharp lost 1.13 trillion yen in the past four fiscal years, leaning heavily on its banks for support. By last year, the company was running so low on funds it couldn't make the investments it needed to remain competitive. Takahashi, 61, needed a bailout.
INCJ quickly emerged as the leading contender. The government-backed investment fund has a history of rescuing Japanese companies that can't save themselves. It created Japan Display - a competing Apple supplier - by merging the troubled panel units of Sony, Toshiba and Hitachi.
INCJ looked to cut a similar deal with Sharp. In January, the fund worked out an offer in which it would inject 300 billion yen of cash into Sharp, sell assets and get more financial support from its banks. INCJ planned to carve out the company's appliances business and combine it with a similar business from Toshiba, another distressed icon.
But Terry Gou came calling. Foxconn and Sharp had worked together as far back as 2011 and Gou coveted the company's technology. With Sharp's LCD business, Gou would become an even more important supplier to Apple - and perhaps gain some leverage with the world's most-valuable company. He put together an offer to take control of Sharp for about 600 billion yen.
Takahashi wasn't interested, at least at first. Sharp was inclined toaccept the INCJ bid, despite the higher Foxconn offer, people familiar with the matter said at the time. The consensus in Japan was also that the government would never let such an important tech company fall into foreign hands. INCJ was the "only" option, one analyst said at the time.
Gou refused to back down. In late January, he flew to Japan to lobby government officials and met with Sharp's board to raise his bid. He also made a shrewd appeal to Sharp's banks: He offered to pay Mizuho Financial Group and Mitsubishi UFJ Financial Group a combined 100 billion yen for half of their preferred stock; under the INCJ bid, those shares would have been canceled and the banks would have received nothing.
The banks ultimately proved supportive. It may have helped that Gou is friends with Mizuho chief executive officer Yasuhiro Sato, whom he frequently calls and texts.
The momentum swung in Gou's favor as Sharp's board met on Feb 4. Directors pushed to give serious consideration to Foxconn's sweetened bid, despite Sharp's initial resistance. Takahashi emerged from the meeting to say he would take another month to consider the offers.
The Taiwanese mogul didn't want to wait that long. He bolted from Foxconn's annual internal meetings in Taiwan and flew back to Japan. He arrived at Osaka headquarters on Feb 5, flamboyantly wearing a red sweater and gold scarf (celebratory colors in China) and publicly predicted certain victory. He emerged nine hours later without a final agreement - but full of confidence.
"We are 90 per cent there, the remaining 10 per cent are legal matters and are not a big deal," he said in Chinese, along with a Japanese translator.
Sharp's board approved the Foxconn offer three weeks later, but only with the disclosure of 300 billion yen in potential liabilities.
Gou may have been angry, but he ultimately wouldn't be deterred. Takahashi traveled to Foxconn's facility in Shenzhen over the next weekend, while lawyers and bankers huddled to assess the scale of the potential liabilities. The companies quickly concluded they may have to revise terms of the original deal, according to people familiar with the meetings.
Early this month, Foxconn summoned executives from Mizuho and Mitsubishi UFJ to Taiwan to ask them to help make up for Sharp's liabilities, according to a person familiar with the matter. The banks pledged to extend the March 31 deadline for Sharp to repay its 510 billion yen in credit lines and loans, the person said.
Foxconn's total payment will probably increase from the 389 billion yen. Under the previous agreement, the company had said it would spend an additional 100 billion yen to acquire preferred stock from Sharp's main banks. Neither side discussed that transaction in the just-announced deal. People familiar with the matter said last week that Foxconn would buy the shares, but delay payment.
Now comes the hard part for Gou: turning around a company with chronically unprofitable businesses. On Wednesday, Sharp said its operating loss for the fiscal year would be about 170 billion yen. It also carries about 793 billion yen in debt, more than triple its cash and equivalents, according to data compiled by Bloomberg. Sharp shares fell as much as 6.7 per cent to 126 yen in early Tokyo trading.